Like many areas of life, succeeding in business is all about getting the timing right. Thanks to strong management and some good fortune, that's exactly what has happened at Hochschild Mining (HOC), which transformed in 2015 just in time for the start of a recovery in precious metal prices. The South America-centred high-grade miner can now boast a significantly strengthened balance sheet, a new world-class deposit and falling costs. And with gold and silver spot prices both significantly up since January, we think Hochschild's shares are primed for a re-rating in 2016.
- Improved outlook for precious metals
- Strengthened balance sheet
- Inmaculada mine operational
- Argentina cost savings
- Commodity volatility
- No dividend
The picture was a lot cloudier at the half-year stage midway through 2015. At that point, Hochschild had racked up a debt pile of $456m (£319m) after ploughing cash into the flagship Inmaculada plant. Production only commenced in June, by which point net debt stood at a heady 5.8 times cash profit. This was all the more daunting given battered silver prices had slimmed cash-flow forecasts.
Hochschild set about rectifying the position. A "near faultless" ramp up in operations at Inmaculada produced 8.3m silver equivalent ounces by the end of December, at all-in sustaining costs of just $7.30 an ounce, among the lowest quartile of silver production costs globally. This beat management guidance on both measures, and accounted for nearly a third of the group's total production for the year, which comprised 14.8m ounces of silver and 166,000 ounces of gold across its four mines in Peru and Argentina.
With Inmaculada scaling up and replacing ounces lost by the closure of the Ares and Moris mines in 2014, Hochschild then launched a three-for-eight rights issue in October, raising $100m to repay and renegotiate a portion of its debt. It also hedged 55 per cent of the 32m silver equivalent ounces targeted for production this year at prices. UBS estimates this hedging means the group will continue to generate positive free cash flow as long as spot prices stay above $1,000 and $13 for an ounce of gold and silver respectively.
So while Hochschild may not be the lowest cost producer in the industry - Fresnillo's (FRES) eponymous mine had a cash cost of just $5.60 per ounce of silver in 2015, for example - it should still generate substantial sustainable free cash flow well below current spot prices of $1,250 for the yellow metal and $15.60 for silver. And if prices stay at current levels, the net debt could be entirely covered by cash profit by the end of this year.
During that time, costs are expected to pare back a further 5 per cent, thanks in part to better operating conditions in Argentina since Mauricio Macri's government came to power in December. The devaluation of the peso, which accounts for 70 per cent of the San José mine's costs, is already having a "material impact", as is the elimination of a 10 per cent tax on concentrates and the restoration of rebate on exports.
HOCHSCHILD MINING (HOC) | ||||
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ORD PRICE: | 89p | MARKET VALUE: | £450m | |
TOUCH: | 88.75-89.5p | 12-MONTH HIGH: | 102p | LOW: 39p |
FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 13 | |
NET ASSET VALUE: | 133¢ | NET DEBT: | 46% |
Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢)* | Dividend per share (¢) |
---|---|---|---|---|
2013 | 622 | -120 | -26.2 | nil |
2014 | 493 | -68.2 | -18.8 | nil |
2015 | 469 | -256 | -52.2 | nil |
2016* | 620 | 40.0 | 2.9 | nil |
2017* | 711 | 90.1 | 9.5 | nil |
% change | +15 | +128 | +228 | - |
Normal market size: 5,000 Matched bargain trading Beta: 0.92 £1=$1.43 *UBS forecasts |