Hochschild Mining PLC

Hochschild Mining PLC (LON: HOC) is a FTSE 250 index quoted Mining Company, which focuses on Gold and Silver deposits. The Company has been operating over the past 50 years, and has operations in the region of Argentina, Chile, and Peru. It currently operates with one underground mine in the southern part of Argentina and three underground mines in the southern part of Peru. Even in the Americas, HOC has numerous long-term projects.

On 2 June 2021, HOC expects to pay the final dividend of 1.681 pence per Ordinary Share, subject to shareholder approval. 

 (Source: Company Presentation)

Growth Prospects

• Substantial Resource Base: During FY20, HOC demonstrated promising results from the Corina deposit and added 25.3 million gold equivalent ounces of reserves from the Inmaculada drilling programme. It has also shown solid operational recovery despite Covid-19 related stoppages, which underpins strong prospects to meet the FY21 production guidance.
• Favourable Metal Prices: During FY20, gold prices have risen 24% and silver prices surged 47%. Going forward, the enormous global fiscal and monetary response to the economic impact of the pandemic shall create a healthy price environment and support the Company’s free cash flow position and strengthen the balance sheet.
• Solid Mine Recovery: With a robust budget of nearly US$34 million for brownfield exploration and approximately US$11 million for greenfield and advanced project budget, and around US$14 million for advancing the Biolantanidos project, HOC shall deliver significant improvements in recoveries and optimise key projects.
• Strong Financial Position to Generate Shareholder Return: HOC has a robust balance sheet with current (as on 31 March 2021) Net Cash/LTM EBITDA of nearly 0.125x to pursue M&A strategy, attractive optionality in Greenfield and provide attractive dividends to shareholders.

Risk Assessment

• Pandemic led disruption: The Global Covid-19 pandemic could result in the suspension of operations and increase labour absenteeism, and thus, the operation costs.
• Gold prices volatility: Moreover, the financial performance is highly dependent on the Gold price, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control.
• Strict regulatory policies: Furthermore, the business needs to adhere to the stringent environmental and compliance guidance, failure to adhere to those policies can have an adverse impact on output and cause legal actions as well.

Gold Price Trend

• Gold prices edged higher during the past two weeks post breaching US$1800/oz, supported by the weak dollar and easing of US bond yield. The unexpected slowdown of US job growth data did not impact the gold prices substantially. The crypto plunge and falling of tech stocks on inflation also rallied the Gold prices last week.
• Overall, Gold finished April at US$1,768/oz, rebounded 4.5% in April 2021, and registered the first positive monthly returns since December 2020.
• In April 2021, Global gold ETFs shed 18.3 tonnes, albeit global outflow slowed substantially and global assets under management stood at 3,567 tonnes. The impact of ETF outflow was mitigated by the bolstering consumer demand as global economies continued to recover.

Now we will analyse some key fundamental and shareholders statistics of Hochschild Mining PLC

Production Report for the three months ended 31 March 2021 (as on 21 April 2021)

 (Source: Company Website)

• HOC delivered a solid start to FY21 and remained on track to meet FY21 cost and production targets.
• In FY21, it aims to target -
  • 360,000-372,000 gold equivalent ounces at all-in sustaining costs (AISC) of US$1,210 and US$1,250 per gold equivalent ounce, and
  • 0-32.0 million silver equivalent ounces at an AISC of US$14.1 and US$14.5 per silver equivalent ounce.
• In terms of exploration activities, San Jose demonstrated promising results, Inmaculada drilling adding high grade resources, and drilling campaigns already initiated at Cochaloma, Corina, Pallancata and Palca targets.
• As on 31 March 2021, total cash was nearly US$245 million (on 31 December 2020: US$232 million) with net debt of around US$38 million (on 31 December 2020: US$22 million).

Financial Highlights for the year ended 31 December 2020 (as on 18 February 2021)

 (Source: Company Website)

• HOC demonstrated strong financial performance in FY20 despite the impact of stoppages.
• Reported year-end net cash position for the first time in eight years, driven by strong free cashflow generation and higher precious metal prices.
• HOC also increased reserves at Inmaculada drilling and reported solid progress on the ongoing brownfield strategy.
• Further, it was looking forward to progressing greenfield strategic alliance portfolio across the Americas.

Financial Ratios (FY20)

Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 17 May 2021, at 9:06 AM GMT, Hochschild Mining PLC’s shares were trading at GBX 189.82, up by 0.86% against the previous day closing price. Stock 52-week High and Low were GBX 326.80 and GBX 166.55, respectively.

HOC's price is trading in a consolidation phase and sustaining above the major support level GBX 179.50 for more than a year. Prices reversed thrice upside after taking support of the GBX 179.50 level and we can expect further upside move from the current level. On the weekly chart, the leading indicator RSI (14-period) is trading at ~44 levels and consolidating in negative territory. The trend-following indicators 21-period SMA and 50-period trading above current market price and acting as the resistance levels for the stock.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

HOC has reiterated its production and cost guidance, supported by better-than-expected grades at Inmaculada operation. It has hedged 4 million ounces of silver for FY21 and FY22 at an average price of US$27 per ounce to protect cash flows in Peru. For gold (production target: 360,000-372,000 gold equivalent ounces) and silver (production target: 31.0-32.0 million silver equivalent ounces), AISC is expected to be US$1,210-US$1,250 per gold equivalent ounce and US$14.1 and US$14.5 per silver equivalent ounce. Moreover, the Company has substantial cash resources to meet the challenges ahead and investing in the future. It shall continue to pursue value-accretive acquisition opportunities and towards the middle of the year, it is also targeting feasibility study at Biolantanidos rare earths project. Furthermore, HOC has a considerable brownfield programme scheduled for FY21 and attractive optionality in Greenfield to generate substantial shareholder return.

 (Source: Company Presentation)

Considering the resilient financial performance, favourable metal price environment, operational recovery, healthy balance sheet, reiterated guidance, substantial resource base, encouraging industry dynamics, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Hochschild Mining PLC at the current market price of GBX 189.82 (as on 17 May 2021 at 9:06 AM GMT) with lower double-digit upside potential based on 12.14x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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