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Hochschild attacks the debt pile

With the Inmaculada mine firing on all cylinders, Hochschild has rebuilt its balance sheet at pace
March 9, 2017

It was debt, not dividends, to which Hochschild Mining (HOC) directed its free cash firepower in 2016. Full-year results for the South American silver and gold miner showed that $127.4m (£105m) worth of borrowings were repaid in the period, a figure just shy of the entire adjusted cash profit result for the previous 12 months. Together with a $56m bump in cash-at-hand, Hochschild has significantly depleted a gearing ratio that stood at 46 per cent just a year ago. Now, following the retirement of a further $25m of short-term debt in February, the ratio will be even lower.

IC TIP: Hold at 227p

It's not hard to spot the source of this virtuous cycle: a surge in super low-cost production from Inmaculada, which helped matters by sucking in a lot less capital. Statistics for the Peruvian mine, which now accounts for 30 per cent of silver production and two-thirds of group gold output, speak for themselves. In its first full-year of operation, the underground mine doubled ore production while keeping all-in sustaining costs at $8.70 per silver equivalent ounce, or $644 in gold terms.

That could increase this year, as the group chases a record production target of 37m silver equivalent ounces. Excluding investment in growth projects, Inmaculada's sustaining costs are expected to rise to between $9 and $9.50 an ounce, while average group costs could hit $12.70. Against those estimates, average market forecasts are for adjusted EPS of 8.5¢ in 2017, rising to 16.1¢ next year.

HOCHSCHILD MINING (HOC)

ORD PRICE:227pMARKET VALUE:£1.15bn
TOUCH:227-228p12-MONTH HIGH:328pLOW: 81p
DIVIDEND YIELD:1%PE RATIO:31
NET ASSET VALUE:139¢NET DEBT:24%

Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
2012*81821214.74.60
2013*622-120-27.8nil
2014*493-68.2-14.7nil
2015469-256-52.0nil
20166881089.02.76
% change+47---

Ex-div: 20 Apr

Payment: 17 May

£1=$1.22. *Adjusted for 2016 three-for-eight rights issue