Hochschild Regulatory News (HOC)

20 Mar 2007 07:04

Hochschild Mining PLC20 March 2007 20 March 2007 Hochschild Mining plc Preliminary Results for the Year Ended 31 December 2006 Highlights: • Strong financial results during 2006 with adjusted EBITDA up 52% to $108 million • Despite industry wide cost pressure, our weighted average cost per tonne for our three operating mines decreased 2% in 2006 • Stable production in 2006 with production of 23.3 million silver equivalent ounces • Cash flow from operations increased over 300% from 2005, totalling $126 million, and declaration of maiden dividend • Successfully increased our attributable stated reserves by 25% in the second half of 2006 • During 2007, we will commence production at three new projects and will expand capacity at two of our existing mines, more than doubling our throughput capacity • Forecast 2007 production in excess of 26 million silver equivalent ounces (+11% y-o-y) Highlights for the year ended 31 December 2006(stated before exceptional items)-------------------------------------------------------------------------------($ thousands, unless stated) Year ended 31 Year ended 31 December 2006 December 2005 % change-------------------------------------------------------------------------------Revenue 211,246 161,235 31%Attributable after tax profit 1 46,646 24,719 89%EPS (pre-exceptionals) 2 0.19 0.11 73%Adjusted EBITDA 3 107,617 70,650 52%Cash costs ($/oz Ag co-product)4 3.57 2.77 29%Cash costs ($/oz Au co-product)4 153 159 (4%)Silver production (koz) 11,604 10,550 10%Gold production (koz) 196 232 (16%)-------------------------------------------------------------------------------1 Attributable after tax profit is calculated as the profit for the year attributable to the equity shareholders of the company from continuing operations before exceptional items. 2 EPS is calculated using the weighted average number of shares outstanding for the period (2006: 242.9 million; 2005: 230.0 million). EPS from continuing operations after exceptional items was $0.17 and $0.15 per share for 2006 and 2005, respectively. 3 Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance costs and income tax plus depreciation, amortization and exploration costs other than personnel and other expenses (see reconciliation on page 17). 4 Cash costs are calculated to include cost of sales, treatment charges, and selling expenses less depreciation included in cost of sales Chairman's comments "I am delighted to be presenting Hochschild Mining plc's first set of results asa publicly listed company. Our Listing marks the beginning of a new stage in theGroup's development. We are now well-placed to build on our proven operationalstrengths to deliver value for all our shareholders. The combination of our lowcost assets with the ability to grow reserves and production whilst remainingfocused on underground precious metals mining in Latin America, form a strongbase for future growth. The Listing proceeds, together with our strong yearlycash flow, provide us the necessary resources to expand our existing operations,develop our pipeline of projects, and consider potential acquisitions. We thusremain on course to deliver on our target for organic growth of 50 millionsilver equivalent ounces by 2011." Chairman's statement I am pleased to be presenting Hochschild Mining plc's first set of resultsfollowing our successful Listing on the London Stock Exchange in November 2006,when we raised approximately $500 million. It has been a landmark year for theCompany and I must extend my thanks to all those who made it possible: ourworkers, management, office staff and our shareholders. Our Listing marks thebeginning of a new stage in the Group's development. We are now well-placed tosubstantially increase our capacity to build on our track record of successfulfinancial, operational and social performance. Over the last twelve months, we have seen a good operational performance andstrong financial results that demonstrate the strengths of our business. In2006, our revenues for the year amounted to $211 million, a 31% increase on2005, and adjusted EBITDA for the year increased by 52% to $108 million. Wecontinue to achieve low cash costs and high margins in our extraction ofprecious metals due to our focus on exploiting high grade deposits and ourrigorous system of cost controls at all our operations. Whilst costs across theindustry have been rising and production has been constrained in many parts ofthe world by escalating prices for mining machinery, we have seen a 2% reductionin the weighted average cost per tonne at our existing operations. Our production for 2006 was steady, with 11.6 million ounces of silver and 196thousand ounces of gold, contributing to a combined total of 23.3 million silverequivalent ounces, a slight decline on last year due to the anticipated gradedecline at our Ares mine. We expect this decline to continue into the firstquarter of this year as we continue to extract lower grades at Ares, but to bemore than fully reversed over the course of the year as we ramp-up throughput atour three operating mines and as we bring three new mines into productionstarting at the end of the second quarter. Consequently, for 2007, we aretargeting production in excess of 26 million silver equivalent ounces. Thebenefits of increasing the number of producing mines from three to six in 2007will be fully reflected, both operationally and financially, in 2008. This willalso keep us on course to reach our target of producing 50 million silverequivalent ounces by 2011. Pricing for both gold and silver was strong during 2006, with the prices rising25% and 45%, respectively, on the back of significant investment demand notablyin the wake of inflation concerns, a weak dollar and geopolitical influences, inaddition to the introduction of the iShares Silver ETF in April 2006. Theaverage spot price for gold in 2006 was $604.65 per ounce and for silver it was$11.59 per ounce. Looking forward, we continue to favour precious metals andbelieve the silver price trend is set to continue into 2007 for two primaryreasons. First, we expect the investment demand growth to continue and second,industrial demand is targeted to remain robust largely driven by continuedstrength within the electronics fabrication sector coupled with the new andexpanding antibacterial uses of silver. The strong cash flow demonstrated in this set of results - with cash fromoperations of approximately $126 million, combined with the net cash of $406m atthe Group level - gives us the financial strength to deliver on our growthstrategy and to partake in the expected industry consolidation in the region. Iam happy to announce our maiden dividend for the two months of 2006 during whichwe were listed totalling $2.3 million. Exploration continues to be a strong focus of the Group and we made significantprogress during 2006. Since the half year figures reported at the time of ourListing, we have increased our attributable reserves by 25% and extended ouroverall mine life, after discounting our increased production in 2007.Furthermore, our Listing has increased our visibility within the region and hasgiven us access to more acquisition and joint venture opportunities. For 2007,we have increased our exploration budget as we look to enhance further ourreserve and resource base, explore new properties and continue to build on theprogress made last year. It is with deep regret that we report that in the last year there have beenfatalities in our business - three in 2006 and one more in the first quarter of2007 - a substantial aberration from our previous track record. The Board hastaken steps to support the families of the people involved and the CSR committeehas ordered a comprehensive review of safety procedures and reporting with theleading consultants in the industry. We will continue to exert every effort toensure the safety of all our employees. We take Corporate Social Responsibility very seriously and believe that thehealth and safety of our employees, the respect for the environment and ouractive engagement with local communities are fundamental to our business in thelong term. Responsibility for these important issues at Board level has now beenentrusted to the Deputy Chairman, Roberto Danino, who chairs the Corporate andSocial Responsibility Committee As a newly-listed company on the London Stock Exchange, my Board colleagues andI are also firmly committed to delivering high standards of corporategovernance. We believe that our combination of a strong management team andexperienced independent Directors will provide the best opportunities for growthand strategic direction for the company. In summary, we are well poised to build on our proven operational strengths todeliver value for all our shareholders. The combination of our low cost assetswith the ability to grow reserves and production whilst remaining focused onunderground precious metals mining in Latin America, form a strong base forfuture growth. The Listing proceeds, together with our strong yearly cash flow,provide us the necessary resources to expand our existing operations, developour pipeline of projects, and consider potential acquisitions. We thus remain oncourse to deliver on our target of 50 million silver equivalent ounces by 2011.We look forward to the year ahead with optimism and to the opportunities that itoffers with confidence. I extend a warm welcome to all our new shareholders and thank you for yoursupport. Enquiries:Hochschild Mining plcWray Barber +44 (0)20 7152 6014Head of Investor Relations FinsburyRobin Walker +44 (0)20 7251 3801Public Relations About Hochschild Mining plc: Hochschild Mining plc (HOC.L for Reuters / HOC LN for Bloomberg) is a publiclyheld company listed on the London Stock Exchange. Hochschild is a leadingprecious metals company with a primary focus on the exploration, mining,processing and sale of silver and gold. The Company currently operates threeunderground epithermal vein mines located in southern Peru. The Company also hasthree advanced stage development projects, one in each of Mexico, Peru andArgentina and one early stage development project in Mexico. In addition, theCompany has over twenty long-term prospects throughout Latin America. TheCompany has over forty years experience in the mining of precious metalepithermal vein deposits. For further information please visitwww.hochschildmining.com. Operational review: Summary Production: In-line with expectations at the time of the Listing and as disclosed in ourquarterly production report in January, the second half production was slightlyabove that of the first half with a total production of 23.3 million silverequivalent ounces for the full year ended 31 December 2006. Silver productionfor the year was up 10% to 11.6 million ounces as a result of an increase fromboth Arcata and Selene while gold was down 16% to 196 thousand ounces due to theanticipated decrease in grade at the Ares mine. Costs: Despite industry wide cost pressure, our weighted average cost per tonnedecreased 2% in 2006 principally driven by a significant cost reduction at theSelene unit. However, our silver cash cost increased on a co-product basis. Cashcosts on a co-product basis must be considered in conjunction with theco-product commodity because as the percentage sales of one commodity increasethe other decreases resulting in a similar effect on the respective cash costs.In 2006, we experienced an increase in co-product cash cost for silver from$2.77/oz in 2005 to $3.57/oz principally driven by a higher percentage of silversales (68% increase in revenue from silver and 2% increase in revenue from gold)and consequently a greater amount of cost attributed to silver production, andto a lesser extent, by a decrease in average head grades mined for both silverand gold. On the other hand, co-product cash cost for gold decreased from $159/oz in 2005 to $153/oz in 2006 while by-product cash cost for gold went fromnegative $21/oz to negative $273/oz. We do not typically look at silver on aby-product basis. Exploration: Exploration remains at the core of our business as we seek to expand ourexisting operations and add to our project pipeline through the discovery of newproperties. In 2006, we increased our capital expenditure on mine siteexploration and will do the same in 2007. We typically capitalize explorationcapital expenditure once the project has passed feasibility stage. In 2007, wehave budgeted $35 million for all exploration at our operations, projects andprospects. Reserves and resources: We have indicated our intention to increase our reserve and resource base inorder to bring it more in-line with that of other publicly traded precious metalcompanies. We have increased our attributable stated reserves by 25% in thesecond half of 2006. Silver Equivalent Content (moz)-----------------------------------------------------------------------------------------------------Category June 2006 Depletion(1) Addition* Dec 2006 % June 2006 Att.(2) Dec 2006 Att.(2) %----------------------------------------------------------------------------------------------------- Resource 233.4 34.2 267.5 15% 177.8 202.2 14%Reserve 105.6 (11.7) 49.4 143.3 36% 83.4 103.9 25%----------------------------------------------------------------------------------------------------- (1) Depletion: reduction in reserves based on ore delivered to the mine plant (2) Attributable reserves based on our percentage ownership at our joint venture projects Notes: resources are inclusive of reserves; reserves and resources are reportedaccording to the JORC code developed by the Australasian Joint Ore ReservesCommittee; Gold/Silver equivalency: 1oz Au= 60oz Ag * Increase in reserves due mainly to mine site exploration but also to price increase. Arcata Production: Year ended 31 Year ended 31 % change December 2006 December 2005---------------------------------------------------------------------------------Ore production (tonnes) 313,688 282,199 11%Average head grade silver 536.61 538.55 0%(g/t)Average head grade gold (g/t) 1.39 1.19 17%Concentrate produced 12,407 10,787 15%(tonnes)Silver grade in concentrate 11.92 12.31 (3%)(kg/t)Silver produced (Koz) 4,754 4,271 11%Gold produced (Koz) 11.89 7.19 65%Net silver sold (Koz) 4,046 4,194 (4%)Net gold sold (Koz) 9.8 7.2 36%--------------------------------------------------------------------------------- Arcata's processing capacity will be increased to 420 ktpa in the second quarterof 2007 and we envisage undertaking a further expansion to 530 ktpa in 2009. AtArcata we experienced a timing difference between production and sale ofconcentrate which was significantly above that of previous years and, as such,we anticipate a shipment of approximately 692 koz of silver and 1.7 koz of goldthat was mined in 2006 to be recognized as revenue in 2007. We recognize revenuefrom concentrate when the risk passes to the customer which under the contractwith Penoles is when the concentrate is loaded onto the ship in Peru. Weanticipate the magnitude of this effect will normalize in 2007 to that ofprevious years. Revenues and costs: ($ thousand) Year ended 31 Year ended 31 % change December 2006 December 2005---------------------------------------------------------------------------------Revenue 55,020 32,587 69%% of consolidated revenue 26% 20%--------------------------------------------------------------------------------- Unit costs per tonne at Arcata increased 6% in 2006 principally resulting froman increase in mine costs, up 10%, and royalties, up 137%, although offset by adecrease in geology costs, down 33%. Mine costs increased because of less lowcost open stopping in the Macarena Vein, more fill transport due to new areas ofoperation, and to a lesser extent, a greater expense for ventilation. Royaltiesare dictated by Peruvian legislation whereby owners of mining concessions mustpay for the exploitation of metallic and non-metallic resources. Miningroyalties, of 1%-3% of sales, are calculated depending on the value of themineral concentrates according to the quoted market price published by theMinistry of Energy and Mines. Accordingly, as mineral prices have increased, sohave the applicable royalties. Absent any unforeseen circumstances, we do notforesee a significant change in the cost profile of Arcata in 2007. Capital expenditure: ($ million) Year ended 31 December 2006 2007 Budget---------------------------------------------------------------------------------Total capital expenditure 14.6 24.8Sustaining 2.1 8.5Expansion 10.6 12.2Exploration 1.9 4.0--------------------------------------------------------------------------------- The increase in sustaining capital expenditure at the Arcata unit in 2007 is dueto the necessary replacement of the integral pump system for tailings, heavyequipment purchases, the replacement of the pump system in the mine and someinfrastructure improvements. Additionally, we have significantly increased thebudget for mine site exploration, which we will permit us to continue to proveup additional reserves and resources at Arcata while increasing productioncapacity. Exploration & Geology: Stated on an attributable basis 31 December 2006 30 June 2006 % change---------------------------------------------------------------------------------------Resource (moz Ag eq.) 60.6 43.6 39%Reserve (moz Ag eq.) 20.4 16.1 27%--------------------------------------------------------------------------------------- Notes: contains only the percentage of reserves or resources attributable to ourownership in the mine/project; resources are inclusive of reserves; reserves andresources are reported according to the JORC code developed by the AustralasianJoint Ore Reserves Committee; Gold/Silver equivalency: 1oz Au= 60oz Ag Exploration and development has centred on the Mariana vein system at thenorthern margin of the mineralised area, which includes the majority of reservesand which currently supports the greater part of production. Exploration in andaround the Mariana vein system will continue in order to convert additionalresources into reserves, expand the mine life, and build a strong platform forproduction growth at our flagship mine. Ares Production: Year ended 31 Year ended 31 % change December 2006 December 2005---------------------------------------------------------------------------------Ore production(tonnes) 289,138 281,095 3%Average head grade silver 310.61 355.28 (13%)(g/t)Average head grade gold (g/t) 17.37 22.81 (24%)Dore total (Koz) 2,850 3,151 (10%)Silver produced (Koz) 2,688 2,944 (9%)Gold produced (Koz) 155.5 198.55 (22%)Net silver sold (Koz) 2,651 2,895 (8%)Net gold sold (Koz) 152.9 196.4 (22%)--------------------------------------------------------------------------------- As anticipated, the average grade at the Ares mine is declining due to thegeologic nature of the ore body and, as such, we anticipate that we will mine ata lower average head grade in 2007. In 2006, we completed the planned expansionof the plant at Ares taking its capacity from 280 ktpa to 325 ktpa. Results fromthe testing were positive and we are currently producing at a rate of 325 ktpa. Revenues and costs: ($ thousand) Year ended 31 Year ended 31 % change December 2006 December 2005---------------------------------------------------------------------------------Revenue 92,368 90,943 2%% of consolidated revenue 44% 56%--------------------------------------------------------------------------------- Despite higher prices, revenue was offset by a decrease in the ounces producedand thus sold from Ares. Unit costs per tonne at Ares increased by a modest 2% in 2006. This change wasprincipally driven by an increase in plant costs, up 26%, and administrativecosts, up 14%, and offset by a decrease in mine costs, down 8%, and generalservices costs, down 6%. Plant costs increased as a result of higher prices ofsodium cyanide, more detoxification cycles in 2006 and an increase in steelprices. Administrative costs were affected by the implementation of a revampedcatering service. Mine costs decreased because of a higher proportion ofmechanized stopes and a decrease in the number of stopes compared to 2005.General services decreased as a result of an overall reduction in energyconsumption and operational supplies. We have a legal stability agreement at theAres unit which was granted in January 1999 for a ten year term, andconsequently, we do not make any royalty payments. Absent any unforeseencircumstances, we do not foresee a significant change in the cost profile ofAres in 2007. Capital expenditure: ($ milion) Year ended 31 December 2006 2007 Budget----------------------------------------------------------------------------------Total capital expenditure 4.1 11.1Sustaining 2.3 4.2Expansion 0.3 2.9Exploration 1.5 4.0---------------------------------------------------------------------------------- The increase in sustaining capital expenditure at the Ares unit in 2007 is dueto the replacement of heavy equipment and other equipments used in operationalareas. We also have increased the budget for mine site exploration at the Aresunit to focus on new exploration targets. Exploration & Geology: Stated on an attributable basis 31 December 2006 30 June 2006 % change---------------------------------------------------------------------------------------Resource (moz Ag eq.) 24.9 30.5 (18%)Reserve (moz Ag eq.) 22.3 28.5 (22%)--------------------------------------------------------------------------------------- Notes: contains only the percentage of reserves or resources attributable to ourownership in the mine/project; resources are inclusive of reserves; reserves andresources are reported according to the JORC code developed by the AustralasianJoint Ore Reserves Committee; Gold/Silver equivalency: 1oz Au= 60oz Ag As anticipated, the stated reserves and resources at Ares have decreased as aresult of production, declining grades and limited geological developments in2006. In response to this change, we have increased our exploration efforts inprospective areas around the high grade Victoria vein looking for a deposit of asimilar, high grade nature and will continue to do so in 2007. We are alsoexploring areas adjacent to the already exploited parts of the Victoria veinsystem at higher elevations. This exploration has shown positive results inidentifying minable high grade splays and cymoid veins that went previouslyun-detected. We expect to produce a reserve and resource replacement in 2007from this effort which should offset production depletion. Selene Production: Year ended 31 Year ended 31 % change December 2006 December 2005------------------------------------------------------------------------------Ore production (tonnes) 359,686 288,919 24%Average head grade silver 397.76 399.11 0%(g/t) Average head grade gold (g/t) 2.85 3.43 (17%)Concentrate produced 3,812 3,559 7%(tonnes)Silver grade in concentrate 33.96 29.15 17%(kg/t)Silver produced (Koz) 4,162 3,335 25%Gold produced (Koz) 28.34 27.48 3%Net silver sold (Koz) 3,705 3,277 13%Net gold sold (Koz) 26.9 26.4 2%------------------------------------------------------------------------------ The capacity at the Selene concentrator will be expanded to 700 ktpa in thethird quarter of 2007 to accommodate for the extension of the Selene mine andfor the commencement of production at the Pallancata project. In the first halfof 2007, Selene will produce approximately 424 ktpa and in the second half 75%of plant capacity will be used to treat ore from Selene while the remaining 25%will be used to treat ore from Pallancata. The basic and detailed engineeringwork for the expansion has been completed and construction is currently inprogress and on schedule. As in Arcata, we also experienced a timing difference between production andsale of concentrate at the Selene unit which was above that of previous years.Approximately 635 koz of silver and 3.5 koz of gold from the Selene unit remainsin inventory and will add to revenue in 2007. We are converting the Seleneconcentrate into silver/gold dore at Ares which will reduce the future magnitudeof the timing difference between production and sales. Revenues and costs: ($ thousand) Year ended 31 Year ended 31 % change December 2006 December 2005---------------------------------------------------------------------------------Revenue 63,713 37,307 71%% of consolidated revenue 30% 23%--------------------------------------------------------------------------------- Unit costs per tonne at Selene decreased by 20% in 2006, principally resultingfrom an increase in production coupled with further development andmechanisation of the operation. This effect significantly impacted our totalcost per tonne. Mine costs decreased by 33% as we were able to improveproductivity with technical solutions most notably stope mechanisation. Inaddition, general services costs decreased by 24% as we were able to connect tothe national grid in 2006 as opposed to running the unit off a generator whichhad been the case previously. Finally, administrative costs, a fixed cost, were14% lower on a per unit basis due to the increased tonnage of production and areduction in personnel services due to a decrease in the workforce. The decreasein costs was offset by an increase in royalties, up 64%, given higher averageselling prices. We do not anticipate any significant change in the per unit costat the Selene unit in 2007. Capital expenditure: ($ million) Year ended 31 December 2006 2007 Budget----------------------------------------------------------------------------------Total capital expenditure 4.9 14.1Sustaining 4.2 5.5Expansion 0.3 4.7Exploration 0.4 4.0---------------------------------------------------------------------------------- Sustaining capital expenditure will increase due to the replacement of heavyequipment and a new pump station in the mine. The increase in the expansioncapital expenditure at Selene is to fund mine developments. Exploration & Geology: Stated on an attributable basis 31 December 2006 30 June 2006 % change --------------------------------------------------------------------------------------Resource (moz Ag eq.) 25.2 18.6 35%Reserve (moz Ag eq.) 12.3 13.6 (10%)-------------------------------------------------------------------------------------- Notes: contains only the percentage of reserves or resources attributable to ourownership in the mine/project; resources are inclusive of reserves; reserves andresources are reported according to the JORC code developed by the AustralasianJoint Ore Reserves Committee; Gold/Silver equivalency: 1oz Au= 60oz Ag We significantly increased the resource base at Selene and are now poised toincrease Selene's reserves in 2007. The Selene mine is a low sulphidation, precious metal epithermal vein systemconformed, based on current knowledge, by two vein systems. The first, theExplorador system, is where most of our production, reserve and resource base isfocused. The second, the Tumiri system, had been mined by previous owners and itstill has an important exploration potential to develop. In 2007, explorationexpenses will be focused in converting resources to reserves mainly by deepeningthe Explorador mine workings. Additionally, we plan to explore, with undergroundworkings and drilling, a set of parallel tensional veins which cross diagonallybetween the Explorador and Tumiri vein systems, as well as the Tumiri and Timidaveins where we anticipate expanding our reserve and resource base significantly.We have also a number of exploration targets within the Selene mining concessionwhich will be explored using surface drills during 2007. Pallancata The Pallancata silver/gold property is jointly owned with International MineralsCorporation. We have a 60% ownership interest and are the operator. Pallancatais located in southern Peru approximately 11 kilometers from the Selene veinsystem and is considered part of the same geological environment. We have commenced construction of the tunnels to reach the Pallancata vein whichwe plan to mine in the third quarter of 2007. Future exploration targets existaround the Mariana, Mercedes and San Javier structures. We will need to build a22 kilometer road to transport the ore from Pallancata to Selene where weanticipate commencing construction in March 2007 after the rainy season. We arein the process of building an electrical line between the Selene mine and thePallancata property, which will completely supply the Pallancata property withpower. The majority of the personnel at the Pallancata mine will be contracted, similarto our other Peruvian operations, and we are in the process of ramping upon-site mine personnel. We have applied for all the relevant mining permits and although we have notreceived all approvals, we are confident in our ability to ascertain thesebefore we begin production. We have submitted our Environmental ImpactAssessment to the regulatory authority and having received some suggestions, arein the process of implementing some recommendations. We do not howeveranticipate any significant issues. The expansion at the Selene plant to accommodate for the ore from Pallancata isprogressing according to the original schedule. Initial production fromPallancata is scheduled to begin in the third quarter of 2007 and will amount toapproximately 175 ktpa. In the current expansion at the Selene plant, we areallowing for a further expansion to be implemented in due course and areconstructing the plant accordingly. In the near future, the ore from Pallancatawill be sold from Selene in the form of concentrate although we will evaluatethe possibility of converting the Pallancata concentrate into dore at Ares. Capital expenditure: ($ million) Year ended 31 December 2006 2007 Budget----------------------------------------------------------------------------------Total capital expenditure 1.6 23.0Sustaining - -Expansion 1.6 19.0Exploration - 4.0---------------------------------------------------------------------------------- The budget for the Pallancata project has increased due to an increase in thecosts associated with road construction to transport the concentrate fromPallancata to Selene and costs associated with more exploration to increasefurther the reserve base. Exploration & Geology: Stated on an attributable basis 31 December 2006 30 June 2006 % change ----------------------------------------------------------------------------------Resource (moz Ag eq.) 29.5 21.7 36%Reserve (moz Ag eq.) 14.3 6.8 110%---------------------------------------------------------------------------------- Notes: contains only the percentage of reserves or resources attributable to ourownership in the mine/project; resources are inclusive of reserves; reserves andresources are reported according to the JORC code developed by the AustralasianJoint Ore Reserves Committee; Gold/Silver equivalency: 1oz Au= 60oz Ag The increase in reserve and resource is the result of significant drillingactivity on the Pallancata vein and the extension of the previously knownmineralization along the vein both east and west with significant widths. Themineralization appears still open to the west and further drilling is planned in2007. San Jose The San Jose silver/gold property, located in southern Argentina, is jointlyowned with Minera Andes, S.A. We have a 51% ownership interest and are theoperator. We plan to commence production at San Jose in the second quarter of2007. In 2006, we completed a 21,240.66-meter drill program which increased ourresources and reserves by 37% and 54% respectively and in 2007 we plan tocomplete an additional 32,000-meter drill program. This year we plan to mine the Huevos Verdes vein and the nearby Frea vein wherewe have developed approximately 9 kilometers of underground workings and havecompleted the required infrastructure. While construction of the undergroundmine is finished, we are completing construction of the plant. We are buildingthe plant to accommodate approximately 275 ktpa. However, the plant has beendesigned to be upgraded to 550 ktpa in the future. We also have completed asignificant portion of the construction of the plant that will produce a silver/gold dore. Initially, we project working with diesel generators at the San Jose property;however, we are currently evaluating alternative sources of energy in order toreduce our future cost base. During the last four months, we have hired all personnel for the mine and arecurrently in the process of hiring plant personnel. Unlike our Peruvianoperations where the majority of our personnel are contracted, the majority ofthe workforce at San Jose will be employed by the Company as is standardpractice in Argentina. All relevant mining permits in respect of the San Jose property have beenobtained. On the corporate and social responsibility front, we have establishedcontact with the local communities in order to begin forging a long lasting,mutually beneficial relationship following the approach taken at our Peruvianoperations which over time has proven successful. Despite the difficulties of entering a new country, especially one notcharacterized by an extensive mining history, we are proud of theaccomplishments made thus far. Capital expenditure: ($ million) Year ended 31 December 2006 2007 Budget-----------------------------------------------------------------------------------Total capital expenditure 32.8 64.7Sustaining - 4.4Expansion 32.8 56.9Exploration - 3.4----------------------------------------------------------------------------------- The budget for the San Jose project has increased due to a more aggressivedrilling campaign in the Kospi vein and a planned increase in infrastructure.The increase in infrastructure mainly includes more camps and offices as well asan increase in the size of the laboratory all which were not considered in theoriginal scope. Exploration & Geology: Stated on an attributable basis 31 December 2006 30 June 2006 % change---------------------------------------------------------------------------------------Resource (moz Ag eq.) 35.9 26.3 37%Reserve (moz Ag eq.) 28.3 18.4 54%--------------------------------------------------------------------------------------- Notes: contains only the percentage of reserves or resources attributable to ourownership in the mine/project; resources are inclusive of reserves; reserves andresources are reported according to the JORC code developed by the AustralasianJoint Ore Reserves Committee; Gold/Silver equivalency: 1oz Au= 60oz Ag At San Jose, reserves and resources have increased significantly due to thedrilling performed in the newly discovered Kospi vein. Will continue to explorethe property in 2007 focusing on the Kospi, Frea and Odin veins where we havefound positive results. Furthermore, we have identified other structures whichhave been initially tested and where we will drill in 2007 in order to increaseour reserve base further at the San Jose property. Mina Moris In early December 2006, we exercised our option to acquire a 70% stake in theMina Moris open pit mine in Chihuahua, Mexico, which was owned and operated byManhattan S.A. de C.V between 1996 and 1999. Exmin Resources Inc. ("Exmin") isour partner in this project and owns the remaining 30%. Our current strategy with Mina Moris initially focuses on bringing the open pitmine back into production in a very cost efficient manner and mining theremaining surface ore. However, we are most interested in the surface andunderground potential and geological characteristics of the surrounding 30,000hectare property package we own with our partner Exmin plus an additional 50,000hectare claim under approval by authorities. This property package is in one ofMexico's most prolific gold belts and is host to the most recent exploration andnew mine developments, namely Ocampo, Mulatos and Dolores. We are committed toexplore the area with increasing intensity in the next several years. We expect to commence production at Mina Moris in the third quarter of 2007 atan initial capacity of 1,060 ktpa. The ore will be processed at a plant whichcame with the property and is currently being refurbished. Since the operationwas initially commissioned in 1996, some of the permits and licenses havelapsed. However, we have obtained the majority of the necessary permits andlicenses save for the health license, blasting license and the authorization topurchase explosive material. Mexico is a country with a long history of mining. The local reaction to ourentering the region has been positive with the people of the local villageoptimistic about the opportunities which will arise from our recommissioning themine. The local village provides a skilled workforce having once worked at thesame operation not so long ago. In line with our corporate culture, we believein an emphasis on social responsibility and have already begun a dialogue withthe local communities near the mine in Mexico. Capital expenditure: ($ million) Year ended 31 December 2006 2007 Budget----------------------------------------------------------------------------------Total capital expenditure - 7.2Sustaining - -Expansion - 7.2Exploration - ----------------------------------------------------------------------------------- Exploration & Geology: Stated on an attributable basis 31 December 2006 30 June 2006 % change-------------------------------------------------------------------------------------Resource (moz Ag eq.) 8.6 8.9 (3%)Reserve (moz Ag eq.) 6.2 0.0 n.m.------------------------------------------------------------------------------------- Notes: contains only the percentage of reserves or resources attributable to ourownership in the mine/project; resources are inclusive of reserves; reserves andresources are reported according to the JORC code developed by the AustralasianJoint Ore Reserves Committee; Gold/Silver equivalency: 1oz Au= 60oz Ag Reserves and resources in the Moris Mine were calculated based on a validationof data delivered by the vendor. Our drilling and sampling has validatedexisting data and has confirmed the reliability of the data to calculatereserves and resources. However, we will undertake a full audit in 2007 similarto what we have done at our other operations. Review of Development Project: San Felipe The San Felipe project is located approximately 6 kilometres west of San Felipede Jesus in northern Sonora, Mexico and consists of seven mining concessionscovering a total of approximately 548 hectares as well as two other nearbyprojects El Gachi and Moctezuma. In mid 2006, we entered into an agreement with the underlying owner GrupoSerrana whereby we have an option to acquire up to 70% of all mining rights andownership of the San Felipe, Moctezuma and El Gachi properties through aninvestment of $33.3 million in the property within five years of the date of theagreement. Since late 2006 and into early 2007, we have engaged in an accelerated andpromising exploration project, including regional surface mapping andconfirmation drilling on the original resource block in La Ventana ore body. La Ventana ore body, based on information we received from the previous owner,contained 4.5 million tonnes of inferred resources averaging 7.5% Zn, 3.5% Pb,0.5% Cu and 80 g/t Ag. After the initial drilling campaign in excess of 8,000meters on a portion of the ore body (42 holes drilled of which 33 had assays atthe time of resource calculation), we have been able to confirm inferred andindicated resources of 2.7 million tonnes containing 6.8 % Zn, 3.2%, Pb, 0.4% Cuand 71 g/t Ag. The ore body is still open at depth and to the west and we expectto increase this resource significantly during 2007 with an additional 8,000meters drilling program during the first half of 2007. We expect to delivermeasured and indicated resources that will justify the initial feasibility workin July 2007. Additionally, we have identified, mapped and sampled a number of explorationtargets within the San Felipe project. Two of them hold significant newpotential. In the Las Lamas ore body initial exploration drilling has startedand we have two wide intercepts with high grade zinc mineralization. Thepreviously explored San Felipe ore body, has also returned high grade results inrehabilitated underground workings which suggest significant potential stillexist at depth. We will commence exploration drilling on this target in duecourse. Many other surface exposures of mineralization have been evidenced by regionalsurface mapping which indicates that the San Felipe project is facing amineralised district with great exploration potential. We are currently inadvanced negotiations to secure the surrounding property blocks to expand thescope of this very exciting project. Review of Prospects: El Gachi Together with the San Felipe joint venture, we have acquired rights on the ElGachi project located 70 km northeast from San Felipe. El Gachi was explored byAnaconda and Penoles in the 1960's and 1970's and unverified historicinformation indicates grades of 400 to 900 g/t silver and greater than 12%combined Pb and Zn. We presently envision a potential ranging from a minimum of2.0 meters to upwards of 10 meters at similar grades. Currently we are reviewingthe existing information and mapping the area to design an initial drill programdesigned to fast track this high grade silver and base metal project. Claudia and Santa Rita We signed a definitive joint venture agreement with Mirasol Resources on 26February 2007. The joint venture agreement provides us with the option to earn a51% interest in each of the Claudia and Santa Rita properties by spending $6million on exploration at the Claudia Project and $3 million on exploration atthe Santa Rita project over four years, and by making cash payments totaling$950,000. We may increase our interest to 65% in either, or both, projects bycompleting a bankable feasibility study, and may further increase our ownershipto 75% by providing mine financing on commercial terms to Mirasol. At eachdecision point, Mirasol may elect to retain its participating interest and fundits share of expenditures. The Claudia property is located 30 kilometres south of the producing CerroVanguardia mine in Argentina and is hosted in a similar regional setting. Thevein system at Claudia is exposed within an erosional window exposingprospective Chon Aike volcanic rocks. Exploration to date has identified threegold/silver mineralized zones, where each hosts multiple quartz veins orveinlets of classic, epithermal style. The three zones lie within a structurallycomplex area some 3 kilometres in strike length and 1 kilometre wide, and appearto represent distinct erosional levels exposed by block faulting. At this pointin time, the property has not undergone any drilling activity. The Santa Rita silver project is located near our San Jose project in southernArgentina. At Santa Rita, reconnaissance exploration has resulted in thediscovery of mineralised structural breccia system localized by a regionalstructural trend that hosts several other gold-silver showings in the area. Inkeeping with similar low-sulphidation epithermal precious metals occurrences,the quartz vein textures and stratigraphic position at Santa Rita are permissivefor gold-silver grades increasing at depth. We plan to drill both these properties in the coming months. Other prospects At the San Luis del Cordero property in Mexico, we completed mapping last yearand expect to commence drilling in 2007. According to the terms of the contractwith Exploraciones del Altiplano S.A. de C.V. where we have agreed to undertakeexploration with an option to acquire all rights and ownership, we must spend$2.7 million over the next 4 years, of which we have spent $0.3 million withinthe first year. We are seeking prospective partners for our San Martin site as results wereencouraging but below our expectations and specified hurdle rates. We arecurrently in negotiations with prospective partners. At the Sierra de las Minas property in Argentina, we encountered high gradeintercepts but due to a lack of continuity we have decided to cease mapping,sampling and drilling programs. Financial review: Key financial performance indicators: (stated before exceptional items) ($ thousands, unless stated) Year ended 31 Year ended 31 % change December 2006 December 2005-------------------------------------------------------------------------------Revenue 211,246 161,235 31%Attributable after tax profit 1 46,646 24,719 89%EPS 2 0.19 0.11 73%Adjusted EBITDA 3 107,617 70,650 52%Cash costs ($/oz Ag co-product) 4 3.57 2.77 29%Cash costs ($/oz Au co-product) 4 153 159 (4%)Silver production (koz) 11,604 10,550 10%Gold production (koz) 196 232 (16%)------------------------------------------------------------------------------- 1 Attributable after tax profit is calculated as the profit for the year attributable to the equity shareholders of the company from continuing operations before exceptional items. 2 EPS is calculated using the weighted average number of shares outstanding for the period (2006: 242.9 million; 2005: 230.0 million). EPS from continuing operations after exceptional items was $0.17 and $0.15 per share for 2006 and 2005, respectively. 3 Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance costs and income tax plus depreciation, amortization and exploration costs other than personnel and other expenses (see reconciliation on page 17) 4 Cash costs are calculated to include cost of sales, treatment charges, and selling expenses less depreciation included in cost of sales Summary of financial performance In our discussion of financial performance we remove the effect of exceptionalitems and in our income statement show the results both pre and post suchexceptional items. We consider events to be exceptional when they aresignificant and which, due to their nature or the expected infrequency of theevents giving rise to them, need to be disclosed separately. Revenue for the year ended 31 December 2006 amounted to $211 million, a 31%increase from 2005 principally driven by an increase in realizable commodityprices and offset by the number of gold ounces sold. Our average realizableprice for silver and gold increased 68% and 25%, respectively in 2006. Thenumber of silver ounces sold was flat in 2006 while gold ounces sold decreased18% year over year. Profit from continuing operations before exceptional items, net finance costsand income tax was up 133% from $32 million in 2005 to $75 million in 2006 withthe margin expanding from 20% to 36% during the same period. Adjusted EBITDA, akey performance indicator for measuring underlying operating efficiency, rose52% from 2005 to $108 million in 2006 corresponding to an adjusted EBITDA marginof 51%. The increase in profit and adjusted EBITDA was fuelled by highercommodity prices and a decrease in the weighted average cost per tonne of ourthree operating units as is evidenced by the significant margin expansion. Attributable after tax profit from continuing operations increased by 89% to $47million in 2006. Our overall strong performance is attributable to an increasein commodity prices across both silver and gold, stable production and strongcost control at each of the three operating units. Despite industry wide cost pressure, our weighted average cost per tonnedecreased 2% in 2006 principally driven by a significant cost reduction at theSelene unit. However, our silver cash cost increased on a co-product basis. Cashcosts on a co-product basis must be considered in conjunction with theco-product commodity because as the percentage sales of one commodity increasethe other decreases resulting in a similar effect on the respective cash costs.In 2006, we experienced an increase in co-product cash cost for silver from$2.77/oz in 2005 to $3.57/oz principally driven by a higher percentage of silversales (68% increase in revenue from silver and 2% increase in revenue from gold)and consequently a greater amount of cost attributed to silver production, andto a lesser extent, by a decrease in average head grades mined for both silverand gold. On the other hand, co-product cash cost for gold decreased from $159/oz in 2005 to $153/oz in 2006 while by-product cash cost for gold went fromnegative $21/oz to negative $273/oz. We do not typically look at silver on aby-product basis. Net debt (see page 18) decreased significantly in 2006 as we raised net proceedsof $469 million from the Listing and used a portion of the proceeds to pay downlong term debt. Our working capital position improved in 2006 as a result of an increase intrade payables which was offset by the increase in inventory. Cash flow from operations increased over 300% in 2006 from $30 million in 2005to $126 million in 2006. This increase is largely due to higher realizablecommodity prices, increased profitability and a release of cash from workingcapital, most notably trade receivables and trade payables. Dividends The Directors recommend a final dividend of US$0.00740 per share whichrepresents one third of the Company's attributable profit after tax postexceptional items in respect of the two month period from Listing until 31December 2006. Dividend dates 2007------------------------------------------------------------------------------Ex-dividend date 13 JuneDeadline for return of currency election forms 13 JuneRecord date 15 JunePayment date 06 July------------------------------------------------------------------------------ As stated at the time of the Listing, the Company's dividend policy takes intoaccount the profitability of the business and underlying growth in earnings ofthe Company, as well as its capital requirements and cash flows, whilemaintaining an appropriate level of dividend cover. Interim and final dividendswill be paid in the approximate proportions of one-third and two-thirds of thetotal annual dividend, respectively. Dividends will be declared in US dollars. Unless a shareholder elects to receivedividends in US dollars, they will be paid in pounds sterling with the US dollardividend being converted into pound sterling at exchange rates prevailing at thetime of payment. Revenue Our full year revenue from continuing operations increased 31% to $211 million(2005: $161 million) due to higher realized commodity prices and offset by adecrease in the number of gold ounces sold. We recognize revenue from concentrate when the risk passes to the customer whichunder the contract with Penoles is when the concentrate is loaded onto the shipin Peru. As explained more fully on page 5, we were not able to recognize thesale of approximately 1.3 moz of silver and 5.3 koz of gold as revenue in 2006.However, we anticipate the magnitude of this timing effect will normalize in2007 to that of previous years. Silver. Revenue from silver increased by 68% in 2006 to $118 million (2005: $70million). This change reflects a higher realized silver price, $11.4/oz in 2006(2005: $6.8/oz). Total net silver ounces sold were flat in 2006 with 10,403 kozsold versus 10,366 koz in 2005. A timing difference between production and salesof concentrate at the Arcata and Selene units left approximately 1.3 moz ofsilver in stocks most of which is sold in 2007. In 2006, revenue from silveraccounted for 56% of consolidated revenue compared to only 44% in 2005. Gold. Revenue from gold was up modestly in 2006 to $92 million (2005: $90million). This change in gold revenue was driven by a 18% decrease in the numberof gold ounces sold and offset by a higher realizable gold price, $487/oz in2006 (2005: $391/oz). Total net ounces of gold sold decreased from 231 koz in2005 to 190 koz in 2006 as a result of the anticipated decrease in the ore gradeat Ares. Similar to silver, we also experienced an increase in gold stocks inconcentrate with approximately 5.3 koz remaining most of which will likely besold in 2007. In 2006, revenue derived from the sale of gold accounted for 44%of consolidated revenue compared to 56% in 2005. Hedging We have a number of forward sales contracts in place for both silver and goldwhich were entered into as part of the security package for a loan facility in2003, the last of which is scheduled to expire in June 2007. 2006 2005------------------------------------------------------------------------------Silver sales hedged (Koz) 2,468 2,037Gold sales hedged (Koz) 102 143Silver average sale price ($/oz) $11.4 $6.8Gold average sale price ($/oz) $487 $391------------------------------------------------------------------------------ In the first half of 2007, approximately 60 koz of gold sales and 880 koz ofsilver sales from Ares are hedged at an average hedge price of $418/oz and $10.7/oz per ounce, respectively. Our current policy is not to hedge exposure to the underlying commodity prices. Gross profit Our gross profit increased 53% to $136 million in 2006 (2005: $89 million). Thiswas driven not only by higher commodity prices but also by increasedefficiencies, which is evidenced by the significant gross margin expansion. Ourgross margin increased from 55% in 2005 to 64% in 2006 and is principally areflection of our weighted average production cost decreasing 2% in 2006. At theArcata operation the increase in unit costs per tonne was driven principallyfrom an increase in mine costs and royalties although offset by a decrease ingeology costs. Furthermore, as mentioned above, we experienced a modest increasein the per unit cost at Ares as a result of an increase in plant andadministrative costs and offset by a decrease in mine and general servicescosts. At Selene, the unit cost decreased significantly as a result of anincrease in production coupled with further development and mechanisation of theoperation although offset by an increase in mining royalties. It is ourfundamental corporate focus on operational efficiency and a rigorous system ofcost controls that makes us one of the lowest cash cost producer globally andhistorically has enabled us to remain profitable throughout the commodity cycle. Administrative expenses Administrative expenses increased in 2006 to $39 million (2005: $25 million).Our administrative costs include all those costs associated with the corporateheadquarters as well as certain indirect costs associated with the operatingmines. The increase in administrative expenses was driven principally by anincrease in personnel expenses, workers' profit sharing and third-partyservices. Personnel expenses increased mainly due to a special bonus payment tomanagement. Workers' profit sharing is a function of an increase in profitbefore tax and is not considered a metric over which we have significantcontrol. Workers' profit sharing is governed by Peruvian legislation and isequivalent to 8% of taxable income each year. The expenses associated withthird-party services were incurred during the Listing process to restructure theCompany and ultimately increase efficiencies both at operating and manageriallevels. We believe this increase represents a step change in overhead costs andis a reflection of the incremental annual costs associated with being a publiccompany. Exploration expense Exploration expenses decreased 29% in 2006 to $20 million (2005: $28 million).This decrease was due principally to the winding down of the exploration phaseof the San Jose project and the fact that we capitalize underground developmentand expense costs associated with pre-feasibility exploration. In addition, wehad a lower level of mine site exploration at Selene, offset by an increasedeffort in exploring the Pallancata project as we prepare for production start-upand an increase in mine site exploration at Arcata, as we are placing additionalemphasis on proving up additional reserves at the Arcata site. Profit from continuing operations and adjusted EBITDA Adjusted EBITDA was up 52% from 2005 to $108 million in 2006 (2005: $71 million)with margins expanding from 44% in 2005 to 51% in 2006. Below is areconciliation of the adjusted EBITDA calculation: Adjusted EBITDA reconciliation: $ thousands Year ended 31 Year ended 31 % change December 2006 December 2005------------------------------------------------------------------------------Profit from continuing operations 75,063 32,281 133%before exceptional items, netfinance and income taxOperating margin 36% 20%Plus:------------------------------------------------------------------------------Depreciation in Cost of Goods Sold 16,435 14,605Depreciation in Administrative 993 2,001ExpensesExploration Expense 19,863 28,057Minus:------------------------------------------------------------------------------Personnel and other in Exploration 4,737 6,294ExpenseAdjusted EBITDA 107,617 70,650 52%Adjusted EBITDA margin 51% 44%------------------------------------------------------------------------------ Finance income Finance income increased significantly in 2006 to $7 million (2005: $4 million)principally due to additional interest earned on the net proceeds from theListing. This increase was offset by a decrease in the interest on loans torelated parties as the loans were repaid mid-way through the year prior to theListing. Income tax The weighted average statutory income tax rate was 25% for 2005 and 30% for2006. This change is due to a change in the weighting of profit/(loss) beforetax in the various jurisdictions in which the Company operates. The effective tax rate for 2006 was 42% which was significantly higher than thatof the previous year at 19% principally due to our recognizing a significantdeferred tax asset in 2005 related to tax losses incurred during the developmentof San Jose and Arcata, in addition to the introduction of taxable interest inthe United Kingdom, an increased weighting of income arising in Peru and morewithholding tax paid as a result of dividends declared in Peru. Minority interest The loss attributable to minority interest in both 2005 and 2006 consistspredominantly of that portion of the pre-feasibility costs for the San Joseproject of which the Company has a 51% ownership with Minera Andes owning theremaining 49%. Exceptional items We consider events to be exceptional when they are significant and which, due totheir nature or the expected infrequency of the events giving rise to them, needto be disclosed separately. In 2006, exceptional items in other expenses principally included a $3.0 millionasset impairment at Sipan, one of our former operations which was closed in2003, and a loss on the sale of investments of $2.2 million which was incurredwhen the Company disposed off shares in Inversiones Pacasmayo prior to theListing. In addition, there was a $1.0 million loss on the sale of the Group'swholly owned subsidiary, Mauricio Hochschild & Cia. Ltda. S.A.C. Cash flow & balance sheet review Our operations generated $126 million of cash flow in 2006 which is up 314% from2005 (2005: $30 million). This increase is principally driven by an increase inthe underlying profit from continuing operations coupled with a shift in workingcapital which was primarily due to an increase in payables and a decrease inreceivables. Working capital: $ thousands Year ended 31 December Year ended 31 December 2006 2005-------------------------------------------------------------------------------Current assets-------------------------------------------------------------------------------Inventories 16,405 10,499Trade and other receivables 49,726 81,106Current liabilities-------------------------------------------------------------------------------Trade and other payables 64,140 31,664Pre-shipment loans 26,894 18,800-------------------------------------------------------------------------------Working capital (24,903) 41,141------------------------------------------------------------------------------- Net debt: In 2006, as a result of the proceeds raised in the Listing and the repayment oflong term debt at the end of 2006, we were able to improve the strength of ourbalance sheet. The majority of the long term debt currently outstandingcorresponds to a loan at one of our subsidiaries from our joint venture partneras a way of financing its 49% of the San Jose project. Upon consolidation weaccount for the portion of the loan outstanding to our partner. We exclude shortterm pre-shipment loans from net debt as we consider these loans to be moreclosely related to working capital requirements as they are secured by inventoryand receivables $ thousands Year ended 31 Year ended 31 December 2006 December 2005-------------------------------------------------------------------------------Cash and cash equivalents 435,543 2,467Long term borrowings 27,114 31,089Short term borrowings less 2,888 50,993pre-shipment loansNet debt / (net cash) (405,541) 79,615------------------------------------------------------------------------------- Consolidated Income Statement For the year ended 31 December 2006 Notes Year ended 31 December 2006 Year ended 31 December 2005 ------------------------------ ----------------------------- Before Exceptional Total Before Exceptional Total exceptional items exceptional items items items---------------------------------------------------------------------------------------------- (in thousands of US dollars)Continuing 3&4operations Revenue 211,246 - 211,246 161,235 - 161,235Cost of sales (75,547) - (75,547) (72,529) - (72,529)----------------------------------------------------------------------------------------------Gross profit 135,699 - 135,699 88,706 - 88,706Administrative (38,738 ) - (38,738) (25,434) - (25,434)expensesExploration 6 (19,863) - (19,863) (28,057) - (28,057)expensesGain on sale 7 - - - - 14,812 14,812of Bongarazinc projectand CompaniaMineraCoriantaS.A.C.Selling (3,187) - (3,187) (3,161) - (3,161)expensesOther income 8 5,022 346 5,368 2,846 - 2,846Other expenses 8 (3,870) (6,495) (10,365) (2,619) (202) (2,821)-----------------------------------------------------------------------------------------------Profit from 75,063 (6,149) 68,914 32,281 14,610 46,891continuingoperationsbefore netfinance costsand income taxFinance income 6,906 - 6,906 4,144 - 4,144Finance costs (12,037) - (12,037) (10,105) - (10,105)Foreign 353 - 353 (552) - (552)exchange gain/ (loss)----------------------------------------------------------------------------------------------Profit from 70,285 (6,149) 64,136 25,768 14,610 40,378continuingoperationsbefore incometaxIncome tax 9 (29,486) 791 (28,695) (4,902) (4,771) (9,673)expense----------------------------------------------------------------------------------------------Profit for the 40,799 (5,358) 35,441 20,866 9,839 30,705year fromcontinuingoperationsDiscontinuedoperationsProfit for the - - - 12,179 - 12,179year fromdiscontinuedoperations----------------------------------------------------------------------------------------------Profit for the 40,799 (5,358) 35,441 33,045 9,839 42,884year----------------------------------------------------------------------------------------------Attributableto:Equity 46,646 (5,358) 41,288 36,898 9,839 46,737shareholdersof the CompanyMinority (5,847) - (5,847) (3,853) - (3,853)interest---------------------------------------------------------------------------------------------- 40,799 (5,358) 35,441 33,045 9,839 42,884---------------------------------------------------------------------------------------------- Basic and 10 0.19 (0.02) 0.17 0.11 0.04 0.15dilutedearnings /(loss) perordinary sharefromcontinuingoperations(expressed inU.S. dollarsper share)Basic and 10 - - - 0.05 - 0.05dilutedearnings perordinary sharefromdiscontinuedoperations(expressed inU.S. dollarsper share)---------------------------------------------------------------------------------------------- Consolidated Balance Sheet As at 31 December 2006 Notes As of 31 December 2006 2005------------------------------------------------------------------------ (in thousands of US dollars)ASSETS Non-current assetsProperty, plant and equipment 118,413 59,403Goodwill 2,091 2,091Available-for-sale financial assets 6,285 26,267Trade and other receivables 17,427 6,050Derivative financial instruments - 1,902Deferred income tax assets 15,704 10,990------------------------------------------------------------------------ 159,920 106,703------------------------------------------------------------------------Current assetsInventories 16,405 10,499Trade and other receivables 49,726 81,106Derivative financial instruments 6,022 7,047Other financial assets at fair value through - 19,835profit or lossCash and cash equivalents 11 435,543 2,467------------------------------------------------------------------------ 507,696 120,954------------------------------------------------------------------------Assets classified as held for sale 345 3,844------------------------------------------------------------------------Total assets 667,961 231,501------------------------------------------------------------------------ EQUITY AND LIABILITIESCapital and reserves attributable toshareholders of the ParentEquity share capital (including additional 146,466 219,233capital)Share premium 396,156 -Other reserves (205,112) (198,055)Retained earnings 142,810 28,198------------------------------------------------------------------------ 480,320 49,376------------------------------------------------------------------------Minority interest 9,011 (2,533)------------------------------------------------------------------------Total equity 489,331 46,843------------------------------------------------------------------------ Non-current liabilitiesTrade and other payables 1,064 3,161Borrowings 27,114 31,089Provisions 28,690 30,982Deferred income tax liabilities 4,026 4,134------------------------------------------------------------------------ 60,894 69,366------------------------------------------------------------------------ Current liabilitiesTrade and other payables 64,140 31,664Borrowings 29,782 69,793Provisions 11,385 8,860Income tax payable 12,429 4,975------------------------------------------------------------------------ 117,736 115,292------------------------------------------------------------------------Total liabilities 178,630 184,658------------------------------------------------------------------------Total equity and liabilities 667,961 231,501------------------------------------------------------------------------ Consolidated Cash Flow Statement For the year ended 31 December 2006 Notes Year ended 31 December 2006 2005--------------------------------------------------------------------------- (in thousands of US dollars) Cash flows from operating activitiesCash generated from operations 126,231 30,464Interest received 2,576 345Interest paid (9,163) (4,989)Payments of mine closure costs (5,426) (5,228)Tax paid (26,010) (12,602)---------------------------------------------------------------------------Net cash generated from operating activities 88,208 7,990---------------------------------------------------------------------------Cash flows from investing activitiesPurchase of property, plant and equipment (63,864) (18,852)Purchase of available-for-sale financial (2,770) (3,107)assetsPurchase of shares of Minera Colorada S.A.C (240) -Purchase of other financial assets at fair (5,867) (21,537)value through profit or lossPurchase of assets and liabilities of Mina (4,983) -MorisLoan to Exmin, S.A. de C.V. (754) -Loan to Minera Andes Inc. (9,800) -Proceeds from other financial assets at fair 5,591 17,566value through profit or lossProceeds from sale of Bongara zinc project - 16,364and Compania Minera Corianta S.A.C.Proceeds from sale of available-for-sale 6,550 -financial assetsProceeds from sale of Mauricio Hochschild & 3,801 -Cia. Ltda. S.A.C. (subsidiary)Proceeds from sale of Caylloma mining unit 4,500 3,050Proceeds from sale of property, plant and 991 239equipment and assets classified as held forsaleProceeds from sale of supplies 3,975 3,417Dividends received 147 182---------------------------------------------------------------------------Net cash used in investing activities (62,723) (2,678)---------------------------------------------------------------------------Cash flows from financing activitiesProceeds of borrowings 77,014 118,103Repayment from borrowings (95,977) (127,073)Dividends paid (58,375 (50)Capital contribution 93 -Proceeds from issue of ordinary share under 515,245 -Global offerTransaction costs associated with issue of (33,989) -sharesPurchase of shares from minority shareholders (2) (2,667)Capital contribution from minority 4,215 3,229shareholdersRepayment of capital to minority shareholders (671) ----------------------------------------------------------------------------Cash flows generated from (used in) financing 407,553 (8,458)activities---------------------------------------------------------------------------Net increase/(decrease) in cash and cash 433,038 (3,146)equivalents during the yearExchange difference 38 (20)Cash and cash equivalents at beginning of year 2,467 5,633---------------------------------------------------------------------------Cash and cash equivalents at end of year 435,543 2,467--------------------------------------------------------------------------- Consolidated Statement of Changes in Equity For the year ended 31 December 2006 Other Reserves Unrealised gain/ Equity (loss) on Capital and share available reserves capital -for Cumulative attributable to (including -sale trans- Total shareholders additional Share financial lation Merger Other Retained of the Minority Total Note capital) premium assets adjustment reserve reserves earnings Parent interest Equity------------------------------------------------------------------------------------------------------------------------ (in thousands of US dollars) Balance at 1 219,233 - 6,773 - (210,046) (203,273) (16,095) (135) (1,833) (1,968)January 2005Fair value gains on available-for-salefinancial assets - - 4,492 - - 4,492 - 4,492 - 4,492Translation adjustment for theyear - - - 726 - 726 - 726 147 873-----------------------------------------------------------------------------------------------------------------------Net income recogniseddirectly in equity - - 4,492 726 - 5,218 - 5,218 147 5,365Profit for the year - - - - - - 46,737 46,737 (3,853) 42,884-----------------------------------------------------------------------------------------------------------------------Total recognised income for 2005 - - 4,492 726 - 5,218 46,737 51,955 (3,706) 48,249Purchase of sharesfrom minorityshareholders - - - - - - (2,444) (2,444) (223) (2,667)Capital contribution fromminorityshareholders - - - - - - - - 3,229 3,229-----------------------------------------------------------------------------------------------------------------------Balance at 31 December 2005 219,233 - 11,265 726 (210,046) (198,055) 28,198 49,376 (2,533) 46,843Fair value gains onavailable-for-salefinancial assets - - 13,351 - - 13,351 - 13,351 20 13,371Deferred income tax onavailable-for-salefinancial assets - - (398) - - (398) - (398) - (398)Fair value changes transferred toincome statementon disposal - - (22,844) - - (22,844) - (22,844) - (22,844)Translation adjustment for theyear - - - 2,834 - 2,834 - 2,834 142 2,976-----------------------------------------------------------------------------------------------------------------------Net income recogniseddirectly in equity - - (9,891) 2,834 - (7,057) - (7,057) 162 (6,895)Profit for the year - - - - - - 41,288 41,288 (5,847) 35,441-----------------------------------------------------------------------------------------------------------------------Total recognised income for 2006 - - (9,891) 2,834 - (7,057) 41,288 34,231 (5,685) 28,546Share issued 93 - - - - - - 93 - 93Shares issued under Global offer plc 73,606 441,639 - - - - - 515,245 - 515,245Transaction costsassociated withissue of shares - (45,483) - - - - - (45,483) - (45,483)Capital reduction (146,466) - - - - - 146,466 - - -Dividends 12 - - - - - - (73,142) (73,142) (298) (73,440)Capital contribution fromminorityshareholders - - - - - - - - 18,200 18,200Purchase of shares from minorityshareholders - - - - - - - - (2) (2)Repayment of capital tominorityshareholders - - - - - - - - (671) (671)------------------------------------------------------------------------------------------------------------------------Balance at 31 December 2006 146,466 396,156 1,374 3,560 (210,046) (205,112) 142,810 480,320 9,011 489,331------------------------------------------------------------------------------------------------------------------------ Notes 1 General Information Hochschild Mining plc (hereinafter the "Company") is a public limited companyincorporated on 11 April 2006 under the Companies Act 1985 as a Limited Companyand registered in England and Wales with registered number 05777693. TheCompany's registered address is One Silk Street, London EC2Y 8HQ, UnitedKingdom. The Company was incorporated to serve as a holding company to be listedin the London Stock Exchange. The Company acquired its interest in the companieslisted below constituting the Hochschild Mining Group pursuant to a shareexchange agreement ("Share Exchange Agreement") dated 2 November 2006 (see note2 (a)). The financial information for the year ended 31 December 2006 contained in thisdocument does not constitute statutory accounts as defined in section 240 of theCompanies Act 1985. The financial information for the year ended 31 December2006 has been extracted from the audited financial statements of HochschildMining plc which will be delivered to the Registrar of Companies in due course.The group consolidated financial statements, which were the first financialstatements presented by the Group, were approved for issue by the Board ofDirectors on 19 March 2007. The basis of preparation and the accounting policies used in preparing theconsolidated financial statements for the years ended 31 December 2006 and 2005are set out below. These accounting policies have been consistently applied toall the periods presented unless otherwise stated. 2 Significant Accounting Policies (a) Basis of preparation On 2 November 2006 and according to the share exchange agreement termsHochschild Mining plc entered into an agreement to acquire Hochschild Mining(Argentina) Corporation, Larchmont Corporation, Garrison Corporation, ArdsleyCorporation, Hochschild Mining (Peru) Corporation and Hochschild Mining (Mexico)Corporation (together referred to as the "Cayman Holding Companies"). In relation to this transaction, Hochschild Mining plc issued 229,900,000 sharesto the former shareholders of the Cayman companies in exchange for the issuedshare capital on these companies. As this transaction involved the combinationof businesses under common control, the pooling of interests method ofaccounting has been applied in the presentation of the consolidated financialstatements for the years ended 31 December 2006 and 31 December 2005 whichpresent the results of the Group as if the Cayman Holding Companies had alwaysbeen part of the Group. Accordingly, the assets and liabilities transferred tothe Company have been recognised at historical amounts. For periods prior to thelegal formation of the Company, the assets, liabilities, revenue and expenses ofthe Cayman Holding Companies comprising the Predecessor Operations wereconsolidated in preparing the financial statements. The accompanyingconsolidated financial statements present the results and changes in equity ofthe Company and its subsidiaries as if the Group had been in existencethroughout the years presented and as if the Predecessor Operations weretransferred to the Company from the Cayman Holding Companies as of 1 January2005. The consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted for use in theEuropean Union (EU). The Group's Financial Statements are also consistent withIFRS issued by the IASB. The financial statements have been prepared on a historical cost basis, exceptfor certain classes of property, plant and equipment which have been re-valuedat 1 January 2003 to determine deemed cost (refer to note 2(d)), derivatives,available-for-sale financial instruments and other financial assets at fairvalue through profit and loss which have been measured at fair value. Thefinancial statements are presented in US dollars ($) and all monetary amountsare rounded to the nearest thousand ($000) except when otherwise indicated. The Group's transition date to IFRS is 1 January 2005. The rules for first-timeadoption of IFRS are set out in IFRS 1, first-time adoption of InternationalFinancial Reporting Standards. IFRS 1 allows certain exemptions in the application of particular Standards toprior periods in order to assist companies with the transition process. TheGroup has applied the following exemptions: i) Certain classes of tangible assets had been re-valued at 1 January 2003.Deemed cost as at the date of transition by considering the re-valued amounts asof 1 January 2003 at the time of initial public offering of the group anddepreciated for the period until the date of transition. ii) IFRS 3 is appliedas from 1 January 2001 and not retrospectively to past business combinations,and iii) The Group has deemed cumulative translation differences for foreignoperations to be zero at the date of transition; any gains and losses orsubsequent disposals of foreign operations will not therefore includetranslation differences arising prior to the transition date. (b) Basis of consolidation The consolidated financial statements sets out the Group's financial positionand operations and cash flow as of 31 December 2006 and 31 December 2005 and forthe years then ended, respectively. Subsidiaries are those enterprises controlled by the Group regardless of theamount of shares owned by the Group. Control exists when the Group has thepower, directly or indirectly, to govern the financial and operating policies ofan enterprise so as to obtain benefits from its activities. Subsidiaries areconsolidated from the date on which control is transferred to the Group andcease to be consolidated from the date on which control is transferred out ofthe Group. The purchase method of accounting is used to account for theacquisition of subsidiaries by the Group. On acquisition of a subsidiary, thepurchase consideration is allocated to the assets and liabilities on the basisof their fair value at the date of acquisition. The excess of the cost ofacquisition over the fair value of the Group's share of the identifiable netassets acquired is recorded as goodwill. If the cost of acquisition is less thanthe fair value of net assets of the entity acquired, the difference isrecognised directly in the income statement. The financial statements of subsidiaries are prepared for the same reportingperiods as the Company using consistent accounting policies. All intercompanybalances and transactions, including unrealised profits arising from intra-Grouptransactions, have been eliminated on consolidation. Unrealised losses areeliminated in the same way as unrealised gains except that they are onlyeliminated to the extent that there is no evidence of impairment. Minority shareholders primarily represent the interests in Minera Santa Cruz,Compania Minera Arcata, Minera Suyamarca, and Mina Santa Maria de Moris S.A. deC.V. not held by the Company. In the event of a purchase of minorityshareholders' interest when the Group holds the majority of shares of asubsidiary, any excess of the consideration given over the Group's share of netassets is recorded in Retained earnings in Equity. (c) Currency translation The functional currency for each entity in the Group is determined by thecurrency of the primary economic environment in which it operates. For theholding companies and operating entities it is US dollars and for the otherentities it is the local currency of the country in which it operates. TheGroup's financial information is presented in US dollars, which is the Company'sfunctional currency. Transactions denominated in currencies other than the functional currency of theentity are initially recorded in the functional currency using the exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are remeasured at the rate of exchange rulingat the balance sheet date. Exchange gains and losses on settlement of foreigncurrency transactions which are translated at the rate prevailing at the date ofthe transactions, or on the translation of monetary assets and liabilities whichare translated at period-end exchange rates, are taken to the income statement.Non-monetary assets and liabilities denominated in foreign currencies that arestated at historical cost are translated to the functional currency at theforeign exchange rate prevailing at the date of the transaction. Exchangedifferences arising from monetary items that are part of a net investment in aforeign operation are recognised in equity and transferred to income on disposalof such net investment. Subsidiary financial statements expressed in their corresponding functionalcurrencies are translated into US dollars by applying the exchange rate atperiod-end for assets and liabilities and the average exchange rate for incomestatements items. The resulting difference on consolidation is included ascumulative translation adjustment in equity. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. (d) Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost less accumulateddepreciation and impairment losses. Cost comprises its purchase price and anycosts directly attributable to bringing it into working condition for itsintended use. The cost of self-constructed assets includes the cost ofmaterials, direct labour and an appropriate proportion of production overheads.The cost or deemed cost of property, plant and equipment (hereafter referred toas "cost") at 1 January 2005, the date of the Group transition to IFRS. Deemedcost as at the date of transition by considering the re-valued amounts as of 1January 2003 at the time of initial public offering of the group and depreciatedfor the period until the date of transition. Economical and physical conditionsof assets have not changed substantially over this period. The cost less its residual value of each item of property, plant and equipmentis depreciated over its useful life. Each item's estimated useful life has beenassessed with regard to both its own physical life limitations and the presentassessment of economically recoverable reserves and resources of the mineproperty at which the item is located. Estimates of remaining useful lives aremade on a regular basis for all mine buildings, machinery and equipment, withannual reassessments for major items. Depreciation is charged to cost ofproduction on a units of production (UOP) basis for mine buildings andinstallations, plant and equipment used in the mining production process orcharged directly to the income statement over the estimated useful life of theindividual asset on a straight line basis when not related to the miningproduction process. Changes in estimates, which mainly affect units ofproduction calculations, are accounted for prospectively. Depreciation commenceswhen assets are available for use. Land is not depreciated. An asset's carrying amount is written down immediately to its recoverable amountif the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with thecarrying amount and are recognised within other income/expenses, in the incomestatement. The expected useful lives under the straight-line method are as follows: Years Buildings 3 to 33Plant and equipment 5Furniture, fixtures and fittings 10Vehicles 5 Borrowing costs are not capitalised and are expensed. Mineral properties and mine development costs Payments for mineral properties are expensed during the exploration phase of aproject and capitalised during their development phase when incurred. Costsassociated with developments are capitalised. Mine development costs are, upon commencement of production, depreciated usingthe units of production method based on the estimated economically recoverablereserves and resources to which they relate. Construction in progress Assets in the course of construction are capitalised as a separate component ofproperty, plant and equipment. On completion, the cost of construction istransferred to the appropriate category. Construction in progress is notdepreciated. Subsequent expenditure Expenditure incurred to replace a component of an item of property, plant andequipment is capitalised separately with the carrying amount of the componentbeing written-off. Other subsequent expenditure is capitalised if futureeconomic benefits will arise from the expenditure. All other expenditureincluding repairs and maintenance expenditures are recognised in the incomestatement as incurred. (e) Determination of ore reserves and resources The Group estimates its ore reserves and mineral resources based on informationcompiled by internal competent persons. Reports to support these estimates areprepared each year and are stated in conformity with the Joint Ore ReservesCommittee (JORC) code. Reserves and resources are used in the units of production calculation fordepreciation as well as the determination of the timing of mine closure cost andimpairment analysis. There are numerous uncertainties inherent in estimating ore reserves.Assumptions that are valid at the time of estimation may change significantlywhen new information becomes available. Changes in the forecast prices ofcommodities, exchange rates, production costs or recovery rates may change theeconomic status of reserves and may, ultimately, result in the reserves beingrestated. (f) Assets held for sale Assets are classified as assets held for sale and stated at the lower ofcarrying amount and fair value less cost to sell if their carrying amount is tobe recovered principally through a sale transaction rather than through acontinuing use. These assets are not depreciated. (g) Goodwill Goodwill is included in intangible assets and represents the excess of the costof an acquisition over the fair value of the Group's share of the netidentifiable assets of the acquired entity at the date of acquisition.Separately recognised goodwill is tested annually for impairment and carried atcost less accumulated impairment losses. Impairment losses on goodwill are notreversed. Goodwill is allocated to cash-generating units for the purpose of impairmenttesting. The allocation is made to those cash-generating units that are expectedto benefit from business combination in which the goodwill arose. (h) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization andare tested annually for impairment. The carrying amounts of property, plant and equipment are reviewed forimpairment if events or changes in circumstances indicate that the carryingvalue may not be recoverable. If there are indicators of impairment, an exerciseis undertaken to determine whether the carrying values are in excess of theirrecoverable amount. Such review is undertaken on an asset by asset basis, exceptwhere such assets do not generate cash flows independent of other assets, andthen the review is undertaken at the cash generating unit level. If the carrying amount of an asset or its cash generating unit exceeds therecoverable amount, a provision is recorded to reflect the asset at the loweramount. Impairment losses are recognised in the income statement. Calculation of recoverable amount The recoverable amount of assets is the greater of their value in use and fairvalue less costs to sell. Fair value is based on an estimate of the amount thatthe Group may obtain in a sale transaction on an arm-length basis. In assessingvalue in use, the estimated future cash flows are discounted to their presentvalue using a pre-tax discount rate that reflects current market assessments ofthe time value of money and the risks specific to the asset. For an asset thatdoes not generate cash inflows largely independent of those from other assets,the recoverable amount is determined for the cash-generating unit to which theasset belongs. The Group's cash generating units are the smallest identifiablegroups of assets that generate cash inflows that are largely independent of thecash inflows from other assets or groups of assets. Reversal of impairment An impairment loss is reversed if there has been a change in the estimates usedto determine the recoverable amount. An impairment loss is reversed only to theextent that the asset's carrying amount does not exceed the carrying amount thatwould have been determined, net of depreciation or amortization, if noimpairment loss had been recognised. (i) Inventories Inventories are valued at the lower of cost and net realisable value. Cost isdetermined using the weighted average cost method. The cost of work in progressand finished goods (ore inventories) is based on cost of production and excludesborrowing costs. For this purpose, the costs of production include: - costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore; - the depreciation of property, plant and equipment used in the extraction and processing of ore; and - related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course ofbusiness, less applicable variable selling expenses. (j) Trade and other receivables Current trade receivables are carried at the original invoice amount lessprovision made for impairment of these receivables. Non-current receivables arestated at amortised cost. A provision for impairment of trade receivables isestablished when there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of the receivable whichin average do not exceed 30 days. The amount of the provision is the differencebetween the carrying amount and the recoverable amount and this difference isrecognised in the income statement. (k) Share capital Ordinary shares are classified as equity. Excess to par value of shares receivedupon issuance of shares is classified as share premium. (l) Provisions Provisions are recognised when the Group has a present obligation (legal orconstructive) as a result of a past event, it is probable that an outflow ofresources will be required to settle the obligation and a reliable estimate canbe made of the amount of the obligation. If the effect of the time value ofmoney is material, provisions are determined by discounting the expected futurecash flows at a pre-tax rate that reflects current market assessments of thetime value of money and, where appropriate, the risks specific to the liability.Where discounting is used, the increase in the provision due to the passage oftime is recognised as a finance cost. Mine closure cost Provisions for mine closure costs are made in respect of the estimated futurecosts of closure and restoration and for environmental rehabilitation costs(which include the dismantling and demolition of infrastructure, removal ofresidual materials and remediation of disturbed areas) in the accounting periodwhen the related environmental disturbance occurs. The provision is discountedand the unwinding of the discount is included in finance costs. At the time ofestablishing the provision, a corresponding asset is capitalised and isdepreciated over future production from the mine to which it relates. Theprovision is reviewed on an annual basis for changes in cost estimates, discountrates and operating lives. Workers' profit sharing and other employee benefits In accordance to Peruvian Legislation, Group companies in Peru must provide forworkers' profit sharing equivalent to 8 percent of taxable income of each year.This amount is charged to the income statement within personnel expenses and isconsidered deductible for income tax purposes. The Group has no pension orretirement benefit schemes. Other Other provisions are accounted for when the Group has a legal or constructiveobligation for which it is probable there will be an outflow of resources forwhich the amount can be reliably estimated. (m) Trade payables Trade payables are recognised initially at fair value and subsequently measuredat amortised cost using the effective interest method. (n) Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds (net of transaction costs) and the redemption value isrecognised in the income statement over the period of the borrowings using theeffective interest method. Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least 12 monthsafter the balance sheet date. (o) Contingencies Contingent liabilities are not recognised in the financial statements and aredisclosed in notes to the financial information unless their occurrence isremote. Contingent assets are not recognised in the financial statements, but they aredisclosed in notes if they are deemed probable. (p) Revenue recognition The Group is involved in production and sale of dore bars and concentratecontaining both gold and silver. Concentrate is sold directly to customers. Dorebars are sent to a third party for further refining into gold and silver whichis then sold. Revenue is recognised to the extent that it is probable that economic benefitswill flow to the Group and the revenue can be reliably measured. Revenue associated with the sale of concentrate and dore bars is recognised inthe income statement when all significant risks and rewards of ownership aretransferred to the customer, usually when title has passed to customer. Revenueexcludes any applicable sales taxes. The revenue is subject to adjustment based on inspection of the product by thecustomer. Revenue is initially recognised on a provisional basis using theGroup's best estimate of contained gold and silver. Any subsequent adjustmentsto the initial estimate of metal content are recorded in revenue once they havebeen determined. In addition, sales of concentrate are "provisionally priced" where the sellingprice is subject to final adjustment at the end of a period normally rangingfrom 30 to 90 days after the start of the delivery process to the customer,based on the market price at the relevant quotation point stipulated in thecontract. Revenue is initially recognised when the conditions set out above havebeen met, using market prices at that date. The price exposure is considered tobe an embedded derivative and hence separated from the sales contract at eachreporting date the provisionally priced metal is revalued based on the forwardselling price for the quotational period stipulated in the contract until thequotational period ends. The selling price of gold and silver can be measuredreliably as these metals are actively traded on the international exchanges. Therevaluing of provisionally priced contracts is recorded as an adjustment to"revenue". (q) Exploration and evaluation expenditure Exploration and evaluation expenditure for each area of interest is charged tothe income statement as incurred. Administrative and general expenses relatingto exploration and evaluation activities are also expensed as incurred. (r) Finance income and costs Finance income and expenses comprise interest expense on borrowings, theaccumulation of interest on provisions, interest income on funds invested,foreign exchange gains and losses, gains and losses from the change in fairvalue of derivative instruments and gains and losses on the disposal ofavailable-for-sale investments. Interest income is recognised as it accrues, taking into account the effectiveyield on the asset. (s) Income tax Income tax for the year comprises current and deferred tax. Income tax isrecognised in the income statement except to the extent that it relates to itemscharged or credited directly to equity, in which case it is recognised inequity. Current tax expense is the expected tax payable on the taxable income for theyear, using tax rates enacted at the balance sheet date, and any adjustment totax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are measured at the tax rates that areexpected to apply to the period when the asset is realised or the liability issettled based on the tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. Tax on dividend remittance, where applicable, is provided in the year in whichdistributable income is generated. (t) Financial instruments (i) Recognition (a) The Group recognises financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. (b) Financial assets and liabilities are offset and the net amount is reported in the balance sheet only when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (ii) Measurement (c) Financial assets and liabilities are initially recognised at cost, which is the fair value of consideration given or received, respectively, including in the case of a financial asset or financial liability not at fair value through profit or loss, any transaction costs incurred. (d) In determining estimated fair value, investments in shares or portfolios of listed securities are valued at quoted bid prices. When quoted prices on an active market are not available (and for listed non-actively traded securities), fair value is determined using a valuation technique. Valuation techniques include using recent arm's length transaction, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If the range of reasonable fair value is significant and the probabilities of the various estimates cannot be reliably assessed, the investment is not remeasured at fair value. Investments in warrants are recorded based on an assessment performed by a third party expert using a Black-Scholes option pricing model. (e) The Group has classified its investments as available-for-sale assets or other financial assets at fair value through profit or loss in accordance with the intent of management at the time of the purchase. (f) Changes in fair value of investments classified as available-for-sale are recognised in equity, except for impairment loss and foreign exchange gain and losses for monetary items which are recognised directly in income statement, and are included in income when realised. Changes in the fair value of financial assets at fair value through profit and loss are recognised directly in the income statement. (g) Loans and receivables are loans and receivables created by the Group companies providing money or goods to a debtor. Loans and receivables are initially recognised in accordance with the policy stated above and subsequently remeasured at amortised cost using the effective interest method. Financial liabilities are initially recognised in accordance with the policy stated above and subsequently remeasured at amortised cost using the effective interest method. (h) Derivatives futures are initially recognised at fair value. Any gains and losses arising from changes in fair value are recognised immediately in the income statement in the period in which they occur. (i) Derivatives are classified as a current asset or liability. Changes in fair value of trading derivatives are included in the income statement. (iii)Embedded derivatives (j) Embedded derivatives which are not clearly and closely related to the underlying assets, liability or transaction are separated and accounted for as stand-alone derivatives. (iv) De-recognition Financial instruments are de-recognised when the Group transfers all risks and rewards of ownership. (u) Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders. (v) Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the balance sheet, cash and cash equivalents comprise cash on hand and deposits held with banks that are readily convertible into known amounts of cash within three months or less and which are subject to insignificant risk of changes in value. For the purposes of the cash flow statement, cash and cash equivalents as defined above are shown net of outstanding bank overdrafts. (w) Exceptional items Exceptional items are those significant items which due to their nature or the expected infrequency of the events giving rise to them need to be disclosed separately on the face of the income statement to enable a better understanding of the financial performance of the Group and facilitate comparison with prior years. Exceptional items mainly include goodwill impairments, assets held for sale impairments, gain/(loss) from sale of property, plant and equipment, gain/ (loss) from sale of investments, gain/(loss) from sale of subsidiaries and the related tax impact of these items. 3 Segment Reporting The Group's activities are principally related to mining operations whichinvolve exploration, production and sale of gold and silver. Products aresubject to the same risks and returns and are sold through the same distributionchannels. The Group has a number of activities that exist solely to supportmining operations including power generation and services. As such, the Grouphas only one business segment as its primary reporting segment. The Groupoperates in various countries including Peru, Argentina, Mexico, Chile and theUnited States of America. Therefore, the geographical segment is the Group'ssecondary reporting format. (a) Revenue Revenue for the year is allocated based on the country in which the customer islocated. There are no inter-segment revenues. Year ended 31 December------------------------------------------------------------------- 2006 2005 US$(000) United Kingdom 35,708 60,857 Mexico 116,034 52,708 USA 58,719 30,476 Canada 717 17,235 Peru 68 50 Japan - (91)------------------------------------------------------------------- 211,246 161,235------------------------------------------------------------------- The negative figure results from adjustments to revenue as a consequence ofdifferences between the price and quantity of gold and silver included in afinal invoice and in the provisional invoice issued in the previous year. (b) Profit for the year The Group has no inter-segment transactions. Profit for year is based on countryof operation as follows: Year ended 31 December 2006 Year ended 31 December 2005 Before Exceptional Total Before Exceptional Total exceptional items exceptional items items items--------------------------------------------------------------------------------- US$(000) Peru 58,844 (4,325) 54,519 48,013 9,839 57,852 Cayman Islands (2,756) (1,033) (3,789) 321 - 321 Argentina (10,745) - (10,745) (9,135) - (9,135) Mexico (3,920) - (3,920) (3,647) - (3,647) Chile (1,613) - (1,613) (1,492) - (1,492) USA (778) - (778) (1,015) - (1,015) United Kingdom 1,767 - 1,767 - - ------------------------------------------------------------------------------------ 40,799 (5,358) 35,441 33,045 9,839 42,884----------------------------------------------------------------------------------- 4 Revenue Year ended 31 December------------------------------------------------------------------------ 2006 2005------------------------------------------------------------------------ US$(000) Gold (from dore bars) 70,498 74,923Silver (from dore bars) 23,929 16,368Concentrate 116,751 69,894Services 68 50----------------------------------------------------------------------- 211,246 161,235----------------------------------------------------------------------- Concentrate is made up of: Year ended 31 December----------------------------------------------------------------------- 2006 2005----------------------------------------------------------------------- US$(000) Gold 21,953 15,385Silver 94,208 54,090Other minerals 590 419-----------------------------------------------------------------------Total concentrate 116,751 69,894----------------------------------------------------------------------- Included within the valuation of concentrate are the provisional pricingadjustments which represent changes in the fair value of embedded derivatives ofUS$9,872,000 and US$9,916,000 for 2006 and 2005, respectively (refer to notes 2(q)). The total volumes of gold and silver sold are as follows: Year ended 31 December---------------------------------------------------------------------- 2006 2005----------------------------------------------------------------------Total in thousands of ounces:Gold 190 231Silver 10,403 10,366 5 Acquisitions (a) Business combination Minera Colorada S.A.C. On 30 June 2006, the Group acquired a 30 percent controlling interest, based onits power to govern its financial and operating policies so as to obtainbenefits from its activities, in Minera Colorada S.A.C. ("Colorada"), anexploration company, from Cementos Pacasmayo S.A.A. ("Pacasmayo") (a relatedparty) for US$240,000 in cash. After the Group's acquisition, the shareholdingin Colorada was split 30%/20%/50% between the Group, Pacasmayo and CompaniaMinera Killacolqui, respectively. As of 31 December 2006, Management forecasts that the project will not producefuture benefits and accordingly the Group has impaired in full the goodwill onacquisition of US$230,000 and related assets of US$113,000. No further disclosures have been provided since amounts involved are notconsidered significant in relation to the financial statements of the Group. (b) Acquisition of assets Mina Moris On 30 June 2006 Minera Hochschild Mexico, S.A. de C.V. ("MHM") and Exmin, S.A.de C.V. ("Exmin") entered into an agreement to purchase the assets and relatedliabilities of Santa Maria de Moris mine ("Mina Moris") for US$6 million. MHMagreed to pay US$4.2 million (70% share) and Exmin agreed to pay US$1.8 million(30% share). MHM and Exmin also incurred pre-acquisition costs of US$0.8million, which has been treated as a part of consideration for acquisition ofthese assets. Exmin's contribution to the project has been funded by a loan fromthe Group and the proceeds from purchase of shares in EXMIN Resources Inc. bythe Group. These shares were issued at a discount of 20% to the market price,resulting in an unrealised gain on issue of these shares of US$0.3 million,which has reduced the cost of acquisition of net assets for the Group. Assets and liabilities of Mina Moris at the date of acquisition were as follows: US$(000)Plant and equipment 3,255Mining properties 3,355Land and buildings 1,432Supplies 248Provision for mine closure costs (1,830)----------------------------------------------------------------Total 6,460---------------------------------------------------------------- Pallancata On 3 July 2006, the Group entered into an agreement with Minera Oro Vega S.A.C.("Minorva") to form an entity in order to purchase the mining rights for thePallancata properties located in the Coronel Castaneda District, Parinacochasprovince, Ayacucho (department in Peru) from Minorva. On 10 July 2006,Pallancata Holdings S.A.C. with Minorva incorporated Minera Suyamarca S.A.C("Suyamarca"), with the Group being the operator of the project through a 60%controlling interest in this company. Group's initial contribution was US$6.0 million for the development of theproject and Minorva's contribution was in form of mining rights and anassociated US$1.4 million liability representing payables to third parties, atan agreed net value of US$4.0 million. Further, the group has agreed to fund thecost of construction of the mine in full, up to an operating capacity of 750tonnes per day. As a result, the total cost of acquisition has been determinedby the group to be US$9.7 million (US$4 million of the aforementionedcontribution from Minorva and US$5.7 million towards Minorva's share in the netassets on construction of the mine to be paid by the group), out of whichUS$11.1 million has been allocated to the mining rights and US$1.4 milliontowards the liability acquired. The US$5.7 million has been treated as adeferred consideration. On 2 November 2006, Suyamarca purchased the mining rights of four additionalproperties in the Pallancata project area from Minorva for US$89,000 and assumeda liability of US$140,000. 6 Exploration Expenses Year ended 31 December-------------------------------------------------------------------- 2006 2005 US$(000)--------------------------------------------------------------------Mine site exploration (1)Arcata 1,839 1,335Ares 1,527 1,587Selene 413 1,066Pallancata 1,577 -------------------------------------------------------------------- 5,356 3,988-------------------------------------------------------------------Prospects (2)Peru 411 1,391Argentina - 9,964------------------------------------------------------------------- 411 11,355-------------------------------------------------------------------Generative (3)Peru 1,676 268Argentina 2,826 633Mexico 2,796 3,078Chile 1,018 1,164USA 150 344------------------------------------------------------------------- 8,466 5,487------------------------------------------------------------------- Personnel (4) 4,401 5,145Other 336 1,149Exploration and mining rights (5) 893 933------------------------------------------------------------------- 19,863 28,057------------------------------------------------------------------- (1) Mine site exploration is performed with the purpose of proving mineral reserves, establishing inferred and indicated resources and identifying potential minerals within an existing mine site, with the goal of maintaining or extending the mine's life. (2) Prospects expenses are related to detailed geological evaluations to characterise and interpret the three-dimensional continuity of the geometry, quality and quantity of the ore within a prospect, with the goal of justifying further evaluation. Geological evidence and interpretations can move the project into a more advanced phase of evaluation with reserve estimation and economic pre-feasibility by the Project. (3) Generative expenditure is very early stage exploration expenditure, incurred in connection with identifying and developing exploration targets with an inferred resource or potential to develop into a mining operation. (4) Expenses relating to personnel involved with exploration. (5) Expenditure relating principally to payments for mining rights in accordance with relevant regulation. 7 Gain on sale of Bongara zinc project and Compania Minera Corianta S.A.C. In April 2005, the Group sold its Bongara zinc project to Cementos Pacasmayo forUS$15,558,000. This post-feasibility project was carried at US$1,000,000. Priorto the feasibility study, the Group incurred in US$1,900,000 of mine propertycosts and other expenditures during the exploration period that were charged tothe income statement as incurred. In connection with this transaction, the Group also disposed of its subsidiary,Compania Minera Corianta S.A.C. ("Corianta") to Cementos Pacasmayo forUS$806,000, realising a gain of US$254,000. 8 Other Income and Other Expenses Year ended 31 December 2006 Year ended 31 December 2005---------------------------------------------------------------------------------------------------------------------- Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total---------------------------------------------------------------------------------------------------------------------- US$(000) Other income:Decrease in provision for mine closure (1) 2,812 - 2,812 725 - 725Recovery of expenses 791 - 791 379 - 379Gain on sale of supplies - 252 252 - - -Income from mine concession 151 - 151 - - -Gain on sale of property, plant and equipment - 94 94 - - -Lease rentals 90 - 90 77 - 77Other 1,178 - 1,178 1,665 - 1,665---------------------------------------------------------------------------------------------------------------------- 5,022 346 5,368 2,846 - 2,846---------------------------------------------------------------------------------------------------------------------- Other expenses:Impairment of Sipan assets held for sale(2) - (2,983) (2,983) - - -Loss on sale of investments(3) - (2,249) (2,249) - - -Loss on sale of MHC (subsidiary)(4) - (991) (991) - - -Penalty on cancellation of contract (971) - (971) - - -Loss on maintenance of equipment (369) - (369) (356) - (356)Provision for obsolescence of supplies (377) - (377) (99) - (99)Impairment of Colorada assets, note 5(a) (113) (230) (343) - - -Provision for contingencies (292) - (292) - - -Allowance SEAL/Electroperu (113) - (113) (920) - (920)Loss on sale of Inmobiliaria CNP - (42) (42) - - -Loss on sale of property, plant and equipment and assets - - - - (197) (197)classified a held for saleOther (1,635) - (1,635) (1,244) (5) (1,249)---------------------------------------------------------------------------------------------------------------------- (3,870) (6,495) (10,365) (2,619) (202) (2,821)---------------------------------------------------------------------------------------------------------------------- Notes: (1) Decreases in provision for mine closure costs are recorded in"Other income" where the disturbance is not expected to create a futureeconomic benefit (normally this will occur when the mine to which theprovision relates has fully depleted its resources, but the closure andrehabilitation costs are yet to be incurred, and there is a reduction in theestimate of the total mine closure cost). (2) In December 2006, an appraisal on the assets of Compania MineraSipan S.A.C. was performed resulting in an impairment of a portion of theseassets. (3) During the twelve months ended 31 December 2006 the Groupdisposed of 16,585,047 shares in Inversiones Pacasmayo for US$6,350,000 toGreystone Corporation (a related party). These shares were carried atUS$21,133,000, including an unrealised fair value gain of US$12,534,000 whichhad been recorded in equity. The disposal of these shares, after recyclingthe unrealised gain through the income statement, resulted in a loss ofUS$2,249,000. (4) On 15 June 2006, the Group's wholly owned subsidiary, MauricioHochschild & Cia. Ltda. S.A.C. ("MHC"), was sold to Greystone Corporation (arelated party) for US$1,000,000, plus the benefit of a US$2,801,000 loanpayable by MHC to Ardsley Corporation (a subsidiary of the Group) which hadpreviously been eliminated on consolidation, resulting in total considerationreceived of US$3,801,000. This disposal resulted in a loss to the Group ofUS$991,000. The book value of the individual assets and liabilities disposed of are asfollows: US$(000) Available for sale financial assets carried at fair value (a) 15,077Less: Unrealised fair value gain on assets recorded in equity (10,310)Other assets 344Other liabilities (b) (319)---------------------------------------------------------------------------Net book value of assets and liabilities disposed 4,792--------------------------------------------------------------------------- (a) The available-for-sale financial assets disposed of represent 11,829,971shares in Inversiones Pacasmayo. (b) Does not include the US$2,801,000 loan payable by MHC to ArdsleyCorporation as this loan eliminated on consolidation and therefore thedisposal of this loan does not impact upon the liabilities of theconsolidated balance sheet of the Group. 9 Income Tax Expense Year ended 31 December 2006 Year ended 31 December 2005------------------------------------------------------------------------------------------------ Before Exceptional Total Before Exceptional Total exceptional items exceptional items items items------------------------------------------------------------------------------------------------ US$(000) Current tax: Current tax charge 31,836 104 31,940 14,490 4,383 18,873from continuingoperationsCurrent tax charge from discontinuedoperations - - - 546 - 546------------------------------------------------------------------------------------------------ 31,836 104 31,940 15,036 4,383 19,419------------------------------------------------------------------------------------------------Deferred taxation: Origination and reversal of temporarydifferences fromcontinuing operations (4,325) (895) (5,220) (10,392) 388 (10,004)Charge in respect of discontinuedoperations - - - 2,788 - 2,788------------------------------------------------------------------------------------------------ (4,325) (895) (5,220) (7,604) 388 (7,216)------------------------------------------------------------------------------------------------Withholding taxes 1,975 - 1,975 804 - 804------------------------------------------------------------------------------------------------Total taxation charge in the incomestatement 29,486 (791) 28,695 8,236 4,771 13,007------------------------------------------------------------------------------------------------ The weighted average statutory income tax rate was 30.2% for 2006 and 25.0% for2005. This is calculated as the average of the statutory tax rates applicable inthe countries in which the Group operates, weighted by the profit/(loss) beforetax of the subsidiaries in the respective countries as included in theconsolidated financial statements. The changes in the weighted average statutory income tax rate is due to a changein the weighting of profit/(loss) before tax in the various jurisdictions inwhich the Group operates. The tax on the Group's profit before tax differs from the theoretical amountthat would arise using the weighted average tax rate applicable to profits ofthe consolidated companies as follows: Year ended 31 December-------------------------------------------------------------------- 2006 2005-------------------------------------------------------------------- US$(000) Profit before taxation from continuing operations 64,148 40,378Profit before taxation from discontinued - 15,739operations--------------------------------------------------------------------Profit before tax 64,148 56,117 At average statutory income tax rate of 30.2% 19,359 14,003(2005:25.0%)Expenses not deductible for tax purposes 4,124 4,447Non-taxable income (170) (1,477)Recognition of previously unrecognised deferred - (5,101)tax assets(1)Deferred tax assets generated in the year not 2,552 449recognised(2)Deferred tax on unremitted earnings 397 621Withholding taxes 1,975 804Other 458 (739)--------------------------------------------------------------------At average effective income tax rate of 44.7% 28,695 13,007(2005:23.2%)-------------------------------------------------------------------- Taxation charge attributable to continuing 28,695 9,673operations Taxation charge attributable to discontinued - 3,334operations--------------------------------------------------------------------Total taxation charge in the income statement 28,695 13,007-------------------------------------------------------------------- (1) Mainly corresponds to the initial recognition of the deferred income taxasset related to the mine development costs and the tax loss carryforward inMinera Santa Cruz S.A. (2) Mainly corresponds to the tax losses of Minera Hochschild Mexico, S.A. deC.V. and MH Argentina S.A., which deferred income tax asset is not recogniseddue to the uncertainty of generating taxable income in the future. Santa Cruz is under a special investment regime that allows for a doublededuction in calculating its corporate income tax liability, in respect of allcosts relating to prospecting, exploration and metallurgical analysis, pilotplants and other expenses incurred for feasibility studies of projects. In thisregard, total investment for this regime amounts approximately to $81,884,000Argentinean pesos (US$23,866,000 and US$25,613,000 as of 31 December 2005 and2006, respectively). Only the tax benefit of a single deduction has been recognised in deferredtaxation in the financial statements. The benefit of the additional deductionwill be realised as and when claimed in future periods once production hascommenced. 10 Basic and diluted earnings per share The earnings per share ("EPS") calculation has assumed that the number ofordinary shares issued resulting from the share exchange agreement for theacquisition of the Cayman companies have been in issue throughout the two yearperiod ended 31 December 2006. Basic EPS is calculated by dividing profit forthe year attributable to equity shareholders of the Company by the weightedaverage number of ordinary shares issued during the year. The Company has no dilutive potential ordinary shares. As of 31 December 2006 and 2005, earnings per share have been calculated as follows: Year ended 31 December----------------------------------------------------------------------- 2006 2005----------------------------------------------------------------------- Profit from continuing operations attributable to 41,288 34,558equity holders of the Company US$(000) Profit from discontinued operations attributable to _ 12,179equity holders of the Company US$(000) Weighted average number of ordinary shares in issue 242,867 229,900(thousands) Basic earnings per share from continuing operations 0.17 0.15US$ Basic earnings per share from discontinued operations _ 0.05US$----------------------------------------------------------------------- 11 Cash and Cash Equivalents As of 31 December----------------------------------------------------------------------- 2006 2005----------------------------------------------------------------------- US$(000) Cash in hand 997 125 Liquidity funds(1) 414,527 - Current demand deposit accounts(2) 16,477 2,251 Time deposits(3) 3,542 91 Cash and cash equivalents considered for the cash 435,543 2,467flow statement----------------------------------------------------------------------- Notes: (1) The liquidity funds are mainly invested in certificate ofdeposits, commercial papers and floating rate notes with weighted averageannual effective interest rate of 5.16 percent and a weighted averagematurity of 43 days as of 31 December 2006. (2) Relates to bank accounts which are freely available and do notbear interest. (3) The effective interest rates as of 31 December 2006 and 2005 were4.45 and 3.70 percent, respectively. These deposits have an averagematurity of three days. 12 Dividends Paid and Proposed Amount---------------------------------------------------------------------- US$(000) Year ended 31 December 2005Total dividends paid or provided for during the year -Total dividends declared after year-end and not provided for - Year ended 31 December 2006Total dividends paid or provided for during the year 73,440 (1)Total dividends declared after year-end and not provided for 2,275 (1)Corresponds to dividends paid or provided to former shareholder Dona Limited. Dividends per share The dividends declared in 2006 were US$73,142,000 (US$0.32 per share). Adividend in respect of the year ended 31 December 2006 of US$0.00740 per share,amounting to a total dividend of US$2,274,821, is to be proposed at the AnnualGeneral Meeting on 4 July 2007. These financial statements do not reflect thisdividend payable. 13 Subsequent events (a) On 8 January 2007, the Group granted an option to Ventura Gold Corp("Ventura") for the acquisition of an interest in Inmaculada property, locatedin Peru. Under the agreement, in order to acquire an initial 51% controllinginterest, Ventura shall complete a total of 15,000 meters of drilling on theproperty and issue a total of 1 million of its common shares to the Group withina three-year period. Once Ventura acquires its 51% controlling interest, Ventura shall issue anadditional 2 million of its common shares to the Group within the next 5 years.Additionally, the Group has the option to become the operator of the project andbuy back 11% controlling interest in consideration for a payment to Ventura ofthree times the total investment made in drilling and related exploration workcompleted. If the Group does not exercise the aforementioned option, Ventura mayelect to increase its controlling interest by 19% upon the completion of afeasibility study on the project. (b) On 23 February 2007, the Group signed the option and joint ventureagreement with Mirasol under the arrangements set forth in the letter ofintention. Within thirty days following the execution of the agreement, Mirasolshall constitute under the laws of Argentina two companies named "Cabo Sur" and"Punta Verde", which will hold the rights of Claudia and Santa Rita properties,respectively. Until the exercise of Claudia and Santa Rita options, Mirasol andthe Group will own 99% and 1% of each of the new companies, respectively. Reserves and resources (Unaudited) Metal reserves at 31 December 2006 Reserve Proved And PercentageOperation category Proved Probable Probable Ag Au Attributable-------------------------------------------------------------------------------------------- (t) (t) (t) (g/t) (g/t) Arcata Proved 1,012,036 437 1.21 100%100% Probable 216,897 469 1.26 Total 1,228,933 442 1.22Ares Proved 688,663 249 11.05 100%100% Probable 156,786 175 4.14 Total 845,450 235 9.77Selene Proved 809,259 317 2.30 100%100% Probable 56,161 194 0.94 Total 865,420 309 2.22Pallancata Proved 641,002 263 1.06 60%60% Probable 671,562 283 1.10 Total 1,312,565 273 1.08San Jose Proved 153,188 528 6.79 51%51% Probable 845,611 435 7.29 Total 998,800 450 7.21Moris Proved 1,273,582 5 1.72 70%70% Probable 767,974 4 1.16 Total 2,041,556 4 1.51Total Proved 4,577,732 246 3.19Mines and Probable 2,714,991 258 3.23Projects Total 7,292,723 251 3.21-------------------------------------------------------------------------------------------- N.B. includes discounts for ore loss and dilution. Reserves = Resources - OreLoss + Dilution. Where reserves are attributable to JV partner, reserve figuresreflect the Company's ownership only. Resources include reserves Table 01 - Metal resources at 31 December 2006 Resource Measured Indicated Measured Inferred Ag Au Percentagecategory and Attributable Indicated-------------------------------------------------------------------------------- (t) (t) (t) (t) (g/t) (g/t) %Arcata 100%Measured 983,174 503 1.43Indicated 198,839 562 1.51Total 1,182,012 513 1.44Inferred 1,576,324 648 1.64Ares 100%Measured 668,847 272 12.06Indicated 168,598 181 4.26Total 837,445 254 10.49Inferred 75,161 182 4.40Selene 100%Measured 789,816 345 2.51Indicated 53,742 213 1.04Total 843,558 336 2.41Inferred 914,559 323 1.49Pallancata 60%Measured 548,396 327 1.30Indicated 705,282 330 1.40Total 1,253,678 329 1.35Inferred 616,640 542 1.90San Jose 51%Measured 152,221 600 7.74Indicated 758,934 507 8.48Total 911,155 522 8.36Inferred 162,090 576 9.29Moris 70%Measured 3,015,654 4 1.31Indicated 218,661 5 1.15Total 3,234,315 4 1.30Inferred 37,476 4 0.88San Felipe 1,886,472 71 * 10.3 70%TotalMeasured 6,158,108 200 2.81Indicated 2,104,056 367 4.16Total 8,262,164 243 3.15Inferred 5,268,722 359 1.33--------------------------------------------------------------------------------Note * A combined metal content of 6.75% zinc, 3.18% lead and 0.37% copper whichare not included in totals and these metals represent 13.2 million ounces ofequivalent silver. NB Resources include undiscounted reserves, where reserves areattributable to JV partner, reserve figures reflect the Company's ownershiponly, no ore loss or dilution has been included, and stockpiled ore excluded. Ag Eq. Content (Million Ounces)----------------------------------------------------------------------------------------------Operation Category June2006 Depletion Addition Dec Net % Percentage June Dec (1) * 2006 Difference Attributable 2006 2006 Att.(2) Att.(2)----------------------------------------------------------------------------------------------Peru----------------------------------------------------------------------------------------------Arcata Resource 43.6 17.0 60.6 17.0 39% 100% 43.6 60.6 Reserve 16.1 -3.1 7.4 20.4 4.3 27% 16.1 20.4----------------------------------------------------------------------------------------------Ares Resource 30.5 -5.7 24.9 -5.7 -19% 100% 30.5 24.9 Reserve 28.5 -5.6 -0.5 22.3 -6.2 -22% 28.5 22.3----------------------------------------------------------------------------------------------Selene Resource 18.6 6.6 25.2 6.6 36% 100% 18.6 25.2 Reserve 13.6 -3.0 1.7 12.3 -1.3 -10% 13.6 12.3----------------------------------------------------------------------------------------------Pallancata Resource 36.2 13.0 49.2 13.0 36% 60% 21.7 29.5 Reserve 11.3 0.0 12.5 23.8 12.5 111% 6.8 14.3----------------------------------------------------------------------------------------------Peru Resource 128.9 31.0 159.8 31.0 24% 114.4 140.2Totals: Reserve 69.5 -11.7 21.0 78.8 9.3 13% 65.0 69.3----------------------------------------------------------------------------------------------Argentina----------------------------------------------------------------------------------------------San Jose Resource 51.5 18.9 70.4 18.9 37% 51% 26.3 35.9 Reserve 36.1 0.0 19.5 55.6 19.5 54% 18.4 28.3----------------------------------------------------------------------------------------------Argentina Resource 51.5 18.9 70.4 18.9 37% 26.3 35.9Totals: Reserve 36.1 0.0 19.5 55.6 19.5 54% 18.4 28.3----------------------------------------------------------------------------------------------Mexico----------------------------------------------------------------------------------------------Moris Resource 12.7 -0.4 12.3 -0.4 -3% 70% 8.9 8.6 Reserve 0.0 0.0 0.0 8.9 8.9 0% 0.0 6.2----------------------------------------------------------------------------------------------San Felipe Resource 40.3 -15.3 25.0 -15.3 -38% 70% 28.2 17.5 Reserve 0.0 0.0 0.0 0.0 0.0 0% 0.0 0.0----------------------------------------------------------------------------------------------Mexico Resource 53.0 -15.7 37.3 -15.7 -30% 37.1 26.1Totals: Reserve 0.0 0.0 8.9 8.9 8.9 0% 0.0 6.2----------------------------------------------------------------------------------------------Totals: Resource 233.4 34.2 267.5 34.2 15% 177.8 202.2 Reserve 105.6 -11.7 49.4 143.3 37.7 36% 83.4 103.9---------------------------------------------------------------------------------------------- (1) Depletion: reduction in reserves based on ore delivered to the mine plant (2) Attributable reserves based on our percentage ownership at our joint venture projects * Increase in reserves due mainly to mine site exploration but also to price increase Glossary AgSilver AuGold Adjusted EBITDAAdjusted EBITDA is calculated as profit from continuing operations beforeexceptional items, net finance costs and income tax plus depreciation,amortization and exploration costs other than personnel and other expenses Attributable ProfitProfit for the year before dividends attributable to the equity shareholders ofHochschild Mining plc BoardThe board of directors of the Company Company, Group or HochschildHochschild Mining plc CSRCorporate social responsibility CuCopper DirectorsThe directors of the Company Dollar or $United States dollars EPSEarnings per share Effective Tax RateIncome tax expense as a percentage of profit from continuing operations beforeincome tax Exceptional ItemEvents that are significant and which, due to their nature or the expectedinfrequency of the events giving rise to them need to be disclosed separately Expansion Capital ExpenditureCapital expenditure that increases the Group's operating capacity Exploration Capital ExpenditureCapital expenditure spent to convert resources into reserves and to increase thereserve and resource base g/tGrams per tonne IFRSInternational Financial Reporting Standards kozThousand ounces ktpaThousand metric tonnes per annum ListingThe listing of the Company's ordinary shares on the London Stock Exchange on 8November 2006 mozMillion ounces Ordinary SharesOrdinary shares of $0.25 each in the Company PbLead Sustaining Capital ExpenditureCapital expenditure to maintain the Group's operating capacity ZnZinc - ends - This information is provided by RNS The company news service from the London Stock Exchange