RNS Number : 2261Y
Hochschild Mining PLC
07 May 2019
 

 

 

_________________________________________________________________________________ 

 

2018 Annual Financial Report and

2019 Annual General Meeting ("AGM")

 

Following the release of the Hochschild Mining PLC's 2018 full year results announcement on 20 February 2019 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for the year ended 31 December 2018 (the "2018 Annual Report").

In accordance with LR 9.6.1, the following documents have been submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/nsm

·       2018 Annual Report

·       2019 AGM circular (incorporating the Notice of 2019 AGM) 

·       Notice of Availability of the 2018 Annual Report and 2019 AGM circular

The above documents have been posted or otherwise made available to shareholders and, in accordance with the Disclosure Guidance and Transparency Rules ("DTR"), the 2018 Annual Report and the 2019 AGM circular have been published on the Company's website at www.hochschildmining.com

The 2019 AGM will be held at the offices of Linklaters LLP at One Silk Street, London EC2Y 8HQ on Thursday 6 June 2019 at 4pm.

The appendices to this announcement contain the information required to be disclosed under DTR 6.3.5 which has been reproduced from the 2018 Annual Report and should be read in conjunction with the Preliminary Announcement.  All page references and cross-references in the appendices are to the 2018 Annual Report.

________________________________________________________________________________ 

Enquiries:

Hochschild Mining plc

Raj Bhasin                                                                                                                                                             +44 (0)20 3709 3260

Company Secretary

 

Hudson Sandler

Charlie Jack                                                                                                                                                          +44 (0)20 7796 4133

Public Relations

________________________________________________________________________________________________

 

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.

 

APPENDICES

Appendix 1

Risk Management (reproduced from pages 50 to 54 of the 2018 Annual Report)

 

As with all businesses, management of the Group's operations and execution of its growth strategies are subject to a number of risks, the occurrence of which could adversely affect the performance of the Group. The Group's risk management framework is premised on the continued monitoring of the prevailing environment, the risks posed by it, and the evaluation of potential actions to mitigate those risks.

 

The Risk Committee is responsible for implementing the Group's policy on risk management and monitoring the effectiveness of controls in support of the Group's business objectives. It meets four times a year and more frequently if required. The Risk Committee comprises the CEO, the Vice Presidents, Country General Managers and the head of the Internal Audit function. A 'live' risk matrix is reviewed which maps the significant risks faced by the business and updated at each Risk Committee meeting, and the most significant risks as well as potential actions to mitigate those risks are reported to the Group's Audit Committee, which has oversight of risk management on behalf of the Board.

 

2018 RISKS

The key business risks affecting the Group set out in this report remain largely unchanged compared to those disclosed in the 2017 Risk Management report with the exception of a new risk entitled Commercial Counterparty that has been identified and added in light of a customer of the Company entering into bankruptcy during the year.

 

Reasons for the year-on-year change in the profile of a specific risk can be found in the commentary section of the relevant risk which also provides an outlook on the risk for the current financial year.

 

1. FINANCIAL RISKS

 

a)     Commodity Price

Change in risk profile vs 2017: UNCHANGED

 

Impact

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

 

Mitigation

-     Constant focus on maintaining a low all-in sustaining cost of production and an efficient level of administrative expense.

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

-     Policy to maintain low levels of leverage to ensure flexibility through price cycles.

 

See the Market Review on pages 4 to 5 for further details

 

Commentary

The focus on conserving capital and optimising cash flow continued in 2018 through:

 

-      debt reduction and refinancing;

-      controlling operating and administrative costs;

-      optimising sustaining capital expenditure; and

-      maintaining low working capital.

 

In relation to debt reduction and the refinancing of debt, as previously reported, the Company completed the early redemption of its bonds in early 2018 thereby reducing debt by approximately $95 million. The balance was replaced with shorter-term debt on significantly better terms, saving the Group approximately $15m in interest expenses in 2018. Debt was further reduced in December 2018 by $50 million.

 

As reported earlier in this report, the Inmaculada mine had another record year in 2018 in terms of production and, as the lowest cost operation in the Group's portfolio, it has been key in reducing overall average production costs.

 

Even though currently no part of 2019 production has been hedged, the Group's flexible policy enables the Board to approve hedging contracts to protect cash flow as and when appropriate.

 

b)     Commercial Counterparty

Change in risk profile vs 2017: NEW

 

Impact

Insolvency of a customer or other business counterparty (bank, insurance company, contractor, etc.) could result in the Group's inability to collect accounts receivable or to receive services which could adversely impact the Group's profitability.

 

Mitigation

-       Periodic assessment of customers and business counterparts.

-       Risk mitigation practices seeking to diversify the Group's customer base and/or to limit the size of shipments.

-       Ongoing assessment of methods to mitigate collection risk.

 

Commentary

In November 2018, Republic Metals, a US-based refinery and a long-standing customer of the Company entered into bankruptcy protection while owing the Group c. US$2.76m (attributable) for shipments previously made. The Group is participating in the bankruptcy proceedings as an unsecured creditor. The likelihood of recovery is low as the secured creditors have claims that exceed Republic Metals' assets.

 

The Group has instigated steps to mitigate the impact of a reoccurrence of this risk in the future. Such steps include:

 

-      Enhanced Credit Analysis: the enhancement of initial financial and business quality checks of new customers and business counterparts and more robust and more frequent evaluations of existing customers;

 

-      Diversification: consideration of revising terms and conditions of sale of final product to diversify orders outstanding at any given time, use several banks for cash deposits, distribute business among contractors, etc.; and

 

-      Reduce exposure: the receipt of cash advances on sold product as soon as the product is delivered.

 

 

2. OPERATIONAL RISKS

 

a)     Operational Performance

Change in risk profile vs 2017: UNCHANGED

 

Impact

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

 

Mitigation

-      Close monitoring of operational performance, costs and capital expenditure as well as the overall profitability at all stages of the mining value chain.

 

-      Monitoring the adequacy and safety of key mining components such as tailing dams, waste rock deposits, pipelines to service ongoing operations, in close liaison between relevant departments ensures that procurement, construction and any permitting are undertaken as appropriate.

 

Commentary

In 2018 the Group exceeded its production target by 0.5m attributable silver equivalent ounces with   particularly strong performances at Inmaculada and Pallancata.

 

2018 budgets across the Group continued to focus on maintaining controlled levels of costs, capex and expenses. As reported in the Financial review, the all-in sustaining cost from operations was kept within the positively revised guidance for the year, at $12.6 per silver equivalent ounce.

 

It was reported in last year's risk report that management was closely monitoring performance of the high cost Arcata mine. Despite cost efficiencies and encouraging exploration results in areas outside the authorised operational area, the combination of increasingly narrow vein structures with marginal grades and a volatile and low average silver price prompted the decision to place the mine on care and maintenance.

 

 

b)     Business Interruption

Change in risk profile vs 2017: UNCHANGED

 

Impact

Assets used in the Group's operations may cease to function or the supply of electricity may be interrupted (e.g. as a result of technical malfunction or earthquake damage) thereby causing production stoppages with material effects.

 

Mitigation

-       Insurance coverage to protect against major risks.

-       Management reporting systems to support appropriate levels of inventory.

-       Annual inspections by insurance brokers and insurers assist management's efforts to understand and mitigate operational risks.

-       Negotiation of long-term power supply contracts and the procurement of contingent generators.

 

Commentary

Mitigating actions during the year include the following:

 

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

-      Management reporting systems ensured that an appropriate level of inventory of critical parts is maintained;

-      Adequate preventative maintenance programmes, supported by the SAP Maintenance Module (which has been enhanced following a recent upgrade), are in place at the operating units;

-      Procurement of back-up power transformers; and

-      Design of a Business Continuity Plan documenting the procedures to be implemented on the occurrence of certain disruptive events. Training and implementation has been scheduled for 2019.

 

 

c)     Information security and cybersecurity

Change in risk profile vs 2017: LOWER

 

Impact

Failure of any of the Group's business critical information systems as a result of unauthorised access by third parties, may affect the Group's ability to operate.

 

Mitigation

-       Compliance with ISO 27001, an internationally recognised certification to evaluate information security management systems.

-       Dedicated team within the IT department focused on preventing cyber-attacks.

-       Audits performed by the internal audit department and third parties to test systems and issue recommendations.

 

Commentary

During the year a third-party review by a major audit firm was commissioned to identify areas of vulnerability and to produce recommendations. This process led to the testing of the recoverability of operational and financial reporting systems. The Group was successful in securing the ISO 27001 certification for its information security management system. Migration to a new version of the Group's accounting and payments platform (S/4 HANA) incorporates higher standards of security. Further details are provided in the Audit Committee Report.

 

d)     Exploration & Reserve and Resource Replacement

 

(d)(i) Impact

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

 

Change in risk profile vs 2017: LOWER

 

Mitigation

-       Implementing and maintaining an annual exploration drilling plan.

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

 

Commentary

In 2018, the first drilling campaign at Inmaculada was completed which confirmed the presence of a considerable number of structures close to the existing mine infrastructure, adding 1.3 million of gold equivalent ounces of inferred resources. For further details, refer to page 32.

 

Land easements have been secured and other permits have been or are at an advanced stage of being, secured to facilitate the 2019 brownfield exploration programme.

 

Greenfield exploration in 2018 was driven by a number of earn-in/ joint venture opportunities being secured in 2018. These provide the Group with a balanced portfolio of advanced and early stage opportunities in stable jurisdictions in the Americas. Further details are provided on page 33.

 

From an operational perspective, the Group implemented a new technological platform, Deswik, for the provision of software to support mine planning so that mineable areas are optimised and mineral losses are reduced. See page 15 for further details.

 

(d)(ii) Impact

Reserves stated in this Annual Report are estimates.

 

Change in risk profile vs 2017: UNCHANGED

 

Mitigation

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

•       Adherence to the JORC Code and guidelines therein

 

Commentary

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

 

See page 164 for further details

 

(a) Personnel: Recruitment and Retention

Change in risk profile vs 2017: HIGHER

 

Impact

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

 

Mitigation

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

 

Commentary

Turnover in 2018 was higher than in previous years due to competition for personnel from other mining companies and projects.

 

To counter this risk, the Group has continued with a number of initiatives to improve the retention of employees. These include the use of non-financial benefits (e.g. flexible working arrangements for Head Office staff) and tailored personal development plans. In addition, a three-year Leadership programme has been implemented at all levels of the organisation. The Group has also started a training programme for supervisors and hourly workers, and intends to enhance the Group's employee value proposition. These include the launching of initiatives related to causes that are valued by potential employees; providing them with the opportunity to contribute to innovation, community relations and environmental performance.

 

Retention plans for senior executives in the form of the Company's Long-Term Incentive Plan and Restricted Share Plan are also in place.

 

(b) Personnel: Labour Relations

 

Change in risk profile vs 2017: UNCHANGED

 

Impact

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

 

Mitigation

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

-     Monthly meetings with mineworkers and unions to ensure a complete understanding of expectations and to keep all parties updated on the Group's financial performance

 

Commentary

Given the level of investment at the Inmaculada mine, the Group's Peruvian operation does not generate taxable income and therefore there is no entitlement to statutory profit sharing for Peruvian mineworkers. The Company has, however, implemented an additional bonus to compensate for this situation.

 

As part of the salary increases agreed with the Peruvian labour unions, a new bonus framework was put in place to promote safety and productivity.

 

The uncertainty with regards to the ongoing viability of the Arcata mine impacted morale among workers at the operation. During 2018, the situation of Arcata did not improve and, therefore, regular meetings were scheduled and held with union representatives to understand concerns. As has been previously announced, the mine will be placed on care and maintenance with personnel redeployed where possible.

 

3. MACRO-ECONOMIC RISKS

 

Political, Legal and Regulatory

 

Change in risk profile vs 2017: LOWER

 

Impact

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

 

Mitigation

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

•       Participation in local industry organisations

 

Commentary

President Kuczynsky resigned from office in Peru and was replaced by Vice President Vizcarra who maintains a pro-business attitude and a supportive policy line towards the mining sector. However, mining continues to be a highly regulated industry where multiple permits are required leading to increased delays and costs. The Government is working with the industry to simplify the permitting process but progress has been limited.

 

At the legislative level, the Peruvian Congress, which comprises a majority from the non-governing parties, continues to evaluate measures that could adversely affect the mining industry.

 

In terms of social conflicts, the governmental authorities remain sensitive to conflicts between communities and mining companies and typically take a cautious approach by establishing a dialogue between parties.

 

Regional and local elections in October and December 2018 resulted in the election of a number of anti-mining officials in several key mining areas of Peru.

 

In Argentina, 2018 was marked by a declining popularity of the Government, primarily caused by the higher cost of living and the devaluation of the Peso. The Government has sought to promote investment but material results are yet to consolidate.

 

 

4. SUSTAINABILITY RISKS

 

Health and Safety

Change in risk profile vs 2017: LOWER

 

Impact

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

 

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

 

Mitigation

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

-      Use of world-class DNV safety management systems.

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

-      Systematic programme of training, communication campaigns and other initiatives promoting safe working practices

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

 

Commentary

The Group has sadly reported three fatalities during 2018, which resulted from two separate accidents, one at Pallancata and one at Arcata. Further details of these accidents are provided in the Sustainability Report on page 40.

 

As reported in last year's report, management established the Safety Culture Transformation Plan (the "SCTP") to materially reinforce the Group's commitment to safety.

 

The Plan comprises the following pillars:

 

-       Leadership, with senior management involved in a full review of all high-risk activities

 

-       Communications, focusing on initiatives to motivate and incentivise safe working practices

 

-       Training, with all personnel receiving five hours of on-site learning every week

 

-       Technical, with the migration to the latest version of risk information management systems and a review of the Company's procedures

 

As previously reported, the Group's overall safety performance indicators showed year-on-year improvements with the accident frequency rate falling by 35% and the number of High Potential Events falling by 46%.

 

A third-party audit of the Group's safety procedures was commissioned during the year which highlighted a number of positive aspects and identified areas of   improvements which, among others, featured the inclusion of contractors within the SCTP and enhancements to the mine-site emergency communications plan. The report's recommendations will be fully implemented during the first half of 2019.

 

For further details on the above, including on a training programme designed for the Group's emergency brigades, please refer to the safety section of the   Sustainability Report on pages 42 and 43.

 

Environmental

Change in risk profile vs 2017:

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

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

 

Impact

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

 

Mitigation

-      The Group has a dedicated team responsible for environmental management

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

 

Commentary

Environmental permitting and agency oversight in Peru remained rigorous during the year.

 

In 2018, the Group performed highly in its ECO score (with a score of 5.37 out of 6), which recognises the following aspects of environmental management:

 

-       compliance with discharge regulatory limits;

-       minimising the number of environmental incidents;

-       minimising the number of findings from regulatory audits; and

-       efficient water consumption and minimising waste generation.

 

For further details, please refer to the environmental section of the Sustainability report on page 48.

 

In addition, during the year, the Environmental team:

 

-      completed the design of a management information system tailored for use by the Group for roll-out in 2019;

-      secured environmental permits to support the Group's exploration programme and operational requirements; and

-     made significant progress with the closure of historic mine components and legacy exploration projects where environmental conditions were restored and the process of revegetation completed.

 

Community Relations

Change in risk profile vs 2017: UNCHANGED

 

Impact

Communities living in the areas surrounding the Group's operations may oppose the activities carried out at existing mines or, with respect to development projects and prospects, may invoke their rights to be consulted under new laws.

 

These actions may result loss of productions, increased costs and decreased revenues, longer lead times, additional costs for exploration and have an adverse impact on the Group's ability to obtain the relevant permits.

 

Mitigation

-      The Group has a dedicated team responsible for Community Relations

-      Constructive engagement with local communities based on several years of positive relations

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

-      Policy to actively recruit workers from local communities

-      Policy of hiring service providers from local communities

 

Commentary

Despite the regional elections in Peru in October, the overall climate of social relations remained stable during the year.

 

A number of actions were taken during the year to maximise the Group's ability to work with partner communities which included:

 

-      restructuring and strengthening of the Community Relations function;

-      the launch of a technology partnership at all mines to facilitate the monitoring of community objectives; and

-      the establishment of social committees at each mining unit and an external advisory committee to help assess and address risks related to the Group's social licence.

 

Further details on the Group's activities to mitigate sustainability risks can be found in the Sustainability report on pages 42 to 49.

 

Appendix 2

Related-Party Balances and Transactions, and Compensation of key management personnel of the Group (reproduced from page 142 of the 2018 Annual Report)

 

 (a) Related-party accounts receivable and payable

The Group had the following related-party balances and transactions during the years ended 31 December 2018 and 2017. The related parties are companies owned or controlled by the main shareholder of the parent company or associates.

 

 

Accounts receivable as at 31 December

 

Accounts payable as at 31 December

 

2018

 

2017

 

2018

 

2017

 

US$000

 

US$000

 

US$000

 

US$000

Current related party balances

 

 

 

 

 

 

 

Cementos Pacasmayo S.A.A.1

76

 

160

 

7

 

149

Total                            

76

 

160

 

7

 

149

 

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

 

As at 31 December 2018 and 2017, all other accounts are, or were, non-interest bearing.

 

No security has been granted or guarantees given by the Group in respect of these related party balances.

 

Principal transactions between affiliates are as follows:

 

Year ended

 

2018

 

2017

 

US$000

 

US$000

Expenses
Expense recognised for the rental paid to Cementos Pacasmayo S.A.A.


(200)

 


(200)

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

 

(b) Compensation of key management personnel of the Group

 

 

As at 31 December

Compensation of key management personnel (including directors)

2018

US$000

 

2017

US$000

 

 

 

 

Short-term employee benefits

6,619

 

6,086

Long Term Incentive Plan, Deferred Bonus Plan and Restricted Share Plan

2,899

 

5,446

Total compensation paid to key management personnel

9,518

 

11,532

 

This amount includes the remuneration paid to the Directors of the parent company of the Group of US$4,601,000 (2017: US$5,439,000).

 

Appendix 3

Statements of Directors' Responsibilities

 

A)    Reproduced from page 60 of the 2018 Annual Report

 

The Directors confirm that to the best of their knowledge:

 

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

 

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

 

On behalf of the Board

 

Raj Bhasin

Company Secretary

19 February 2019

 

 

B)    Reproduced from page 90 of the 2018 Annual Report

 

The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the EU.

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the parent company and of their profit or loss for that period. In preparing those financial statements, the Directors are required to:

 

-     select suitable accounting policies and then apply them consistently

-     make judgements and estimates that are reasonable and prudent;

-     state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and

-    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' remuneration report and Corporate governance statement that comply with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


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