Hochschild Mining Stroked by Silver Price Drop and Cost Pressures

on Aug 24, 2012

Precious metals company Hochschild Mining (HOC:LSE) posted a 43 per cent fall in earnings for the first six months of the year. Despite the dramatic drop, the company beat its own half-time forecast of $157 million (£990,000). The Peru-based miner reported profits before interest, tax, depreciation and amortisation (EBITDA) of $168 million (£105.8 million), compared to the $297 million (£187 million) it made in the same period last year. Revenues also fell — from $496.8 million (£312.9 million) to $354.5 million (£223.3 million), or about a 29 per cent decrease. A drastic reduction in the price of silver saw attributable silver production fall six per cent to 6.9 million ounces. Gold was also down 12 per cent at 55.9 ounces, with gold revenues dropping by nearly a fifth.

Recent precious metals pricing volatility, against the background of general cost pressures, explains the big fall in half-year profits at the South America-focused miner. The group saw unit costs per tonne rise 20 per cent to $71.60 (£45) over the period, while average silver prices slipped 14 per cent. Cost pressures in Peru were partly driven up by additional mining taxes introduced this year, which raised the company’s effective tax rate to 42 per cent versus 35 per cent last year. Hochschild said that it expects the cost of production in Peru to remain around 15 per cent higher till the end of 2012.

Commenting on the company’s latest results, Hochschild’s Executive Chairman, Eduardo Hochschild, said: “The first half of 2012 provided the company with tougher challenges than last year, although I am pleased to report that we have delivered on our production targets.” He said that “despite an anticipated fall in financial results,” Hochschild is on track to meet its full-year production target of 20 million silver equivalent ounces, adding that its future growth projects were also progressing in line with its plans, and that it was maintaining its interim dividend of $0.03 per share.

The big hope for the Lima-based miner this year is its new long-term projects in Peru, Crespo and Inmaculada, which initial tests indicate to be abundant. “Both projects have made good progress in the early stages of their development in the first half of the year. In addition, our ambitious exploration campaign continues to bear fruit with further additions to the pipeline and the ongoing drilling campaign well under way across our portfolio,” said Mr Hochschild.

When fully developed, Crespo and Inmaculada mines should increase production by 50 per cent, but getting construction started by the end of the year or early 2013 will depend on obtaining the necessary permits. Management has cautioned, however, that the process for obtaining those permits has become increasingly complex. Ignacio Bustamante, Hochschild chief executive, said: “The increasingly complex permit approval process in Peru could potentially create some uncertainty on the precise timing for receiving the final construction permits.”


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