Last checked at 24 Apr 2012 08:54
Hochschild Mining plc ("the Company")
2011 Annual Financial Report and 2012 Annual General Meeting ("AGM")
Following the release of the Company's 2011 full year results announcement on 20 March 2012 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for the year ended 31 December 2011 (the "2011 Annual Report").
In accordance with LR 9.6.1, the following documents have been submitted to the National Storage Mechanism and will be available for inspection at www.Hemscott.com/nsm.do
·; The 2011 Annual Report
·; The 2012 AGM Circular (incorporating the Notice of 2012 AGM)
·; The 2012 AGM Proxy Card (incorporating the Notice of Availability of the 2011 Annual Report and 2012 AGM Circular)
The 2011 Annual Report and the 2012 AGM Circular are also available on the Company's website at www.hochschildmining.com
The appendices to this announcement contain the information required to be disclosed under DTR 6.3.5 which has been reproduced from the 2011 Annual Report and should be read in conjunction with the Preliminary Announcement.
All page references and cross-references in the appendices are to the 2011 Annual Report.
APPENDICES
Appendix 1 - Risk Management (reproduced from pages 57 to 59 of the 2011 Annual Report)
Overview
As with all businesses, management of the Group's operations and execution of its growth strategies are subject to a number of risks. The occurrence of any of these risks may adversely affect the execution of growth strategies and hence the performance of the Group. The Group's risk management framework is premised on continued monitoring of the prevailing environment and the risks posed by it as well as the management of risks which, in light of either likelihood and/or impact on the business, are categorised as significant risks.
A Risk Committee is responsible for implementing the Group's policy on risk management and monitoring the effectiveness of controls in support of the Company's business objectives.
It meets four times a year and more frequently if required. The Risk Committee comprises the CEO, the Vice Presidents and the head of the internal audit function. A "live" risk matrix is compiled and updated at each Risk Committee meeting and the most significant risks are reported to the Group's Audit Committee which has oversight of risk management on behalf of the Board. Further details on the Audit Committee's activities are provided in the Corporate Governance Report on pages 70 and 71. The key business risks affecting the Group are set out in the table below. The steps taken by the Group to mitigate these risks, where possible, are also described.
1. FINANCIAL RISKS
(i) Commodity Price
Description of risk
Adverse movements in precious metals' prices could have a material impact on the Group's results of operations
Mitigating Steps
Derivative facilities have been negotiated with major banking institutions to facilitate hedging activity as and when considered appropriate.
To mitigate the impact of this risk, and other risks which could potentially impact the Group's results of operations, the Company continuously focuses on reducing costs and expenses and maintains a low leverage policy thus maintaining the lowest level of fixed commitments possible.
(ii) Counterparty credit risk
Description of risk
Loss of revenue resulting from defaulting customers
Mitigating steps
The Company has invested during 2011, and continues to invest, in increasing its dore capabilities, significantly reducing its exposure to counterparty risk (since the sale of dore, as opposed to concentrates, is settled almost immediately).
The Group's sales contracts for concentrate incorporate various protection measures including (i) inbuilt provision for advance payment or the delay in transferring title of goods sold in the event of non-payment, and (ii) the requirement to provide parent company guarantees where possible. In addition, the Group implements risk profiling to appraise key and new customers. The Group's diversified customer base further mitigates the risk of default.
Description of risk
The Group may lose financial resources through the failure of financial institutions
Mitigating steps
The Company has elected a small number of top tier financial counterparties with whom to invest excess cash. Management and the Board have defined limits for the amount of exposure to each counterparty based on a credit risk assessment. The Board receives regular reports on the management of cash and, in particular, oversees the implementation of procedures to monitor counterparty risk.
(iii) Liquidity
Description of risk
The Group may be unable to raise funds to meet its financial commitments as they fall due
Mitigating Steps
Notwithstanding the strength of the Company's balance sheet, the Board and senior management continually monitor the Group's requirements for short- and medium-term liquidity. The Company maintains strong banking relationships and access to credit lines to ensure an appropriate level of financing.
(iv) Foreign Currency
Description of Risk
Given the combination of US dollar denominated sales and certain costs denominated in local currencies, adverse foreign currency movements may impact the Group's results
Mitigating Steps
Local currency exposures may be partially mitigated by offsetting variances in revenues due to silver and gold price movements. However, management periodically reviews the profitability of every operation, which may be impacted by foreign currency movements, to ensure their positive cash flow generation.
2. OPERATIONAL RISKS
(i) Costs
Description of Risk
Increase in production costs could impact on the Group's profitability
Mitigating Steps
As stated in the Operating Review there has been cost inflation during the year across the mining industry and the Group seeks to mitigate the impact of this by entering into long-term supply contracts, where possible. Costs are monitored by management on a monthly basis.
(ii) Business Interruption
Description of Risk
Assets used in operations may break down and insurance policies may not cover against all forms of risks due to certain exclusions and limitations
Mitigating Steps
The Group has combined property damage and business interruption insurance policies for all operations, and adequacy of coverage is regularly reviewed with appointed advisers. Management reporting systems have been implemented to ensure that an appropriate level of inventory of critical parts is maintained. Adequate preventative maintenance programmes, supported by the SAP Maintenance Module, are in place in the operating units. Annual inspections by insurance brokers and insurers take place and recommendations are addressed in order to mitigate operational risks. Contingent power supplies are provided at each of the Group's operations.
(iii) Reserve and Resource Replacement
Description of Risk
The Group's future profitability and operating margins depend upon its ability to replenish reserves with geological characteristics to enable mining at competitive costs. Reserves stated in this Annual Report are estimates
Mitigating Steps
The Group allocated $70 million in 2011 to fund its exploration and geology activities. The 2012 budget has been increased to $90 million.
Specific initiatives have been, and continue to be taken to retain and incentivise the Group's Geologists (see Mitigating Steps for Personnel-related risks below for further information).
The Group has an annual drilling plan which is revised on a monthly basis with exploration targets continually evaluated and new targets incorporated. In parallel, the Group's Business Development function continually evaluates acquisition and joint-venture opportunities.
(iv) Personnel
Description of Risk
(i) Loss of key senior management and personnel including highly skilled engineers and geologists;
(ii) the lack of availability of individuals with relevant mining experience in the vicinity of the Group's operations, particularly when neighbouring projects commence operations; and
(iii) failure to maintain good labour relations with workers and/or unions which may result in work slowdown, stoppage or strike
Mitigating Steps
(i) The Group seeks to provide competitive compensation arrangements and develop well-defined career plans for positions of strategic importance through the Group's Talent Inventory Review. With respect to incentives, in addition to the launch of a Long Term Incentive Plan, during 2011 the Group designed and implemented the Exploration Incentive Plan which provides additional rewards for geologists based on the mineral content of a given project;
(ii) and (iii)a labour relations strategy focusing on working conditions, management style, development opportunities, motivation and communication has been developed to ensure that employees' needs are identified and met. Regular meetings are held with workers and unions to ensure a full and accurate understanding of matters of concern and requirements.
3. MACROECONOMIC RISKS
(i) Political, Legal and Regulatory Risks
Description of Risk
Costs associated with ensuring compliance with all relevant laws and regulations are substantial. Furthermore, changes in the legal or regulatory landscape including increases in taxes and/or royalties could result in additional expense, restrictions on or suspensions of, operations and may lead to delays in the development of current operations and early stage projects
Mitigating Steps
2011 saw new administrations take office in Peru and Argentina which resulted in a number of legislative developments impacting on mining companies.
The Group has local teams to monitor constantly and react, as necessary, to policy changes. It also seeks to participate actively in legislative consultations either directly or through participation in trade associations.
Regional risk assessments are performed when investments in new countries are considered. These incorporate reviews of political environments and likelihood of changes in policy that are likely to impact the Group's results from operations.
4. CORPORATE RESPONSIBILITY RISKS
(i) Health and Safety
Description of risk
Group employees working in the mines may be exposed to health and safety risks. Failure to manage these risks may result in accidents, a work slowdown, stoppage or strike and/or may damage the reputation of the Group and hence its ability to operate
Mitigating Steps
During the year, the Group attained Level 7 of the DNV safety management information system at Arcata and Pallancata and Level 6 at San Jose.
A number of initiatives were taken during 2011 further reinforcing the Group's commitment to safety.
(ii) Environmental
Description of risk
The Group may be liable for losses arising from environmental hazards associated with the Group's activities and production methods, or may be required to undertake extensive remedial clean-up action or pay for governmental remedial clean-up actions
Mitigating Steps
The Group has a dedicated team of professionals with an allocated budget for environmental management. Monthly audits are carried out to monitor the implementation of third-party environmental recommendations and achievement of targets. Air and water quality are monitored on a quarterly and weekly basis respectively.
Our operations are ISO14001 certified.
(iii) Community Relations
Description of risk
Communities living in the areas surrounding Hochschild's operations may oppose the activities carried out by the Group at existing mines or, with respect to development projects and prospects, may invoke their rights to be consulted under new laws enacted during the year.
These actions may result in longer lead times and additional costs in bringing assets into production and lead to an adverse impact on the Group's ability to obtain the relevant permissions for current or future projects.
Mitigating Steps
During the year, the Group has restructured its Community Relations ("CR") department to facilitate an ongoing dialogue with local communities. A specific CR strategy focusing on Education, Health & Nutrition, and Sustainable Development was designed, with associated action plans. Furthermore, the Group maintains a database of all agreements with communities to ensure that all social commitments are met.
Specific initiatives during the year include the "Maestro Líder" campaign, a training programme for community teachers, and "Médico de Cabecera", a programme taking healthcare to the rural populations.
Appendix 2 - Related Party Transactions (reproduced from pages 140 and 141 of the 2011 Annual Report)
30 Related-party balances and transactions
(a) Related-party accounts receivable and payable
The Group had the following related-party balances and transactions during the years ended 31 December 2011 and 2010. The related parties are companies owned or controlled by the main shareholder of the parent company, joint ventures or associates.
Accounts receivable at 31 December | Accounts payable at 31 December | |||
2011 | 2010 | 2011 | 2010 | |
US$000 | US$000 | US$000 | US$000 | |
Current related party balances | ||||
Fosfatos del Pacífico S.A. | - | 28 | - | - |
Cementos Pacasmayo S.A.A. | 222 | 291 | 32 | 23 |
Gold Resource Corp (note 18(a)) | 710 | 1,290 | - | - |
Total | 932 | 1,609 | 32 | - |
As at 31 December 2011 and 2010 all other accounts are, or were, non-interest bearing. No security has been granted or guarantees given by the Group in respect of these related party balances.
Principal transactions between affiliates are as follows:
Year ended | ||
2011 | 2010 | |
US$000 | US$000 | |
Income | ||
Gain on sale of Zincore Metals Inc. shares to Inversiones Pacasmayo S.A. | - | 7,533 |
Dividend recognised for Gold Resource Corp. investment (note 18(a)) | 7,313 | 2,633 |
Revenue recognised for services provided to Gold Resource Corp | 35 | 29 |
Expenses | ||
Expense recognised for the rental paid to Cementos Pacasmayo S.A.A. | (170) | (231) |
Transactions between the Group and these companies are on an arm's length basis.
(b) Compensation of key management personnel of the Group
As at 31 December | ||
Compensation of key management personnel (including directors) | 2011 US$000 | 2010 US$000 |
Short-term employee benefits | 6,504 | 6,751 |
Termination benefits | - | 1,170 |
Long Term Incentive Plan | 1,200 | 2,348 |
Workers' Profit Sharing | 184 | 205 |
Others | 950 | 647 |
Total compensation paid to key management personnel |
8,838 |
11,121 |
This amount includes the remuneration paid to the Directors of the parent company of the Group of US$4,816,370 (2010: US$6,996,557), out of which US$199,960 (2010: US$239,975) relates to pension payments.
(c) Purchase of additional interest in Inmaculada project
During 2010, the Group acquired an additional interest in the Inmaculada project effectively diluting the interest of its joint-venture partner, International Minerals Corporation ("IMZ"). This acquisition qualified as a small related party transaction under the UKLA Listing Rules in light of IMZ's 40% interest in the Pallancata joint-venture (note 4(a))."
Appendix 3 - Statement of Directors' Responsibilities (reproduced from page 64 of the 2011 Annual Report)
The Directors confirm that to the best of their knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
- the Management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.