Hochschild Regulatory News (HOC)

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19 February 2020

Preliminary Results for the year ended 31 December 2019

Robust 2019 financial performance

§ Revenue up 7% at $755.7 million (2018: $704.3 million)[1]

§ Adjusted EBITDA up 28% at $343.3 million (2018: $268.0 million)[2]

§ Profit before income tax (pre-exceptional) up 89% at $103.4 million (2018: $54.7 million)

§ Profit before income tax (post-exceptional) up 100% at $76.8 million (2018: $38.4 million)

§ Basic earnings per share (pre-exceptional) up 80% at $0.09 (2018: $0.05)

§ Basic earnings per share (post-exceptional) up 100% to $0.06 (2018: $0.03)

§ Cash and cash equivalent balance of $166.4 million as at 31 December 2019 (2018: $79.7 million)

§ Net debt reduced by 57% to $33.2 million as at 31 December 2019 (2018 $77.4 million)

§ Final proposed dividend up 19% at 2.335 cents per share ($12.0 million) bringing the full-year total dividend to $22.2 million (2018: $20.0 million)

Strong 2019 operational delivery[3]

§ All-in sustaining costs (AISC) from operations down to $965 per gold equivalent ounce (2018: $973) or $11.9 per silver equivalent ounce (2018: $12.0) comfortably in line with full year cost guidance of $960-$1,000 per gold equivalent ounce or $11.8-12.3 per silver equivalent ounce[4]

§ Full year attributable production of 477,400 gold equivalent ounces (38.7 million silver equivalent ounces) exceeding full year attributable production guidance of 457,000 gold equivalent ounces (37.0 million silver equivalent ounces)

§ Record production at Inmaculada up 6% to 260,126 gold equivalent ounces (2018: 244,445 ounces)

§ Record production at San Jose up 10% to 15.4 million silver equivalent ounces (2018: 14.0 million ounces)

§ Inmaculada brownfield drilling programme added further 46 million silver or 0.5 million gold equivalent ounces of inferred resources in 2019 (calculated using a gold/silver ratio of 86:1) at a grade of 475 grams per tonne silver equivalent 

§ Permits received for key Pablo Sur and Cochaloma exploration targets close to Pallancata with drilling campaign already started at Pablo Sur

2020 outlook[5]

§ Attributable production target of 422,000 gold equivalent ounces (36.0 million silver equivalent ounces)

§ Total sustaining and development capital expenditure expected to be approximately $115-130 million including $22 million expansion of tailings storage facility (TSF) at Inmaculada

§ AISC from operations expected to be $1,040-$1,080 per gold equivalent ounce ($12.1-12.5 per silver equivalent ounce)

§ AISC from operations excluding Inmaculada TSF expansion expected to be $1,000-$1,040 per gold equivalent ounce ($11.6-12.0 per silver equivalent ounce)

§ 2020 brownfield exploration budget expected to be $36 million with greenfield and advanced project budget set at an additional $8 million

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Ignacio Bustamante, Chief Executive Officer said:

"In 2019, we have delivered some strong financial results which reflect another robust year of production including records at two of our operations and good cost control. Improved precious metals prices in the second half of the year combined with strong free cashflow generation saw us reduce leverage further and finish the year with net debt at $33 million. We have again discovered a significant amount of resource additions at Inmaculada and anticipate another year of ambitious exploration with exciting drill targets at all our current operations and projects throughout our entire southern Peru cluster. In addition, we can look forward to progressing our portfolio of greenfield opportunities and strategic alliances."

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A presentation will be held for analysts and investors at 9.30am (UK time) on Wednesday 19 February 2020 at the offices of Hudson Sandler,

25 Charterhouse Square, London, EC1M 6AE

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 9411 (Please quote confirmation code 1877935)

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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 three underground epithermal vein mines, two located in southern Peru and one in southern Argentina. Hochschild also has numerous long-term projects throughout the Americas.

CHAIRMAN'S STATEMENT

2019 was another busy year for Hochschild Mining and I believe we have delivered further strong progress. Our team continued to drive a responsible and innovative mining strategy that aims to combine world class operational performance with exploration-led growth in a safe and environmentally friendly manner. In this regard, I am pleased to report that our delivery in these key areas has been very encouraging. Upholding the Company's high standards is not only critical to our operational success, but to our reputation with our communities, host governments and investors. I also believe that we are continuing to create a stimulating, inclusive and forward-thinking workplace environment where our people can grow their careers and develop new skills and expertise.

2019 was a year in which the efforts of the management team in the design and implementation of our Safety Culture Transformation Plan bore fruit. I am delighted to report that we had our safest year on record. Our key indicators, the accident frequency index and accident severity index were at their lowest and saw year-on year reductions of 40% and 94% respectively. The wide-ranging transformation plan which, in addition to incorporating the traditional elements of training and internal communications, also saw technology play a key role in monitoring day-to-day activities and the safe transportation of our personnel.

The Group has performed well with regards to environmental management, exceeding our target ECO Score for the year. It is also a matter of pride that I can report that the ECO Score itself has won an international award for its innovative approach to sustainability, raising environmental awareness across the entire organisation and its potential application to other industries. Moreover, following on from the successful Safety Culture Transformation Plan, we intend to launch a similar initiative recognising our responsibilities with regards to the environment.

Our people are crucial to our success and therefore it is incumbent on the Board and management to attract and retain a diverse pipeline of talent. An internal study revealed that although Hochschild's gender diversity is better than the average among our peers in Peru, it is a stark fact that women remain significantly under-represented. In order to tackle this imbalance, a working group has been established and an action plan has been developed to achieve the Group's target of increasing workforce diversity. Further details on this and all of the activities mentioned above can be found in the Sustainability section of the 2019 Annual Report. 

Turning to our operations, we delivered a strong year of production despite the decision to place our Arcata mine on temporary care and maintenance in the first quarter. We saw record performances at Inmaculada and San Jose and we were able to once again meet our cost targets. Furthermore, with precious metal prices recovering significantly in the second half of the year, our business generated strong free cashflow allowing us to strengthen our balance sheet, further invest in our exploration initiatives and add value accretive projects to our portfolio. Towards the end of the year, we also augmented our strong financial position by refinancing our existing $150 million of short-term debt with a new $200 million five year loan at a highly competitive rate.

Brownfield exploration remains the focus for our Company and we made good progress in the year with substantial resource additions at Inmaculada and encouraging results at the Palca and Corina zones close to our Pallancata mine. In addition, although there were some delays in the permitting process in Peru for our exciting Cochaloma and Pablo Sur targets, we did receive the requisite approvals in January 2020 and can now look forward to an early start to this year's programme at these two sites. We are confident that there remains a wide array of promising targets, not only surrounding all our operations but also at our early stage projects and at former operations such as Arcata, Ares and Selene. Many of these are expected to be drilled during 2020 and 2021.

Technology is all pervasive and can help drive efficiencies, improve performance and provide insights on a wide range of activities at Hochschild. In the last few years, we have implemented a plan to build a more progressive organisation which drives innovation and also looks to capitalise on our existing skillsets. For example, we have made substantial progress in 2019 with the implementation of our mine digitalisation programme as well as the introduction of our Innova platform across the Group to facilitate efficiency ideas. But in the last few years, we have also aimed to leverage off the talent and experience within the Company and explore the potential for investment in other minerals where we believe we can create shareholder value and where the future demand characteristics are strong. I believe that the acquisition of the unique Biolantanidos rare earth deposit in Chile in October is a key example of this. It brings the Company optionality in an exciting market that benefits from a more technological and environmentally friendly world.

Outlook

2019 was a strong year for precious metals, particularly gold, which was driven by declining U.S. interest rates and heightening geopolitical and global trade risk and represented the largest annual year-end gain since 2010. This was almost matched by silver which rose by around 15%. Such a supportive environment has reinforced our belief in our long-term strategy: a central focus on low cost brownfield exploration; selective greenfield initiatives across the Americas; further development of our numerous early stage projects; and a targeted approach to acquisitions. Consequently, in light of such a solid strategic and financial position the Board is pleased to recommend a final dividend of 2.335 cents per share ($12 million).

The Company will continue to be governed by a financially disciplined approach, emphasising a high quality portfolio and managing risk in a way that protects value, while our assets will be supported by operational practices that meet the highest safety and environmental standards. Finally, I would like to thank all of Hochschild's people, who work with such determination and give their very best to contribute to making Hochschild a success.

Eduardo Hochschild, Chairman

18 February 2020

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased to report that 2019 was another year of achievement for Hochschild. Our safety performance was considerably improved and our environmental performance delivered another robust year, which helped create strong operational reliability leading to solid production, precise cost control and impressive cashflow generation. Our exploration programme was again a key focus and we made encouraging steps in our aim to add low cost resources and to deliver long-term growth opportunities. We believe that our portfolio is well positioned to further transform our business and deliver value and returns for our shareholders.

Operations

Hochschild's operational results were once again able to surpass forecasts, producing 477,400 gold equivalent ounces (38.7 million silver equivalent ounces) which improved on our 2019 target of 457,000 ounces (37.0 million silver equivalent ounces). This represented only a 5% reduction versus 2018 (2018: 503,640 gold equivalent ounces or 40.8 silver equivalent ounces) despite the decision to place our Arcata mine on temporary care-and-maintenance in the first quarter and included record production results from both Inmaculada and San Jose. All-in sustaining costs were in line with expectations at $11.9 per silver equivalent ounce ($965 per gold equivalent ounce). Inmaculada was again the cornerstone with production of 260,126 gold equivalent ounces at $798 per gold equivalent ounce whilst San Jose delivered another strong year with production of 15.4 million silver equivalent ounces at $13.8 per silver equivalent ounce. This was achieved despite a complex economic environment in Argentina. At Pallancata, production was broadly similar to 2018 at 9.4 million silver equivalent ounces (2018: 9.6 million ounces) at a cost of $13.5 per silver equivalent ounce.

Exploration

Our ambitious brownfield exploration programme continued in 2019 with the key highlight being the 46 million silver equivalent ounces of additional resources discovered at Inmaculada close to the Angela vein and at approximately 456 grams per tonne silver equivalent. Furthermore, we also carried out a comprehensive infill drilling programme on the veins discovered in 2018. At San Jose, we have continued to evaluate the Aguas Vivas polymetallic deposit to the north west of existing operations as well as preparing to drill the Telken zone which we believe could form the extension to veins from Newmont's Cerro Negro mine in the south. Long hole drilling also started towards the end of the year close to the mine as well as our first use of Titan geophysics in the area. At Pallancata, drilling campaigns commenced at Palca to the south east and Corina to the north. Encouraging mineralisation was found in both zones with further campaigns scheduled in 2020. We experienced delays in receiving exploration permits for two other key targets close to the operation, Pablo Sur and Cochaloma, and have finally received them in early 2020. As a result, we have reduced production at Pallancata for 2020 in order to extend its life of mine and recalibrate our exploration to production cycle as well as recognising an impairment of $14.7 million.

Business Development

Our team worked on a number of business development initiatives which balanced early stage opportunities including greenfield drilling and project options with the focus on stable jurisdictions in the Americas. In this regard, we carried out selective drilling campaigns in Chile, Canada and the United States. Results from the Corina deposit in Peru were encouraging, and, towards the end of the year, we saw some notable drill holes at the Snip mine in Canada from our partner, Skeena Resources. Further preparatory work has also been carried out at our existing near term projects including Arcata, Ares, Azuca, Crespo and Condor and an exciting drill campaign is scheduled for 2020 and 2021 at a number of these sites across southern Peru subject to the receipt of the relevant exploration permits.

In October, we announced the acquisition of the remaining 94% of the Biolantanidos rare earth deposit in Chile for $56 million. We believe that this acquisition in an attractive mining jurisdiction provides unique optionality for our shareholders and was the direct result of an extensive long-term effort to identify commodities with very strong growth characteristics. The project consists of ionic clay resources, similar to those found in China, but very different from most other rock-based rare earth projects worldwide. The process is environmentally friendly with no requirements for the use of explosives, no tailings dams and no potentially harmful chemicals. Capital and operational expenditure is projected to be low and we are also excited by the strong geological upside potential. Although Hochschild remains focused on precious metals, this diversification gives us a unique deposit in a key industry with expected exponential growth. We intend to deliver a revised feasibility study in 2021 and will thereafter decide on the appropriate path to development to maximise value for shareholders.

Financial position

We have continued to strengthen our balance sheet through the year with strong free cashflow especially in the second half and in December with the refinancing of our $150 million short term debt with a new $200 million five year loan at Libor + 1.15%. We ended the year with a strong cash balance of $166 million (2018: $80 million) and net debt therefore fell to $33.2 million (2018: $77.4 million).

Financial results

The average gold price received in 2019 was 12% higher than the previous year with the silver price rising 8% and therefore, combined with a rise in gold sales, revenue increased by 7% to $756 million (2018: $704 million). The operational all-in sustaining cost of $11.9 per silver equivalent ounce (2018: $12.0 per ounce) was at the better end of forecasts and reflected ongoing cost efficiencies offset by a budgeted increase in exploration expenses investment as well as selling expenses due to the export taxes in Argentina. The combination of the revenue increase and tight cost control led to Adjusted EBITDA rising strongly by 28% to $343 million (2018: $268 million) with Profit from continuing operations before income tax increasing by 79% to $103.4 million (2018: $54.7 million). Adjusted earnings per share was higher at $0.09 per share (2018: $0.05 per share) resulting from the higher profitability and lower interest costs and partially offset by the above-mentioned increase in selling expenses and a rise in mine closure provisions for our former operations at Ares and Sipan ($13.6 million).

Outlook

We expect attributable production in 2020 of 422,000 gold equivalent ounces (36 million silver equivalent ounces) assuming the silver to gold ratio of 86:1 (the average ratio for 2019). This will be driven by: 252,000 gold equivalent ounces from Inmaculada; a contribution of 14.5 million silver equivalent ounces from San Jose; and 7.2 million ounces from Pallancata. All-in sustaining costs for operations are expected at between $1,040 to $1,080 per gold equivalent ounce ($12.1 to $12.5 per silver equivalent ounce). This forecast includes a $22 million investment to expand the tailings storage facility at Inmaculada. Excluding this project, all-in sustaining costs for operations are expected at between $1,000 to $1,040 per gold equivalent ounce ($11.6 to $12.0 per silver equivalent ounce).

The budget for brownfield exploration has increased to approximately $36 million with the greenfield and advanced project budget set at approximately $8 million plus approximately $7 million for advancing the Biolantanidos project. We are also furthering our innovation drive to aid in the delivery of upside in our operations and projects. Finally, we recognise that the management of environmental, social and governance ("ESG") issues is of increasing significance to investors and stakeholders in general, particularly for those operating in the resources sector. This year, we will embark on a process of enhancing our level of ESG reporting and, in particular, in relation to the Company's environmental and social performance.

Although the year has started with relatively high precious metal prices, cost control continues to be a top priority. Our 2020 brownfield programme has already begun at Pablo Sur and we look forward to further results from another ambitious year of exploration both around our existing operations and further afield. I firmly believe that we have set a good course for the future with a focus on low cost growth and a determination to further increase the life-of mine across the Group. All the elements of our strategy will be targeted on delivering sustainable long-term value to those most closely interested in our Company: our shareholders, our communities and our people.

Ignacio Bustamante, Chief Executive Officer

18 February 2020

OPERATING REVIEW

OPERATIONS

Note: 2019 and 2018 (restated) equivalent figures calculated using the previous Company gold/silver ratio of 81x. All 2020 forecasts assume the average gold/silver ratio for 2019 of 86x.

Production

In 2019, Hochschild's attributable production was 38.7 million silver equivalent ounces (477,400 gold equivalent ounces) exceeding its full year guidance of 37.0 million attributable silver equivalent ounces (457,000 gold equivalent ounces). This comprised 269,892 ounces of gold and 16.8 million ounces of silver. This was mostly due to record years at Inmaculada and San Jose offsetting the decision to place the Arcata mine on care and maintenance in early 2019. The overall attributable production target for 2020 is 422,000 gold equivalent ounces or 36.0 million silver equivalent ounces.

Total 2019 group production

Total production includes 100% of all production, including production attributable to Hochschild's minority shareholder at San Jose.

Attributable 2019 group production

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

2020 Production forecast split

Costs

All-in sustaining cost from operations in 2019 was $965 per gold equivalent ounce or $11.9 per silver equivalent ounce (2018: $973 per gold equivalent ounce or $12.0 per silver equivalent ounce), in line with guidance of between $960 and $1,000 per gold equivalent ounce or $11.8 and 12.3 per silver equivalent ounce. This was driven by Inmaculada's competitive $798 per gold equivalent ounce (2018: $751 per ounce) in addition to a solid result from Pallancata ($13.5 per silver equivalent ounce). Please see page 13 of the Financial Review for further details on costs.

The all-in sustaining cost from operations in 2020 is expected to be between $1,040 and $1,080 per gold equivalent ounce (or $12.1 and $12.5 per silver equivalent ounce), which includes a $22 million project to expand the tailings storage facility at Inmaculada.

2020 AISC forecast split

Inmaculada

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

Production

Inmaculada has delivered record gold equivalent production of 260,126 ounces in 2019, a 6% improvement on 2018 (2018: 244,445 ounces) with the key factors being better than forecast extracted grades and steady tonnage.

Costs

All-in sustaining costs were $798 per gold equivalent ounce (2018: $751 per ounce), at the better end of guidance of between $790 and $830 per gold equivalent ounce. The impact of higher than expected grades and cost efficiencies was more than offset by increased mine development and infill drilling capex to access the vein discoveries from 2018.

Pallancata

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

Pallancata's production for the year was 9.4 million silver equivalent ounces, broadly in line with the 2018 result (2018: 9.6 million ounces) and reflecting a full year of production from wider (and therefore higher tonnage) but lower grade veins.

Costs

All-in sustaining costs were $13.5 per silver equivalent ounce (2018: $11.9per ounce), at the better end of guidance of between $13.5 and $14.0 per silver equivalent ounce. The increase versus 2018 reflected a full year of production from the above-mentioned wider, but lower-grade veins.

San Jose

The San Jose silver/gold mine is located in Argentina, in the province of Santa Cruz, 1,750 kilometres south west of Buenos Aires. San Jose commenced production in 2007. Hochschild holds a controlling interest of 51% and is the mine operator. The remaining 49% is owned by McEwen Mining Inc.

Production

San Jose's overall total for 2019 was a record 15.4 million silver equivalent ounces (2018: 14.0 million ounces), an impressive 10% increase versus 2018 mostly due to better than expected grades.

Costs

All-in sustaining costs were $13.8 per silver equivalent ounce (2018: $13.8 per ounce) in line with 2018 with the devaluation of the Argentinian peso and higher gold and silver grades being offset by the reintroduction of export taxes and local inflation.

Arcata

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

Production

On 13 February 2019, Hochschild announced the suspension of operations at Arcata with the mine subsequently placed on temporary care and maintenance. Production for the full year equalled Q1 2019 at 0.4 million silver equivalent ounces.

EXPLORATION

Inmaculada

During 2019, almost 8,500m of potential resource drilling was carried out at the newly-discovered Susana Beatriz, Juliana and Salvador structures to the west of the Angela vein. Thereafter resource drilling commenced in the area and also included work at other structures including Angela, Pilar, Noelia, Dora, Jose and the Sandra veins. Over 35,000m of drilling was executed with the result that approximately 535,000 gold equivalent ounces (46 million silver equivalent ounces) of inferred resources were added to Inmaculada's resource base in 2019 at a grade of approximately 475 grams per tonne silver equivalent. Selected intercepts are detailed below:

Map of current Inmaculada veins

Infill drilling commenced in the first half of the year targeting the key Millet vein, which was discovered in 2018 with further campaigns also targeting the Divina, Keyla, Angela and Susana Beatriz veins. Infill drilling across the entire known Millet vein has now increased the resource grade by 15% from the December 2018 figure of 367 silver equivalent grams per tonne to 424 grams per tonne. Total contained ounces have also risen from 57.0 to 60.6 million silver equivalent ounces whilst tonnage has reduced.

Current plans for infill drilling are for a 110,000m programme from January to July in the Millet west, Divina, Susana Beatriz, Salvador, Dora, Pilar, Barbara, Veronica, Lola, Lizina and Keyla veins.

Pallancata

At Pallancata, almost 10,000m of potential and resource drilling was executed in the year using conventional surface and underground horizontal drilling towards the Pablo, Marco, Mariel, Alizze, Royropata, Mercedes and additional as-yet-unnamed veins, all close to current operations. Results towards the end of the year indicated the continuation of the Rina 4 vein to the north-east. Also, in the Marco and Pablo vein zones, a further 2,400m of resource drilling was executed in the Juan, Simon and Andres structures with economic intercepts indicating new resources in this area. A Titan geophysical programme was also completed in Q4 to define targets for the 2020 programme.

Following a delay, in January 2020, the Peruvian government granted the requisite permits for surface drilling to begin at the Pablo Sur and Cochaloma zones close to Pallancata. Later in January 2020, a 4,500m potential drilling programme started at Pablo Sur whilst a 2,000m programme is also set for Cochaloma.

Palca

The Palca drilling programme started late in the first half of the year with potential resource drilling in the Roxana, Santa Beatriz and Prometida structures and continued with 6,874m of drilling in the third quarter in the Roxana, Santa Beatriz, Prometida, Alejandra, Escondida and Kimberly structures testing continuity to a depth of 300m. Results confirmed mineralisation with 200m of depth. The brownfield team is continuing with efforts to interpret the geology of the Palca zone including the optimum levels of mineralisation and the orientation of the vein structures. The next drilling campaign is scheduled for the second quarter of 2020.

San Jose

At San Jose, potential drilling was executed at the Aguas Vivas system in the first half with structures corresponding to an intermediate sulphidation system with associated grades of zinc and lead.

Potential drilling was also executed earlier in the year at the Pluma 19 structure, the south-east Kospi projection and East and West Antonella. In Q3 2019, just over 5,000m of potential and inferred resource drilling was carried out with the majority concentrating on an area including the Kospi, Kospi South East, Ramal Huevos Verdes and the new Milagro structures. The team has also executed a 1,800m long drill hole to the west of Huevos Verdes. Towards the end of the year, further potential drilling was carried out at the Micaela, Ayelen extension, Kospi Norte and Tonio veins. Finally, almost 4,000m of resource drilling was executed around the current operations.

A magnetometry study was performed on the potential extension of Cerro Negro structures (Telken) covering a total area of 14.3km2.

In 2020, the programme at San Jose involves further long hole drilling, a Titan geophysics programme to the south, 5,000m of drilling at the Telken structures close to Cerro Negro and an assessment of the regional opportunities also to the south of the land package.

Ares

In the fourth quarter of 2020, 1,711m of potential drilling was carried at Ares following previous results from long drill holes. New structures were identified with grades but were generally narrow. New surveys east of the Victoria target are scheduled for 2020.

Other brownfield projects

During 2019, a considerable range of preparatory geological work and permit applications was carried out on a number of Hochschild's former mines and near-term projects with the result that in 2020, the brownfield team intends to drill a number of targets across the Company's southern Peru cluster subject to the receipt of final exploration permits. In addition to work mentioned above at the Corina and Ares deposits, this includes: Titan geophysics and drilling at the former Selene mine; geophysics and a drilling programme at Arcata; drilling at the Crespo project; and drilling at the Huacullo area, which is adjacent to Azuca.

GREENFIELD AND BUSINESS DEVELOPMENT

Hochschild's strategy with regards to its greenfield exploration programme is to maintain and drill a balanced portfolio of early-stage to advanced opportunities using a combination of earn-in joint ventures, private placements with junior exploration companies and the staking of properties.

Corina

At Corina, drilling in the third quarter of the year confirmed promising mineralisation within two sub-parallel structures, Corina and Micky. Drill results are included below and do not necessarily represent true widths.

Hochschild has the option to purchase the Corina Project from Lara Resources by making staged cash payments totalling $4 million of which $0.3 million has been paid to date, with the next instalment of $0.4 million due by July 2020. The Company must also carry out $2.0 million in exploration expenditures, which has been almost fulfilled by the most recent programme, and pay a 2% net smelter return royalty on any future production. The project has now been transferred to Hochschild's brownfield exploration team and a new drilling campaign will begin in 2020 to define inferred resources.

Snip

Hochschild has the right to enter into an option to earn a 60% undivided interest in Skeena Resources' Snip gold project located in the Golden Triangle of British Columbia by spending twice the amount Skeena has spent since it originally optioned Snip from Barrick.

The 2019 Phase I drilling programme was designed to validate an isolated, historical and incompletely sampled high-grade intersection in the 200 Footwall Corridor. The original target in the 200 Footwall was identified by 1997 underground drill hole UG-2610 which intersected 26.8 g/t Au over 3.4m in an incompletely sampled zone. The recent intercept in drill hole S19-044 has discovered a new occurrence of very high-grade mineralisation averaging 1,132 g/t Au over 1.5m, including a significant subinterval containing abundant visible gold grading 3,390 g/t Au over 0.5m. Additional intercepts reported include:

Phase I drill hole S19-043 was completed prior to the newly discovered mineralisation in drill hole S19-044 and intersected anomalous gold grades associated with sheared veining including 12.0 g/t Au over 1.4m. Recently completed modelling of the 200 Footwall mineralisation indicates that this drill hole did not extend deep enough to adequately test the 200 Footwall and will be deepened during the next phase of drilling.

Other projects

In 2020, the team and its joint venture/strategic alliance partners are planning to drill properties across the Americas in Peru and the United States. This includes: the Cooke Mountain gold project owned by Adamera Minerals Corp in Washington State, United States; the Horsethief project owned by Allianza Minerals Ltd, also in Nevada; and the Condor project in Peru.

Biolantanidos

On 2 October 2019, Hochschild announced the acquisition 93.8% of the Biolantanidos rare earths deposit in Chile that it did not already own for a consideration of $56.4 million and therefore consolidated 100% of the project. Biolantanidos was previously controlled by the private fund FIP Lantanidos, managed by private equity firm Mineria Activa SpA. Hochschild initially invested $2.5 million in the project during 2018 and early 2019 in exchange for a 6.2% equity stake with an option to increase ownership.

The deposit has a high concentration of key rare earth minerals and in particular those with permanent magnetic properties such as Terbium, Dysprosium, Praseodymium and Neodymium. These metals offer highly attractive enhancement properties for a wide range of end-use applications and play a pivotal role in driving the efficiency of motors, particularly in electric vehicles and wind turbines.

The project consists of ionic clay resources, similar to those found in China, but very different from most other hard rock-based rare earth projects worldwide. Mineralisation occurs from the surface to 20-30 metres deep and mining will not require explosives. The clay undergoes a simple washing process in which rare earths will be desorbed into a solution, concentrated and calcined to obtain a rare earth oxide. Furthermore, there is no requirement for a tailings dam as the washed clay is expected to be returned to the open pits. The process is environmentally friendly as it does not require potentially harmful chemicals whilst capital and operational expenditure is projected to be low with the result that the project is expected to be one of the lowest cost rare earth producers.

An initial modular project has been developed in the Penco area in an area of 500 hectares, approximately 15km from Concepción in Chile and with excellent access to infrastructure and energy. Other modules are expected to be evaluated in the future, providing significant low capital expenditure growth potential.

Prior to the acquisition, Biolantanidos constructed an on-site pilot plant that has demonstrated both technical and commercial viability, and the opportunity to scale up into industrial operations. Although the company prepared a feasibility study, it is Hochschild's intention to revise the study over the next 14 months and has recently appointed a dedicated management team to oversee development of the project.

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, unless otherwise indicated, and in 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 6% to $780.4 million in 2019 (2018: $733.6 million) due to an increase in the average precious metals prices received as well as a rise in gold sales offsetting a fall in ounces sold of silver in line with decreased silver production.[6]

Gold

Gross revenue from gold in 2019 increased to $449.0 million (2018: $386.2 million) due to a 5% increase in the total amount of gold ounces sold in 2019. This resulted from increases at the Inmaculada and the San Jose mines.

Silver

Gross revenue fell in 2019 to $331.2 million (2018: $347.0 million) mainly due to a fall in silver sales resulting from the decision to place the predominantly silver producing Arcata mine on care and maintenance in the first quarter of 2019.

Gross average realised sales prices

The following table provides figures for average realised prices (before the deduction of commercial discounts) and ounces sold for 2019 and 2018:

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 2019, the Group recorded commercial discounts of $24.7 million (2018: $29.4 million) with the decrease explained by the significant decrease in production from the concentrate-only Arcata mine. The ratio of commercial discounts to gross revenue in 2019 was 3% (2018: 4%).

Net revenue

Net revenue was $755.7 million (2018: $704.3 million), comprising net gold revenue of $441.6 million (2018: $378.8 million) and net silver revenue of $314.0million (2018: $325.1 million). In 2019, gold accounted for 58% and silver 42% of the Company's consolidated net revenue (2018: gold 54% and silver 46%).

Reconciliation of gross revenue by mine to Group net revenue

Costs

Total cost of sales was $512.7 million in 2019 (2018: $531.8 million). The direct production cost excluding depreciation was lower at $327.7 million (2018: $363.9 million) mainly due to lower production and lower cost per tonne both resulting from the decision to place Arcata on temporary care and maintenance in early 2019. This was partially offset by higher production cost at Inmaculada and Pallancata, in line with higher production tonnage, higher mine backfill, detoxification costs and personnel expenses at Inmaculada, as well as higher costs at San Jose mainly due to the start of the new backfill and water recovery plants. Depreciation in production cost increased to $184.4 million (2018: $164.2 million) due to higher estimated unit cost to put resources into production, therefore affecting future capex. Other items, which principally includes personnel-related provisions, increased to $4.4 million in 2019 (2018: $1.1 million) mainly due to the return of the workers profit sharing provision ($3.9 million). Change in inventories was $3.8 million in 2019 (2018: $2.5 million) due to a slight rise in products in process.

Unit cost per tonne

The Company reported unit cost per tonne at its operations of $115.8 per tonne in 2019, a 4% decrease versus 2018 ($121.1 per tonne) mainly due to the decision to place Arcata on temporary care-and-maintenance, good cost control and increased mined tonnage at Inmaculada and Pallancata. These effects were partially offset by higher mine backfill, detoxification costs, personnel expenses and permitting costs at Inmaculada. There were also higher costs at San Jose related to the operation of the new backfill and water recovery plants.

Unit cost per tonne by operation (including royalties)[8]:

Cash costs

Cash costs include cost of sales, commercial deductions and selling expenses before exceptional items, less depreciation included in cost of sales.

Cash cost reconciliation[10]:

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

All-in sustaining cash costs per silver equivalent ounce

Year ended 31 Dec 2019

Year ended 31 Dec 2018

Administrative expenses

Administrative expenses was similar to 2018 at $45.9 million (2018: $45.8 million) primarily due to personnel expenses remaining broadly unchanged although the Company has started to again provision the workers profit sharing Peru ($1.4 million) after being in a tax loss position over the last six years. This was partially offset by lower bonuses provisions (specifically LTIP).

Exploration expenses

In 2019, exploration expenses increased to $38.0 million (2018: $34.4 million) in line with the overall rise in the Company's investment in brownfield and greenfield 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 categories. In 2019, the Company capitalised $6.0 million relating to brownfield exploration compared to $9.2 million in 2018, bringing the total investment in exploration for 2019 to $44.0 million (2018: $43.6 million). 

Selling expenses

Selling expenses increased to $21.1 million (2018: $10.1 million) principally due to the reintroduction of export taxes in Argentina in September 2018 ($16.3million).

Other income/expenses

Other income was slightly higher at $9.0 million (2018: $8.1 million) due to adjustments to electrical services receivables in Peru. Also, other income includes revenue from logistic services in the Matarani warehouse and net income from services provided to contractors.

Other expenses before exceptional items were higher at $33.9 million (2018: $17.1 million) mainly due to an increase in the provision for mine closure adjustments at Ares and Sipan ($13.6 million). This has resulted from the latest review completed by the Group's consultant on these former operations' mine closure plans. At Ares, the variation ($7.7 million) is the result of improvements to the Tailings Storage Facility water treatment plant as part of its final closure. The figure also includes the operational cost of the plant over two years. For Sipan, the review ($5.2 million) incorporates the operating cost of the two water treatment plants for an additional five years. In addition, there is an additional negative impact on mine closure provision ($0.6 million) due to a change in the discount rate. Other expenses also include care and maintenance expenses, corporate social responsibility tax in Argentina and adjustments to receivables.

Adjusted EBITDA

Adjusted EBITDA increased by 28% to $343.3 million (2018: $268.0 million) primarily due to the increase in the average precious metal prices received and good cost control offsetting the reintroduction of export taxes in Argentina in September 2018.

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 $2.9 million increased from 2018 ($2.0 million) due to a small increase in interest on deposits.

Finance costs

Finance costs before exceptional items decreased from $11.2 million in 2018 to $10.0 million in 2019, principally due to the reduction in interest payments resulting from the repayment of the Company's Senior Notes in H1 2018 and lower average interest rates.

Foreign exchange (losses)/gains

The Group recognised a foreign exchange loss of $1.8 million (2018: $8.9 million loss) as a result of exposures in currencies other than the functional currency - mainly the Argentinean peso which again depreciated in 2019 ($1.9 million loss) and the Peruvian sol which appreciated during the year ($0.3 million loss).

Income tax

The Company's pre-exceptional income tax charge was $43.3 million (2018: $36.5 million). The increase in the charge is explained by the Company's increase in profitability in 2019. Income tax includes royalties ($5.0 million), Special Mining Tax ($3.4 million) and withholding tax on dividends paid from Peru to the UK ($3.3 million). Excluding these effects, the effective tax rate was 29% (2018: 27%).

Exceptional items

Exceptional items in 2019 totalled an $18.6 million loss after tax (2018: $11.5 million loss after tax). Exceptional items included the payment of termination benefits due to the restructuring process generated by the temporary suspension of operations at the Arcata mine unit ($12.2 million) and the impairment of the Pallancata mine unit of $14.7 million. 2018 exceptional items included the payment of the premium to redeem early the Senior Notes and the reversal of capitalised Senior Notes issuance costs.

The tax effect of these exceptional items was a $7.9 million tax gain (2018: $4.8 million tax gain). The total effective tax rate was 46% (2018: 83%).

Cash flow and balance sheet review

Cash flow:

Net cash generated from operating activities increased from $185.9 million in 2018 to $283.3 million in 2019 mainly due to higher Adjusted EBITDA of $343.3 million (2018: $268.0 million) and lower interest expense of $5.0 million (2018: $28.8 million).

Net cash used in investing activities increased to $203.6 million in 2019 from $130.0 million in 2018 mainly due to the acquisition of the Biolantanidos project and higher mine developments as well as infill drilling at Inmaculada to access veins discovered in 2018.

Cash from financing activities increased to an inflow of $9.2 million from an outflow of $228.3 million inflow in 2018, primarily due the new medium term loan of $200.0 million, which was used to prepay existing short term loans of $150.0 million partially offset by dividends paid. The 2018 outflow included mainly the repayment of the Company's Senior Notes ($294.8 million) the repayment of bank loans and dividends paid.

Working capital

The Group's working capital position reduced from $25.7 million to $(11.6) million in 2019. The key drivers were: higher income tax payable $(28.5) million in line with 2019 profit; higher provisions of $(13.1) million principally due to the increase of mine closure estimates at Ares and Sipan; and lower trade receivables of $(5.1) million. These effects were partially offset by higher inventories of $4.6 million which were mainly precipitates and spare parts for the new backfill plant in Argentina; and lower trade payables of $4.9 million mainly explained by the suspension of Arcata.

Net debt

The Group's reported net debt position was $33.2 million as at 31 December 2019 (31 December 2018: $77.4 million). In December 2019, the Company repaid $150 million of short term loans using a new $200 million medium term loan with Scotiabank and BBVA ($100 million each). This refinancing helped increase the cash and cash equivalents balance to $166.4 million, which also benefited from strong cashflow generation.

Capital expenditure[19] 

2019 capital expenditure of $205.1 million (2018: $134.4 million) mainly comprised of operational capex of $136.7 million (2018: $131.8 million) with the increase versus 2018 resulting from increased capex at Inmaculada due to a rise in mine developments to access veins discovered in 2018 and the acquisition of Biolantanidos. 

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:

o 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

o 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 2019

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2019

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2019