Hochschild Mining: A Slow Start To The Year – Seeking Alpha

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The Q1 Earnings Season for the Silver Miners Index (SIL) is just around the corner, and one of the first companies to release its results is Hochschild Mining (OTCQX:HCHDF). Unfortunately, the company has seen a slow start to the year with just ~80,900 GEOs produced, continuing a trend of declining production. However, Hochschild has reiterated its guidance and could see a meaningful boost to output with Posse potentially coming online in 2024. At a share price of US$1.49, Hochschild is cheap, but with the stock in the middle of its range, I see the low-risk buy point at US$1.25 or lower, closer to key support.

Hochschild Mining Operations

Hochschild Mining Operations (Company Website)

Hochschild Mining released its preliminary Q1 results this week, reporting quarterly production of ~80,900 gold-equivalent ounces, a 12% decline from the year-ago period. This marked the worst production quarter for the company since Q3 2020 and represented a ~30% decline in production from pre-COVID-19 levels (Q1 2019). The silver lining is that Hochschild has provided more achievable guidance this year and is still on track to meet guidance of ~367,000 gold-equivalent ounces (GEOs) at all-in sustaining costs of $1,350/oz, assuming it hits the mid-point. Let’s take a closer look at the quarter below:

Production

As the chart below shows, Hochschild has one of the ugliest production trends sector-wide, with production sliding from a medium-term peak of ~5.3 million ounces of silver and ~67,200 ounces of gold to just ~2.42 million ounces of silver and ~47,200 ounces of gold in the most recent quarter. This sharp decline can be mostly attributed to placing its Arcata Mine on care & maintenance, but with much lower grades at Pallancata, this #3 mine certainly hasn’t picked up the slack. The same is true of the company’s 51% owned San Jose Mine, where silver grades have dipped from 400+ grams per tonne.

Hochschild Mining - Quarterly GEO Production

Hochschild Mining – Quarterly GEO Production (Company Filings, Author’s Chart)

Fortunately, the company’s largest Inmaculada Mine has done a decent job of maintaining production over the years, with grades holding up relatively well at ~150 grams per tonne of silver and nearly 4.0 grams per tonne of gold. However, with the loss of one asset (Arcata) and declining grades at its #2 and #3 mines, it’s no surprise that Hochschild has struggled to maintain its production profile and has also seen costs skyrocket, up from ~$12.30/oz in FY2017 to guidance of ~$18.75/oz this year.

Hochschild - Quarterly Production by Mine

Hochschild – Quarterly Production by Mine (Company Filings, Author’s Chart)

Digging into the operations a little closer, Inmaculada managed to pull its weight, producing ~58,600 ounces of silver, helped by higher than planned recovery rates and gold grades. While this was a decent quarter, this still represented a slight decline on a year-over-year basis (Q1 2021: ~59,500 GEOs), with the better than budgeted gold grades offset by a slightly lower throughput of ~329,400 tonnes. The good news is that with a solid reserve base (~7.8 million tonnes), this anchor asset still has a multi-year mine life, albeit at slightly lower grades.

Hochschild Mining Operations

Hochschild Mining Operations (Company Report)

Unfortunately, San Jose had a tough quarter, producing just ~11,600 attributable GEOs, down from ~17,000 GEOs in the year-ago period. The company noted that COVID-19-related absenteeism and its scheduled hourly workers’ holiday impacted production with a shorter operational period. Fortunately, the mine is still on track to meet its guidance of ~5.9 million silver-equivalent ounces, with what should be a better quarter ahead. During the quarter, the operation processed ~73,900 tonnes at 331 grams per tonne gold and 6.36 grams per tonne gold.

Finally, at Pallancata, it was also a disappointing quarter, with production coming in at just ~10,700 GEOs, with throughput and grades down sharply. Hochschild noted that silver grades were below expectations, and as the production results showed, they dipped to 165 grams per tonne vs. 240 grams per tonne last year. While a single bad quarter isn’t a huge deal, the bigger issue at this asset is the mine life, which comes in at barely two years on reserves, assuming a ~500,000 tonne per annum throughput rate. While there is a decent amount of inventory in the resource category, we will need to see another year of reserve replacement after depletion.

Given the sub-par performance at San Jose and Pallancata, this was a mediocre quarter at best, with the only consolation being that the company is on track to meet its relatively easy annual guidance. This is evidenced by Hochschild Mining being one of the few producers where guidance is well below pre-COVI9-19 levels and not set to return to those levels this year or even come close (FY2019: ~477,400 GEOs).

Hochschild Mining - Annual Production vs. Guided Production

Hochschild Mining – Annual Production vs. Guided Production (Company Filings, Author’s Chart)

So, Is There Any Good News?

With Hochschild sporting a relatively short mine life at its smallest Pallancata Mine and reserve grades being slightly below current grades at Inmaculada, there’s not a lot of hope for production growth from existing assets. However, with the acquisition of Amarillo Gold, Hochschild could add ~100,000 ounces per annum in 2024 through 2027 at all-in sustaining costs below $1,000/oz. This would boost its production profile and help pull down consolidated costs, assuming the company can execute successfully.

The good news about this project is that it’s relatively low capex, with upfront capex that should come in below $190 million even after adjusting for inflationary pressures. This makes Posse relatively easy to fund for Hochschild, and it also diversifies the company further away from Peru, which is a less attractive jurisdiction than Brazil, in my view. The only issue I see is that inflation rates in Brazil are off the charts, coming in at 10% for three consecutive months. Hence, I would be surprised if all-in sustaining costs came in below $850/oz vs. the $740/oz projected in the most recent study.

Posse Project

Posse Project (Company Presentation)

Still, these are much better than Hochschild’s consolidated costs of ~$1,350/oz, and it could replace Pallancata if production continues to decline at this asset or the mine life can’t be extended. Therefore, I see the Amarillo acquisition as a positive development. Let’s take a look at Hochschild’s valuation below:

Valuation & Technical Picture

As the charts below show, Hochschild trades a single-digit PE ratio as of FY2021, a double-digit trailing free cash flow yield, and 0.60x P/NPV at February metals prices. These are relatively attractive valuation metrics relative to their peer group. In fact, even if we use more conservative metals prices assumptions, 0.80x P/NPV is a reasonable valuation for a silver producer, with silver producers fetching a premium multiple due to silver’s leverage relative to gold. So, at least from a valuation standpoint, I would argue that much of the negativity (production trending lower at higher costs) is priced into the stock here at US$1.49.

Hochschild Mining - Valuation vs. Peers

Hochschild Mining – Valuation vs. Peers (Company Presentation, BMO Market Research)

Moving to the technical picture, it’s clear that Hochschild has been a terrible performer, sliding more than 65% from its August 2020 highs. This has left several resistance levels stacked overhead, with the closest one coming in at US$1.80, where the stock was rejected three times since the start of the year. Meanwhile, the next support level doesn’t come in until US$1.30, translating to $0.19 in potential downside to support and $0.31 in potential upside to resistance, or a reward/risk ratio of 1.63 to 1.0.

HCHDF Daily Chart

HCHDF Daily Chart (TC2000.com)

Generally, when it comes to small-cap producers that have above-average costs, I prefer a reward/risk ratio of 5.0 to 1.0 or better and typically prefer to buy right at support. So, while Hochschild is cheap at a double-digit free cash flow yield and less than 0.85x P/NAV (non-spot prices), I don’t see a low-risk buy point just yet. However, if the stock were to decline to US$1.30, where it would rest right on short-term support, I would view this as a buying opportunity from a swing-trading standpoint.

Inmaculada Operations

Inmaculada Operations (Company Website)

Hochschild has had a tough couple of years, and this year hasn’t started off much better, with production coming in at its lowest levels in nearly 18 months. However, with the potential to increase production at lower costs at Mara Rosa with relatively low capex and the stock trading at its most attractive valuation in years, I believe further weakness would present a buying opportunity. However, given Hochschild’s high costs, I see the stock as a swing-trading vehicle only, similar to Coeur (CDE), with the best trading strategy being to buy at support and sell at a 17-20% profit.

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