Hochschild Regulatory News (HOC)

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21 February 2018

Hochschild Mining plc

Preliminary Results for the year ended 31 December 2017

Financial highlights

§ Revenue of $722.6 million (2016: $688.2 million)[1]

§ Adjusted EBITDA of $300.8 million (2016: $329.0 million)[2]

§ Profit before income tax of $64.1 million (2016: $108.3 million)

§ Basic earnings per share of $0.08 (2016: $0.09)

§ Adjusted basic earnings per share of $0.08 (2016: $0.11)[3]

§ Cash and cash equivalent balance of $257.0 million as at 31 December 2017 (2016: $140.0 million)

§ Net debt of $102.8 million as at 31 December 2016 (2016: $187.4 million)

§ Final proposed dividend of 1.965 cents per share ($10 million) up 42% versus 2016 final dividend (1.38 cents per share)

2017 operational delivery exceeding guidance

§ 2017 AISC per silver equivalent ounce from operations of $12.3 (2016: $11.2) in line with guidance of $12.2-12.7[4]

§ Inmaculada AISC per gold equivalent ounce of $721 (2016: $646)

§ Full year attributable production of 513,598 gold equivalent ounces (38.0 million silver equivalent ounces) exceeding guidance[5]

§ Record production of 239,479 gold equivalent ounces at Inmaculada (2016: 229,033 ounces)

§ First results from surface drilling confirming strong geological potential at Inmaculada

2018 Outlook

§ Production target of 514,000 attributable gold equivalent ounces (38.0 million silver equivalent ounces)

§ AISC expected to be $960-$990 per gold equivalent ounce ($13.0-13.4 per silver equivalent ounce)[6] 

o Inmaculada costs expected to be $700-750 per gold equivalent ounce

§ Total sustaining and development capital expenditure expected to be approximately $125-135 million including $14 million for hydraulic backfill project at San Jose

§ $10million budget approved for greenfield exploration programme in 2018

o 4-6 projects across three countries to be drilled in 2018

§ 7.75% Senior Notes repaid on 23 January 2018 financed by cash resources and significantly lower rate short-to-medium term debt

§ Reduction in Argentina corporate tax rates expected to be a significant positive impact on cash generation

Commenting on the results, Ignacio Bustamante, CEO, said:

"We have delivered another set of solid results driven by record production and costs in line with expectations. We have completed a very successful refinancing and along with strong operational cashflow, we have consequently been able to reward shareholders for their support with a proposed increase in the final dividend for 2017. In 2018, we can look forward to the ramp up of production from the Pablo vein and continued investment in our brownfield exploration programme."

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A presentation will be held for analysts and investors at 9.30am (UK time) on Wednesday 21 February 2018 at the offices of JP Morgan, 60 Victoria Embankment, London, EC4Y 0JP (Entrance at 1 John Carpenter Street)

The presentation and a link to the live audio webcast of the presentation can be found at the Hochschild website: 

www.hochschildmining.com 

To join the event via conference call, please see dial in details below:

UK: +44(0)330 336 9105 (Please quote confirmation code 7595580)

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Enquiries:

Hochschild Mining plc

Charles Gordon +44 (0)20 3709 3264

Head of Investor Relations

Hudson Sandler

Charlie Jack +44 (0)207 796 4133

Public Relations

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Non-IFRS Financial Performance Measures

The Company has included certain non-IFRS measures in this news release. The Company believes that these measures, in addition to conventional measures prepared in accordance with IFRS, provide investors an improved ability to evaluate the underlying performance of the Company. The non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. These measures do not have any standardised meaning prescribed under IFRS, and therefore may not be comparable to other issuers.

About Hochschild Mining plc:

Hochschild Mining plc is a leading precious metals company listed on the London Stock Exchange (HOCM.L / HOC LN) with a primary focus on the exploration, mining, processing and sale of silver and gold. Hochschild has over fifty years' experience in the mining of precious metal epithermal vein deposits and currently operates four underground epithermal vein mines, three located in southern Peru and one in southern Argentina. Hochschild also has numerous long-term projects throughout the Americas.

CHAIRMAN'S STATEMENT

I am delighted with the progress made operationally and geologically in 2017 as well as with our long term goal of balance sheet optimisation. This has been demonstrated with our enviable track record of meeting our production and cost forecasts, as well as the delivery of our ambitious brownfield exploration programme which we believe is now starting to bear fruit. Whilst a complex permitting situation in Peru and unpredictable precious metal prices have at times impacted both the management of our core assets and our ability to execute our drilling campaigns, Hochschild Mining has maintained a consistent strategy over the last few years which places geological expertise at the heart of how we manage our deposits and how we generate further low cost organic growth in the long term. The Board is pleased, therefore, to be able to recommend an increased final dividend of $1.965 cents per share.

Operationally we were able to continue to grow our output reaching another Company record in 2017 with key contributions from Inmaculada and San Jose (both production records) and a vastly improved performance at Pallancata. With a positive gold price performance, we were still able to generate solid cashflow throughout the year despite a fall in profitability due to a rise in overall costs. With regards to our balance sheet, we took a decisive step in January 2018 with the early redemption of the high yield bonds, issued in 2014 to finance the construction of Inmaculada, using existing cash and lower cost local Peruvian debt. We are now in an advantageous financial position with a manageable debt profile and the firepower to meet the requirements of our brownfield and greenfield programmes, consider acquisitions and continue to return capital to shareholders.

Towards the end of the year we started to receive some positive results from our brownfield drilling campaigns. In particular, I would like to mention that geological developments at Inmaculada which have confirmed our long-held confidence in the prospectivity of the district and I look forward to the team continuing to add high quality resources in 2018 and beyond. The majority of our assets are still underexplored and following positive changes to the permitting process in Peru, I believe that our organic growth programme is beginning to gain real momentum. Furthermore, it is pleasing to see an increasing number of greenfield targets come through the pipeline as well as some earn-in joint venture opportunities being evaluated.

Safety and Environment

As mentioned in my statement last year, an accident at the Inmaculada mine early in 2017 resulted in two fatalities. With great regret, we disclosed that a second accident occurred at the Arcata mine in July 2017 which also claimed the lives of two colleagues. On behalf of the Board, I would like to again convey our deepest condolences to the families of the victims involved. Our resolve to make Hochschild Mining a safe place to work is as strong as ever and management has responded by instigating a wide-ranging programme to reinforce our safety culture which: includes senior management reviewing all high-risk activities; involves even more frequent training; focuses on initiatives to motivate and incentivise safe working; and implements the most up-to-date safety risk management information systems. Over the course of a mine's life, geological conditions and mining methods may change but our commitment to safety remains constant and is one of our values which we are not willing to compromise.

Our focus on environmental performance continues to be one of our key priorities. During 2017, we introduced a new environmental corporate objective as part of the Company's overall Performance Objectives Plan (the base for calculating employee bonuses), which has historically been only based on production, safety and financial indicators. We believe that this new objective will help us in further promoting a strong environmental culture, achieve our goal of operating with the least environmental footprint possible and generate long-term value for our stakeholders.

Our People

Our employees are pivotal to the Company's performance and, to them, I wish to express my gratitude for their contribution in making 2017 a record year of profitable production. I also wish to thank my fellow Board colleagues for their support over the year. I am delighted that Dionisio Romero Paoletti joined the Board at the start of the year as a Non-Executive Director, bringing a wealth of business experience in Peru and internationally. Finally, I wish to express the Board's utmost gratitude to Enrico Bombieri who, having served as a Non-Executive Director since 2012 and as Senior Independent Director for four years, retired at the end of 2017.

Outlook

After an encouraging year for metal prices in 2017, particularly for gold, the prospects for precious metals in 2018 remain strong with robust global equity markets and inflation on the rise. We are aiming to continue our long-term growth strategy based around low cost brownfield investment, selective greenfield exploration and a targeted approach to acquisitions. Safety, operational excellence and cost control will remain of paramount importance and we will also continue repaying debt as and when the opportunity arises.

Eduardo Hochschild, Chairman

20 February 2018

CHIEF EXECUTIVE OFFICER'S STATEMENT

Hochschild delivered another record year of production whilst maintaining cost increases within expectations, excellent environmental performance, advancing our brownfield programme and continuing our drive to repay debt and optimise our balance sheet. We have also begun to widen our exploration focus to include selected greenfield projects across the Americas as well as assessing a wide variety of joint ventures and acquisitions that could supplement our long-term growth profile at a low cost.

No less important and in response to the fatalities that occurred during the year, I would like to highlight that the management team has designed and is implementing the "Hochschild Safety Transformation" plan which will reinforce the entire Company's commitment to a safe working environment.

Operations

Our core operations produced over half a million attributable gold equivalent ounces (38.0 million silver equivalent ounces) for the first time since the IPO - achieving a fifth year of output increases and improving on our original 37.0 million ounce silver equivalent target. This, yet again, demonstrates the value of our long-term organic growth strategy. Inmaculada was a key driver, delivering another record year of almost 240,000 gold equivalent ounces at a competitive all-in sustaining cost of $721 per gold equivalent ounce ($9.7 per silver equivalent ounce). San Jose also achieved a record (7.1 million attributable silver equivalent ounces) and Pallancata moved strongly into a new phase with 7.7 million silver equivalent ounces at a cost of $10.7 per silver equivalent ounce. At our Arcata mine, the effects of a lengthy permit delay to brownfield exploration in 2016 began to be fully felt with the accessing of increasingly narrower veins and a reduced number of stopes lowering production to 5.5 million silver equivalent ounces. We remain optimistic that, despite the impairment recognised in 2017, there is still geological potential in the Arcata deposit area and expect that our current drilling programme will enable an improvement in resource quality and quantity in the future. Finally, I am pleased to report that, during 2017, we achieved an excellent score in our newly implemented environmental corporate objective at all our operations. We will continue to work to maintain and improve our environmental culture and performance based on a strong belief that responsible mining is fully compatible with respect for the environment.

Exploration

Our ambitious brownfield exploration programme in Peru started to gain momentum in the second half of 2017 when, with all requisite permits in place, we were able to commence our surface drilling programmes at Inmaculada and Arcata. Early results from the first campaign in six years at Inmaculada are very encouraging and confirmed the presence of the Millet vein as well as eight other structures close to our mining infrastructure at the Angela vein. In Argentina, we had some success in discovering new structures close to the San Jose mine and we also continued to drill in the Aguas Vivas area to the north-west where we are currently assessing the nature of this polymetallic orebody which has significant quantities of zinc and lead as well as precious metals. At Pallancata, the focus was on developing the Pablo vein in preparation for mining in 2018 whilst the discovery of the Marco vein nearby has added further resources and prompted a new regional geological hypothesis which we will be testing in 2018. Finally, at Arcata we were able to discover additional inferred resources and throughout 2018, an intensive campaign will continue to explore for resources with the goal of utilising the plant's significant spare capacity.

Financial position

Strong cashflow from our operations combined with some balance sheet management opportunities has left us in a healthy financial position. On 23 January 2018, we were able to redeem the remaining $295 million of our 7.75% Senior Notes. We replaced a portion of these bonds with short to medium term debt from local banks in Peru with an average rate of 2.2% and approximately $100 million was repaid from existing cash resources. Consequently, our cash balance after this transaction remains a healthy $85m and we expect our interest costs to fall by approximately $20 million per year from 2019 onwards.

Financial results

Whilst an increased average gold price received was offset by a moderate fall in the silver price received, record production once again ensured a rise in revenue of 5% to $723 million (2016: $688 million). The operational all-in sustaining cost of $12.3 per silver equivalent ounce (2016: $11.2 per ounce) was in line with forecasts although the increase reflected an increased investment in brownfield exploration as well as one-off project costs at Inmaculada and consequently this resulted in Adjusted EBITDA of $300 million (2016: $329 million). Finally, with finance costs reduced despite the high yield bonds (now repaid), basic earnings per share and adjusted earnings per share was $0.08 per share (2016: $0.11 and $0.09 per share respectively).

Outlook

We expect attributable production in 2018 to be 514,000 gold equivalent ounces (38 million silver equivalent ounces driven by another 240,000 gold equivalent ounces from Inmaculada, an increased contribution of 9.5 million silver equivalent ounces from the revitalised Pallancata mine and another 7.1 million silver equivalent ounces from the dependable San Jose mine. At Arcata, where we expect production of 4 million silver equivalent ounces, management will continue to closely monitor performance to ensure production is optimised whilst maintaining the asset´s optionality with regards to prices, exploration results and cost efficiencies. All in sustaining costs for operations are expected at between $960 to $990 per gold equivalent ounce ($13.0 to $13.4 per silver equivalent ounce) with the slight increase versus the $12.3 per ounce in 2017 resulting from further development costs of the Pablo vein and a one-off highly profitable investment in a hydraulic backfill project at San Jose. We are also pleased to note that the corporate tax rate in Argentina has been reduced from 35% to 30% from 2018 (and to 25% from 2020) and, hence we can look forward to a significant positive impact on San Jose's net profitability although taxes on dividends have also been reinstated to 7% through to 2020 and then to 13% thereafter.

A further $17 million is expected to be invested in our brownfield exploration in 2018 as we look to maintain the current momentum and an additional budget of $10 million is assigned to greenfield projects with some exciting prospects to be drilled in Peru, Chile, Canada and the United States. Low cost, early stage acquisition opportunities will continue to be pursued across the Americas and, in particular, earn-in joint ventures where operations can benefit from Hochschild's technical expertise. We are confident that our exploration-led growth strategy will continue to add high quality ounces to our existing assets, generate new early-stage projects and deliver long-term shareholder value.

Ignacio Bustamante, Chief Executive Officer

20 February 2018

OPERATING REVIEW

OPERATIONS

Note: silver/gold equivalent production and cost figures assume a gold/silver ratio of 74:1. Hochschild has increased the use of gold equivalent figures throughout the release to provide comparability to the gold industry peer group and due to the Company's Inmaculada mine being a majority gold producer.

Production

In 2017, Hochschild once again exceeded its full year production target, a record 513,598 gold equivalent ounces or 38.0 million silver equivalent ounces, comprising 254,932 ounces of gold and 19.1 million ounces of silver. The overall production target for 2018 is 514,000 gold equivalent ounces (38.0 million silver equivalent ounces).

Total group production

Total production includes 100% of all production, including production attributable to Hochschild's joint venture partner at San Jose.

Attributable group production

Attributable production includes 100% of all production from Arcata, Inmaculada, Pallancata and 51% from San Jose.

2018 Production forecast split

Costs

All-in sustaining costs from operations in 2017 was $910 per gold equivalent ounce or $12.3 per silver equivalent ounce (2016: $829 per gold equivalent ounce or $11.2 per silver equivalent ounce) driven by Inmaculada's very competitive $721 per gold equivalent ounce (2016: $644 per ounce) and Pallancata's low costs ($10.7 per silver equivalent ounce) driven by better than forecast tonnage and silver grades. Please see page 13 of the Financial Review for further details on costs.

The all-in sustaining cost from operations in 2018 is expected to be between $960 and $990 per gold equivalent ounce (or $13.0 and $13.4 per silver equivalent ounce) which includes a full year of the new detoxification process at Inmaculada, further development costs at the Pablo vein and an investment of $14 million in a highly value accretive hydraulic backfill project at San Jose. Arcata´s costs are expected to be higher in line with its resource base and despite the implementation of significant cost control measures. An intense drilling campaign is expected to add higher quality resources during the year in order to provide continuity to the operation

2018 AISC forecast split

Inmaculada (Peru)

The 100% owned Inmaculada gold/silver underground operation is located in the Department of Ayacucho in southern Peru. It commenced commissioning in June 2015.

Production

In 2017, Inmaculada delivered record gold equivalent production of 239,479 ounces, a 5% improvement on 2016 (2016: 229,033 ounces) and represents a very successful result following the unexpected stoppage at the operation in the first quarter of the year.

Costs

All-in sustaining costs were in line with expectations at $721 per gold equivalent ounce or $9.7 per silver equivalent ounce (2016: $646 per ounce). Costs rose versus 2016 due to the previously-disclosed investment in the expansion of the tailings dam and other infrastructure as well as reduced mined tonnage resulting from the stoppage in the first quarter and budgeted lower mined gold grades. These effects were partially offset by the processing of a high grade stockpile as well as operational efficiencies versus plan.

Arcata (Peru)

The 100% owned Arcata underground operation is located in the Department of Arequipa in southern Peru. It commenced production in 1964.

Production

Production for the year was 5.5 million silver equivalent ounces (2016: 8.0 million ounces) a result which reflected significantly reduced tonnage and lower grades following a revision of the mine plan to accommodate a lower number of available stopes and narrower veins.

Costs

In 2017, as expected, Arcata's all-in sustaining cost rose substantially versus 2016 to $18.4 per silver equivalent ounce (2016: $13.7 per ounce) reflecting the significantly reduced tonnage (affecting unit costs) and grades resulting from the above mentioned revised mine plan as well as the increased investment in the mine's brownfield exploration programme.

Pallancata (Peru)

The 100% owned Pallancata silver/gold property is located in the Department of Ayacucho in southern Peru. Pallancata commenced production in 2007. Ore from Pallancata is transported 22 kilometres to the Selene plant for processing.

Production

The full year result was 7.7 million silver equivalent ounces, a 118% improvement on 2016 (2016: 3.5 million ounces) driven by better than forecast tonnage and silver grades.

Costs

All-in sustaining costs at Pallancata in 2017 fell by 34% versus the same period of 2016 to $10.7 per silver equivalent ounce (2016: $16.3 per ounce). The reduction was due to higher than expected tonnage and silver grades resulting from the accessing of high grade ancillary veins with the wider but lower grade Pablo vein forecast to provide the majority of the ore in 2018. Cost were also reduced due Pablo development capex being delayed into 2018 which is expected to increase all-in sustaining costs to be between $13.0 to $13.5 per silver equivalent ounce.

San Jose (Argentina)

The San Jose silver/gold mine is located in Argentina, in the province of Santa Cruz, 1,750 kilometres south-southwest of Buenos Aires. San Jose commenced production in 2007 and is a joint venture with McEwen Mining Inc. Hochschild holds a controlling interest of 51% in the mine and is the mine operator.

*The Company has a 51% interest in San Jose

Production

The overall production results for 2017 were 6.4 million ounces of silver and 100,474 ounces of gold which is 13.9 million silver equivalent ounces, a slight improvement on 2016.

Costs

At San Jose, all-in sustaining costs increased to $14.0 per silver equivalent ounce (2016: $11.5 per ounce) mainly due to the Q4 2016 elimination of the Patagonian port rebate which had lowered costs significantly. In addition, lower than expected currency devaluation in Argentina in 2017 only partially offset ongoing high local inflation.

In December 2017, the Argentine government sanctioned a series of fiscal measures that include a reduction in the 35% rate of corporate income tax, taking it to 30% for the years 2018 and 2019, and then to 25% for 2020 onwards. In addition, a withholding tax was imposed on dividends at a rate of 7% for 2018 and 2019, increasing to 13% from 2020. It is expected that the overall net effect on profitability will be positive.

EXPLORATION

Brownfield exploration

Arcata

27,662m of resource drilling and 11,200m of potential drilling was carried out at Arcata in 2017 and centred on the Tunel 3, Tunel 4, Paralela 3, Paralela Sur, Ramal Marion, Michele, Soledad, Baja, Ramal 4, Ruby 2 and Ruby 3 veins. In addition, long horizontal drilling for potential resources was also executed in the Pamela and Paralelas vein systems.

Selected results are provided in the table below:

In 2018, an intensive 32,000m resource drilling campaign is scheduled for all areas surrounding the main mining area.

Pallancata

At Pallancata, 1,000m of resource drilling was carried out in the Marco vein, a structure identified close to the Pablo vein with just over 1 million ounces of silver equivalent resources identified. Selected results are below:

During 2018, mapping and geophysics will be carried out at the Pablo South area whilst an 8,400m potential drilling programme will be carried out to test continuity between the Marco and the Farallon veins to the North West of Pablo.

Inmaculada

At Inmaculada, following receipt of the requisite permits from the government in the fourth quarter, a 56,000 metre surface drilling programme began in early November with four drill rigs onsite. Results in the area to the south west of the Angela vein have so far confirmed the presence of nine new veins close to the existing mine infrastructure. The first results from almost 5,000 metres of drilling are detailed below and show, in particular, the potential of the Millet vein. The current campaign will continue throughout 2018 and will include further potential drilling as well as infill drilling and resource conversion. The Company expects to provide further updates on drill results throughout the year.

In addition, mine development during the third quarter allowed a reinterpretation of the geological model at the deposit and identified a further 9.7 million silver equivalent ounces of resources.

During 2018, mapping and geophysics is planned for the Inmaculada East zone whilst a programme of 4,500 metres of drilling for potential as well as 53,000 metres of resource drilling is scheduled in the same area.

San Jose

At San Jose, 8,624 m of drilling for potential resources was carried out during the year at the Aguas Vivas zone with results indicating an intermediate sulphide deposit with associated zinc and lead mineralisation. A further 3,000 metres of drilling at Aguas Vivas is scheduled for Q1 2018. In addition, 5,000 metres of further resource and potential drilling was carried out during the year in the Molle, Odin, Ramal Ayelen and Frea E-W veins with selected results of both campaigns shown below.

In 2018, mapping and geophysics will continue on the Aguas Vivas zone as well as approximately 3,000m of both potential and resource drilling.

FINANCIAL REVIEW

The reporting currency of Hochschild Mining plc is U.S. dollars. In discussions of financial performance the Group removes the effect of exceptional items when indicated. The income statement results are shown both pre and post such exceptional items. Exceptional items are those 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 to facilitate comparison with prior years. 

Revenue

Gross revenue

Gross revenue from continuing operations increased by 5% to $759.1 million in 2017 (2016: $722.0 million) driven by an increase in sales resulting from increases in production from the Company's Inmaculada and Pallancata mines as well as a rise in gold prices.[8]

Gold

Gross revenue from gold increased 5% in 2017 to $381.3 million (2016: $363.4 million) mainly as a result of a 4% rise in the average gold price as well as a small increase in the total amount of gold ounces sold in 2017. The increase in gold sales came from the recovery in the Pallancata mine offsetting a fall in gold sales from the Arcata mine.

Silver

Gross revenue from silver increased by 5% in 2017 to $377.8 million (2016: $358.7 million) as a result of a 6% increase in the total amount of silver ounces sold to 22,295 koz (2016: 21,088 koz) driven by a recovery at the primarily silver mine of Pallancata as well as increased sales from Inmaculada . This was partially offset by a 31% decrease in the silver sales from the Arcata operation.

Gross average realised sales prices

The following table provides figures for average realised prices (which are reported before the deduction of commercial discounts and include the effects of the hedging agreements in place during the prior year) and ounces sold for 2017 and 2016:

Commercial discounts

Commercial discounts refer to refinery treatment charges, refining fees and payable deductions for processing concentrate, and are deducted from gross revenue on a per tonne basis (treatment charge), per ounce basis (refining fees) or as a percentage of gross revenue (payable deductions). In 2017, the Group recorded commercial discounts of $36.9 million (2016: $34.1 million). The increase is explained by the higher production of concentrate mainly from the Pallancata mine. The ratio of commercial discounts to gross revenue in 2017 was 5% (2016: 5%).

Net revenue

Net revenue increased by 5% to $722.6 million (2016: $688.2 million), comprising net gold revenue of $372.3 million and net silver revenue of $349.8 million. In 2017, gold accounted for 52% and silver 48% of the Company's consolidated net revenue (2016: gold 51% and silver 49%) with the increase in the gold contribution mainly due to the increase in the gold price received.

Revenue by mine[9]

Costs

Total cost of sales was $549.0 million in 2017 (2016: $487.7 million). The direct production cost excluding depreciation was higher at $345.4 million (2016: $293.8 million) explained by higher backfill and detoxification costs at Inmaculada and the impact of the net inflation in Argentina. Depreciation in 2017 was $195.7 million (2016: $185.7 million) with the increase due to Pallancata's higher tonnage extraction. Other items was higher at $3.2 million in 2017 (2016: $1.8 million) due to costs related to the community stoppage at Pallancata in January. Change in inventories was $4.7 million in 2017 (2016: $6.5 million).

Unit cost per tonne

The Group reported unit cost per tonne at its operations of $125.0 per tonne in 2017, an 18% increase versus 2016 ($106.2 per tonne) mainly as a result of new detoxification and backfill processes at Inmaculada, stoppages at Pallancata and Inmaculada, local inflation in Argentina and higher costs at Arcata, partially offset by reduced costs at Pallancata.

Unit cost per tonne by operation (including royalties)[10]:

Cash costs

Cash cost reconciliation[11]:

Co-product cash cost per ounce is the cash cost allocated to the primary metal (allocation based on proportion of revenue), divided by the ounces sold of the primary metal. By-product cash cost per ounce is the total cash cost minus revenue and commercial discounts of the by-product divided by the ounces sold of the primary metal.

All-in sustaining cost reconciliation

Year ended 31 Dec 2017

Year ended 31 Dec 2016

Administrative expenses

Administrative expenses increased by 7% to $51.3 million (2016: $48.0 million) primarily due to increased share-based compensation affecting personnel expenses.

Exploration expenses

In 2017, exploration expenses increased to $17.2 million (2016: $9.2 million) in line with the overall rise in the Company's investment in brownfield exploration. In addition, the Group capitalises part of its brownfield exploration, which mostly relates to costs incurred converting potential resource to the Inferred or Measured and Indicated category. In 2017, the Group capitalised $2.3 million relating to brownfield exploration compared to $1.3 million in 2016, bringing the total investment in exploration for 2017 to $19.5 million (2016: $10.5 million). 

Selling expenses

Selling expenses decreased by 22% versus 2016 to $11.0 million (2016: $14.2 million) mainly due to the elimination of export duties at San Jose. Selling expenses in 2017 consisted mainly of logistic costs for the sale of concentrate whilst 2016 expenses also included approximately 1.5 months of export duties on concentrate until their elimination on 12 February 2016. Previously, export duties in Argentina were levied at 10% of revenue for concentrate.

Other income/expenses

Other income before exceptional items was $10.2 million (2016: $33.1 million). The reduction is mainly due to the elimination of the Patagonian port rebate (2016: $16.7 million) in the fourth quarter of 2016.

Other expenses before exceptional items were reduced to $11.5 million (2015: $13.9 million).

Adjusted EBITDA

Adjusted EBITDA decreased by 9% over the period to $300.8 million (2016: $329.0 million) driven primarily by production costs.

Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance costs and income tax plus non-cash items (depreciation and changes in mine closure provisions) and exploration expenses other than personnel and other exploration related fixed expenses.

Finance income

Finance income before exceptional items of $5.9 million increased from 2016 ($1.1 million) primarily due to the impact of a higher net present value of the Patagonian port rebate ($1.9 million) which was discounted in 2016 but collected in 2017. The remainder consists of interest received on deposits ($1.6 million) and other financial income ($2.4 million) which included a gain on sale of shares ($1.4 million) and a gain on derivative instruments ($0.6 million).

Finance costs

Finance costs decreased from $30.5 million in 2016 to $26.1 million in 2017, principally due to the reduction of interest resulting from the repayment of Scotiabank medium term loan in H1 2016 and from lower average short-term borrowings.

Foreign exchange losses

The Group recognised a foreign exchange loss of $5.3 million (2016: $1.8 million loss) as a result of exposures in currencies other than the functional currency - primarily the Argentinean Peso.

Income tax

The Group's pre-exceptional income tax charge was $13.5 million (2016: $47.6 million). The substantial decrease in the charge is explained by the Group's decrease in profitability in the year in addition to a deferred tax credit recognised as a result of a progressive tax rate reduction in Argentina from 35% to 30%.

The effective tax rate for the period was 20.2% (2016: 40.7%). The reduction in the effective tax rate is mainly due to the positive deferred tax impact of the Argentina tax rate reduction which is non-recurring.

Exceptional items

Exceptional items in 2017 totalled a $0.5 million gain after tax (2016: $6.4 million loss). Exceptional items principally included impairment reversals of $31.9 million for Pallancata and $8.4 million at San Felipe partially offset by a $43.0 million impairment of Arcata.

The tax effect of exceptional items amounted to a $3.3 million tax charge (2016: $2.2 million tax credit) although this did not include the impairment reversal at San Felipe which did not attract a deferred tax liability as no tax asset arose when the impairment was originally carried out.

Cash flow and balance sheet review

Cash flow:

Operating cash flow decreased from $316.1 million in 2016 to $233.9 million in 2017. Lower operating cash flow is mainly due to: (i) income tax payments in 2017 of $26 million in Argentina of which $17 million corresponded to income tax from 2016 and the rest to income tax advances for the 2017 period; (ii) the reduction of working capital achieved in 2016 (excluding the income tax effect) of $37 million and maintained during 2017; (iii) higher production costs and exploration expenses partially offset by stronger revenue.

Net cash used in investing activities decreased to $121.1 million in 2017 from $127.4 million in 2016 mainly due to reduced capital expenditure at Arcata, Inmaculada and care and maintenance expenditure at the Azuca and Crespo projects, partially offset by an increase in Pallancata investment.

Finally, cash flows generated from financing activities resulted in a net inflow of $4.9 million in 2017 from $132.2 million used in 2016. In 2016, the $132.2 million used was due to $107.4 million of debt repayment and the remainder by equity dividends of $7.0 million paid to Hochschild shareholders and also $13.0 million to McEwen Mining. The change in 2017 is primarily due to the net increase in short term credit lines of $31.5 million ($25 million repaid in January 2017 in Peru, $50 million raised in December 2017 in Peru to re-purchase the bonds and $6.5 million raised in Argentina during the year). This was partially offset by dividends paid to Hochschild's shareholders of $14.0 million and to minority shareholders in Argentina of $12.3 million. As a result, total cash flows resulted in a net increase of $117.8 million from $56.5 million in 2015 ($61.2 million improvement).

Working capital

The Group's working capital position changed by $6.2 million to $64.9 million in 2017 from $71.1 million in 2016. Key drivers were: higher income tax receivable ($24.5 million) resulting from $24.2 million of tax payments in Argentina; a negative movement in other financial assets/(liability) of $4.3 million from a liability position in 2016, to an asset position in 2017 resulting from the embedded derivative associated with provisional pricing and higher trade. These were partially offset by: an increase in trade and other payables and provisions of $(16.9) million mainly due to Pallancata's trade payables in line with its higher production.

Net debt

The Group reported net debt position was $102.8 million as at 31 December 2017 (2016: $187.4 million). The reduction in 2017 is mainly due to the operating cash generated mainly in Inmaculada and Pallancata.

Capital expenditure[17]

2017 capital expenditure of $128.5 million (2016: $131.6 million) mainly comprised of operational capex of $125.9 million (2016: $126.5 million) with the small decrease versus 2016 comprising decreases at Inmaculada and Arcata partially offset by an increase in capital expenditure at Pallancata.

Forward looking Statements

This announcement contains certain forward looking statements, including such statements within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, such forward looking statements may relate to matters such as the business, strategy, investments, production, major projects and their contribution to expected production and other plans of Hochschild Mining plc and its current goals, assumptions and expectations relating to its future financial condition, performance and results.

Forward-looking statements include, without limitation, statements typically containing words such as "intends", "expects", "anticipates", "targets", "plans", "estimates" and words of similar import. By their nature, forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results, performance or achievements of Hochschild Mining plc may be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Factors that could cause or contribute to differences between the actual results, performance or achievements of Hochschild Mining plc and current expectations include, but are not limited to, legislative, fiscal and regulatory developments, competitive conditions, technological developments, exchange rate fluctuations and general economic conditions. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.

The forward looking statements reflect knowledge and information available at the date of preparation of this announcement. Except as required by the Listing Rules and applicable law, Hochschild Mining plc does not undertake any obligation to update or change any forward looking statements to reflect events occurring after the date of this announcement. Nothing in this announcement should be construed as a profit forecast.

Statement of Directors' responsibilities

The Directors confirm that to the best of their knowledge:

- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

- the Management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2017

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2017

These financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by:

Ignacio Bustamante

Chief Executive Officer

20 February 2018

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year 31 December 2017