Hochschild battles to keep a lid on costs

A week prior to the publication of its half-year figures Hochschild Mining (HOC) received a key environmental clearance relating to its Mara Rosa gold project in Goiás, Brazil. Mara Rosa remains on schedule for initial production in the first half of 2024 even though full-year capital expenditure for the project has been pared back. The good news is that a sizeable portion of the planned expenditure for the project is at pre-agreed prices, providing a degree of insulation in an inflationary environment. Mara Rosa remains on track to be delivered on time and on budget, something of a rarity.

The positive noises on the development front are set against a challenging trading environment, faltering precious metals prices and rising cost inflation. Interim financial performance was broadly in line with consensus as adjustments were previously made on the release of the July production update. The miner had guided for falling silver and gold production due to scheduled grade decreases at Inmaculada and Covid-linked stoppages at the San Jose operation.

Grades at Pallancata’s current operations have also been steadily declining, so management is now “considering all geological options with regards to the mine's future”. Investors will be hoping that Hochschild displays its usual seasonal ramp-up through the second half, with 2022 guidance set at 360,000-375,000 gold equivalent ounces or 26mn-27mn silver equivalent ounces.

Unsurprisingly, the focus on cost efficiencies has intensified. Hochschild delivered its production at the upper end of guidance at an all-in sustaining cost (AISC) of $1,371 (£1,124) per gold equivalent ounce (oz), leaving it on track to meet AISC guidance of $1,330-$1,370 an oz assuming production increases through the second half of the year.

That’s not an unrealistic scenario given historical precedent, but, if anything, industry cost pressures seem to be escalating. Management has the option of increasing the proportion of production at Inmaculada to keep average costs down, Peel Hunt said. 

The average silver price was down on the 2021 comparator, although this was partially offset by a 6 per cent increase in the average gold price achieved by the company. Given the combination of soaring costs and falling grades, a one-third reduction in gross profit to $107mn isn’t as lamentable as you might imagine, particularly when you consider that US dollar strength has kept a lid on precious metals prices.

Meanwhile, net earnings fell into negative territory partly due to an impairment of $9.9mnn in the investment in Aclara Resources, the Chilean rare earth unit spun-off last year.

Apart from Mara Rosa and the 1.95ȼ dividend, there was little to cheer shareholders, but consensus AISC is forecast to fall by a fifth next year and keeping falling, so the 44 per cent discount to the target price for Hochschild provides a viable entry point despite the prospect of further volatility. Buy.

Last IC View: Buy, 98p, 13 Feb 2022