Buyers wary of Hochschild even as profits double

War and inflation: what could be more conducive for gold and silver sales? Plenty of things, apparently. Investors have not yet flocked to traditional haven investments yet this year, although gold and silver have maintained historically elevated price levels.

Despite this shift from conventional thinking, Hochschild Mining’s (HOC) 2021 profit numbers show the sector has plenty to offer. Its adjusted profit almost doubled to $67mn (£49mn), while sales were up 30 per cent.

The dollar-figure dividend was down on last year although the company also handed shareholders a stake in its spun-out rare earths company Aclara Resources (CA:ARA). It maintains a 20 per cent stake, while chair Eduardo Hochschild holds 37 per cent. The company booked a $37mn fair value gain on the transaction, helping out the 2021 profit and balancing out $24mn in Covid-19 costs and a $25mn impairment on the Pallancata mine. 

Hochschild is still trading weakly after a bizarre threat of closure of its key mine by the government of Peru in November, although it was already on a downward path before this brief crisis, with its share price down by half in the past year.

Chief executive Ignacio Bustamente said more general “volatility” was on the way this year but that “Hochschild has shown an ability to withstand operational, political and social challenges” in the past and would do so again. 

Like all miners, Hochschild is facing a cost increase this year, with its all-in sustaining cost (AISC) guidance set at a lofty $1,440-$1,480 per gold equivalent ounce (oz) at the higher gold/silver ratio estimate. 

We are bullish on Hochschild, and see it as a bargain at a price of 11 times forward earnings against a five-year average of 18 times, even with costs eroding this year’s profits. Buy.

Last IC View: Buy, 150p, 25 Nov 2021