Hochschild Regulatory News (HOC)

Hochschild Mining plc

("the Company")

2016 Annual Financial Report and 2017 Annual General Meeting ("AGM")

Following the release of the Company's 2016 full year results announcement on 8 March 2017 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for the year ended 31 December 2016 (the "2016 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

· 2016 Annual Report

· 2017 AGM circular (incorporating the Notice of 2017 AGM) 

· 2017 AGM proxy card (incorporating the Notice of Availability of the 2016 Annual Report and 2017 AGM circular)

The 2016 Annual Report and the 2017 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 2016 Annual Report and should be read in conjunction with the Preliminary Announcement.

All page references and cross-references in the appendices are to the 2016 Annual Report.

APPENDICES

Appendix 1

Risk Management (reproduced from pages 35 to 39 of the 2016 Annual Report)

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 which could adversely affect the performance of the Group. The Group's risk management framework is premised on the continued monitoring of the prevailing environment, the risks posed by it, and the evaluation of potential actions to mitigate those risks.

The Risk Committee is responsible for implementing the Group's policy on risk management and monitoring the effectiveness of controls in support of the Group'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 reviewed which maps the significant risks faced by the business and updated at each Risk Committee meeting and the most significant risks as well as potential actions to mitigate those risks are reported to the Group's Audit Committee, which has oversight of risk management on behalf of the Board.

2016 RISKS

The key business risks affecting the Group set out in this report remain largely unchanged compared to those disclosed in the 2015 Risk Management report, with the exception that:

• the risks associated with the Delivery of Projects are no longer considered to be significant as the Inmaculada asset transitioned to a core operation in the second half of 2015; and

• Refinancing Risk has been removed as a significant risk following the recovery in the commodities sector and the improvement in the Group's balance sheet.

The year-on-year changes in the profile of specific risks can be explained as follows:

• Operational Performance risks are considered by the Board to have reduced following the commencement of production at Inmaculada; and

• Community Relations, Safety and Legal/Regulatory risks are regarded as having heightened due to (a) the above-mentioned transition of Inmaculada since the impact of those risks could become more severe in the context of an operating asset and (b) the changing social and political environment in the countries where the Group operates.

In addition, in order to provide a more accurate view of the change in the profile of environmental-related risks, the table below distinguishes between changes in the level of (a) the environmental

risks arising from operations, which are considered to have reduced in light of the infrastructure work carried out during the year; and (b) the risks arising from regulatory action which are considered to have increased as a reflection of the regulator's more stringent approach 

1. FINANCIAL RISKS

Commodity Price

Change in risk profile vs 2015: UNCHANGED

Impact

Adverse movements in precious metal prices could materially impact the Group in various ways beyond a reduction in the results of operations. These include impacts on the feasibility of projects, the economics of the mineral resources and heightened personnel and sustainability related risks

Mitigation

• Constant focus on maintaining a low cost of production and an efficient level of administrative expense

• Flexible hedging policy that allows the Group to contract hedges to mitigate the effect of price movements taking into account the Group's asset mix and forecast production

See Our Market Overview on pages 12 to 13 for further details

Commentary

The focus on conserving capital and optimising cash flow continued in 2016 through:

• controlling operating and administrative costs;

• optimising sustaining capital expenditure;

• reducing debt; and

• reducing working capital.

In addition to the above, the Inmaculada mine, which started commercial production in the second half of 2015, brought about a reduction in average production costs and diluted fixed costs.

Even though no part of 2017 production has been hedged, the Group's flexible policy enables the Board to approve hedging contracts to protect cashflow as and when appropriate.

2. OPERATIONAL RISKS

Operational Performance

Change in risk profile vs 2015: REDUCED

Impact

Failure to meet production targets and manage the cost base could adversely impact the Group's profitability.

Mitigation

• Close monitoring by management of operational performance, costs and capital expenditure

• Negotiation of long-term supply contracts where appropriate

Commentary

2016 budgets across the Group focused on maintaining controlled levels of administrative expenses and sustaining capital expenditure.

Production goals at all operations were met or, in the case of Inmaculada, exceeded with the focus on the extraction of profitable ounces.

The Group benefited from operational flexibility through a full-year's production at Inmaculada.

Management closely monitors the wide range of risks that could affect operational performance to, among other things, ensure the adequacy and safety of key mining components, such as tailing dams, waste rock deposits and pipelines to service ongoing operations. Close liaison between relevant departments ensures that procurement, construction and any permitting are undertaken as appropriate.

Business Interruption

Change in risk profile vs 2015: HIGHER

Impact

Assets used in the Group's operations may break down and cause stoppages with material effects.

Mitigation

• Insurance coverage to protect against major risks

• Management reporting systems to support appropriate levels of inventory

• Annual inspections by insurance brokers and insurers with recommendations addressed in order to mitigate operational risks

Commentary

In light of the transition of Inmaculada from project to core asset and the high proportion of production sourced from that asset, the change in the risk profile vs 2015 reflects its heightened impact.

Mitigating actions during the year include the following:

• Insurance advisors conducted site visits and completed a full review of operational risks to ensure that adequate property damage and business interruption risk management processes and insurance policies are in place at our operations.

• Management reporting systems ensured that an appropriate level of inventory of critical parts is maintained.

• Adequate preventative maintenance programmes, supported by the SAP Maintenance Module, are in place at the operating units.

Exploration & Reserve and Resource Replacement

Change in risk profile vs 2015: UNCHANGED

(a) Impact

The Group's operating margins and future profitability depend upon its ability to find mineral resources and to replenish reserves.

(a) Mitigation

• Implementing and maintaining an annual exploration drilling plan

• Ongoing evaluation of acquisition and joint venture opportunities to acquire additional ounces

• High-end software programmes implemented to improve the estimate mineral resources

(a) Commentary

In 2016 all brownfield exploration goals were achieved, including the discovery of additional resources at the Pablo vein at Pallancata.

The continued focus on cost control has resulted in our exploration activity being primarily focused on current operations.

In 2017, exploration of new projects and appraisal of acquisition/joint venture opportunities restarted given the Group's improved financial position.

As mentioned in the CEO's statement, the Company has undertaken a conservative re-evaluation of its Reserves and Resources which (a) reflects lower commodity price assumptions and (b) excludes material that has a low probability of being mined.

(b) Impact

Reserves stated in this Annual Report are estimates.

(b) Mitigation

• Engagement of independent experts to undertake annual audit of mineral reserve and resource estimates

• Adherence to the JORC Code and guidelines therein

(b) Commentary

The Group has engaged P&E Consultants to undertake the annual audit of mineral reserve and resource estimates.

See pages 139 to 141 for further details

(a) Personnel: Recruitment and Retention

Change in risk profile vs 2015: LOWER

Impact

Inability to retain or attract personnel through a shortage of skilled personnel.

Mitigation

• The Group's approach to recruitment and retention provides for the payment of competitive compensation packages, well defined career plans and training and development opportunities

Commentary

The Group has continued with its initiatives to improve the retention of employees. These include the use of non-financial benefits (e.g. flexible working arrangements for Head Office staff) and tailored personal development plans.

The improvement in the sector as a whole is the principal reason why the profile of this risk has reduced relative to 2015.

(b) Personnel: Labour Relations

Change in risk profile vs 2015: UNCHANGED

Impact

Failure to maintain good labour relations with workers and/or unions may result in work slowdown, stoppage or strike.

Mitigation

• Development of a tailored labour relations strategy focusing on profit sharing, working conditions, management style, development opportunities, motivation and communication

Commentary

Given the losses incurred in previous years by the Peruvian operating entity, there continues to be no statutory profit sharing for Peruvian mineworkers.

Management has conducted monthly meetings with mineworkers and unions during 2016 to ensure a complete understanding of their requirements and concerns and to keep all parties updated on the Group's financial performance with the aim of preparing the groundwork for the 2017 union negotiations.

3. MACRO-ECONOMIC RISKS

Political, Legal and Regulatory

Change in risk profile vs 2015: HIGHER

Impact

Changes in the legal, tax and regulatory landscape could result in significant additional expense, restrictions on or suspensions of operations and may lead to delays in the development of current operations and projects.

Mitigation

• Local specialist personnel continually monitor and react, as necessary, to policy changes

• Active dialogue with governmental authorities

• Participation in local industry organisations

Commentary

As an electoral year, 2016 saw the mining industry in Peru become the subject of heightened political debate. In the period leading to the elections and during the transition to a new administration, no new governmental measures were taken and various permitting processes saw their timelines extended which continues to be the case.

Even though the new government that assumed office in July 2016 is supportive of business, the risk of social conflicts has become heightened in certain parts of the country to which the authorities remain sensitive.

In addition, a number of new laws were introduced during the year relating to, among other things (a) the permissible limits of chemicals in stored tailings and (b) various aspects of health and safety at mining operations.

In Argentina, 2016 was marked by relative stability following the Presidential elections in October 2015 where the new government placed inward investment as a key priority.

With regards to specific developments:

• the Supreme Court agreed to hear the merits of the Company's claim challenging the constitutionality of a proposed Reserves tax which was subsequently withdrawn by the relevant Province; and

• in late 2016, the Argentinian Government removed the benefit received by those exporting through Patagonian ports.

3. SUSTAINABILITY RISKS

Health and Safety

Change in risk profile vs 2015: HIGHER

Impact

Group employees working in the mines may be exposed to health and safety risks.

Failure to manage these risks may result in occupational illness, accidents, a work slowdown, stoppage or strike and/or may damage the reputation of the Group and hence its ability to operate.

Mitigation

• Health & Safety operational policies and procedures reflect the Group's zero tolerance approach to accidents

• Use of world class DNV safety management systems

• Dedicated personnel to ensure the safety of employees at the operations via stringent controls, training and prevention programmes

• Rolling programme of training, communication campaigns and other initiatives promoting safe working practices

• Use of reporting and management information systems to monitor the incidence of accidents and enable preventative measures to be implemented

Commentary

The change in risk profile vs 2015 primarily reflects:

• the fact that Inmaculada was an operating asset for the whole of 2016; and

• the increased use of less mechanised processes at Pallancata in light of the narrower veins being mined.

In 2016, the Group achieved its on-going objective of Zero Fatalities for the third consecutive year. As reported earlier in the Chairman's statement and Sustainability Report, the Board was saddened to report the fatalities that occurred at the Inmaculada mine in the first quarter of 2017.

Further details on the accident and the steps being taken to reinforce the Group's safety values can be read in the Sustainability Report on page 30

Environmental

Change in risk profile vs 2015:

(a) In relation to those risks arising from the Group's environmental performance/infrastructure: LOWER

(b) In relation to those risks arising from the increased oversight of the environmental regulator: HIGHER

Impact

The Group may be liable for losses arising from environmental hazards associated with the Group's activities and production methods, ageing infrastructure, or may be required to undertake corrective actions or extensive remedial clean-up action or pay for governmental remedial clean-up actions or be subject to fines and/or penalties.

Mitigation

• The Group has a team responsible for environmental management

• The Group has adopted a number of policies and procedures to limit and monitor its environmental impact

Commentary

Environmental permitting and oversight have become more rigorous, leading to delays in project execution and increases in fines from the environmental regulator.

In 2016, the Group has taken a series of measures to mitigate this risk, including:

• establishing a Permitting Committee, with the participation of all relevant departments, that meets bi-weekly to assess the status of all permitting applications and ensure that the process is carried out as efficiently as possible;

• the launch of new Environmental Key Performance Indicators;

• implementation of state-of-the-art water quality management tool that allows for real time monitoring of all water discharges from the operations;

• completing the staffing of the environmental team with professionals working in related operational and environmental management roles;

• strengthening our environmental culture, improving overall housekeeping throughout our operations, reducing water consumption and solid waste generation;

• continuing to improve water treatment infrastructure, at Pallancata, Inmaculada, Arcata and the closed Sipan mine; and

• reviewed and updated Mine Closure Plans, in some cases with the support of internationally renowned environmental consultants

Community Relations

Change in risk profile vs 2015: HIGHER

Impact

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.

These actions may result in loss of productions, increased costs and decreased revenues and in longer lead times and additional costs for exploration and 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.

Mitigation

• Constructive engagement with local communities

• Community Relations strategy focuses on promoting education, health and nutrition, and sustainable development

• Allocation of budget and personnel for the provision of community support activities

• Policy to actively recruit workers from local communities

Commentary

The higher risk profile vs 2015 reflects the increase in the incidence of social conflicts in the areas surrounding the Group's operations. Such conflicts have led to temporary stoppages at other mining operations such as Las Bambas and Constancia.

Protests by a community close to the Pallancata mine resulted in a blockade by community members from November 2016 until mid-January 2017. Even though the mine stopped producing from 1 December, Pallancata's targeted production was not impacted. Government intervention resulted in the lifting of the blockade after an informal mediation between the Company and the relevant community representatives.

Working groups with stakeholders groups near Inmaculada continue to meet periodically.

In addition, the Group continues to actively engage with other local communities to fully understand their needs and to implement an action plan, to the extent possible.

The risk of additional stoppages or blockades will continue to be present if the working groups do not reach long-term agreements between the parties involved.

Further details on the Group's activities to mitigate sustainability risks can be found in the Sustainability report on pages 29 to 34

Appendix 2

Related-Party Balances and Transactions (reproduced from pages 116 and 117 of the 2016 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 2016 and 2015. The related parties are companies owned or controlled by the main shareholder of the parent company or associates.

1 The account receivable relates to reimbursement of expenses paid by the Group on behalf of Cementos Pacasmayo S.A.A. The account payable relates to the payment of rentals.

As at 31 December 2016 and 2015, 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:

Transactions between the Group and these companies are on an arm's length basis.

(b) Compensation of key management personnel of the Group

This amount includes the remuneration paid to the Directors of the parent company of the Group of US$5,487,769 (2015: US$4,155,759).

(c) Participation in rights issue by Pelham Investment Corporation ("Pelham") and Inversiones ASPI SA ("ASPI")

As at the record date of the Rights Issue, Eduardo Hochschild held his investment in the Company through Pelham. Following receipt of its entitlement under the Rights Issue, Pelham transferred, for nil consideration, its Nil Paid Rights in respect of 74,745,101 new ordinary shares to ASPI an entity that is also under the control of Eduardo Hochschild. Under the terms of an irrevocable undertaking signed between Pelham, ASPI and the Company, it was agreed that:

(i) ASPI would, among other things, subscribe for at least 68,887,508 new ordinary shares at an issue price of 47 pence per new ordinary share (the "Subscription Commitment"); and

(ii) the Company would, among other things, pay ASPI a fee of 1% of the Subscription Commitment of approximately US$500,000.

Appendix 3

Statement of Directors' Responsibilities (reproduced from page 43 of the 2016 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 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. 

On behalf of the Board

Raj Bhasin

Company Secretary

7 March 2017