Hochschild Mining plc. Analyst teach-in 18 June 2008

Transcription

1 Hochschild Mining plc Analyst teach-in 18 June 2008

2 Disclaimer Some statements contained in this presentation or in documents referred to in it are or may be forward-looking statements. Actual results may differ from those expressed in such statements, depending on a variety of factors. Past performance of the Company or its shares cannot be relied on as a guide to future performance. Any forward-looking information contained in this presentation has been prepared on the basis of a number of assumptions which may prove to be incorrect, and accordingly, actual results may vary. This presentation does not constitute, or form part of or contain any invitation or offer to any person to underwrite, subscribe for, otherwise acquire, or dispose of any shares in Hochschild Mining plc or advise persons to do so in any jurisdiction, nor shall it, or any part of it, form the basis of or be relied on in any connection with or act as an inducement to enter into any contract or commitment therefore. No reliance may be placed for any purpose whatsoever on the information or opinions contained in this document or on its completeness and no liability whatsoever is accepted for any loss howsoever arising from any use of this document or its contents otherwise in connection therewith. Nothing in this presentation is to be construed as a profit or production forecast. This presentation has been prepared in compliance with English law and English courts will have exclusive jurisdiction over any disputes arising from or connected with this presentation. 1

3 Welcome & introduction 2

4 Welcome & introduction PURPOSE: to generate greater understanding of assets and their geology to assist forecasting at mine level & to update on current market conditions 3

5 Today s agenda Company overview Calculating reserves & resources Understanding the geology Financial & political situation 4

6 Leading precious metals producer Hochschild: Almost 100 years in Latin America Diversified asset base Growth story Underground mining and regional expertise Strong financial performance & low cash costs Proven track record in reserve replacement A responsible operator Experienced management team 5

7 Achieving our goals Achieved production target of 26 moz Ag eq Completed expansion at Arcata, Ares and Selene Commenced production at San José, Moris and Pallancata Increased reserve life 100% hedge free Declared and paid dividend Lake Shore Gold Corp. C$144 million total investment for 35% ownership Q1 production in-line with forecast Consolidated San Felipe ownership 100% for $52 million Appointment of Miguel Aramburú as CEO 6

8 Operating in the Americas CANADA Lake Shore Gold Corp. (35%) x PERU Arcata (100%) Ares (100%) Selene (100%) Pallancata (60%) x x MEXICO Moris (70%) San Felipe (100%) ARGENTINA San José (51%) x 7

9 4 th largest primary silver producer No. Company 2007 production (moz Ag) % of global¹ 1 BHP Billiton 48 7% 2 KGHM Polska Miedz 3 Fresnillo plc % 6% 4 Kazakhmys 19 3% 5 Pan American Silver 17 3% 6 Goldcorp 7 Volcan 8 Buenaventura 9 Polymetal 10 Grupo Mexico Primary silver producers Fresnillo Pan American Polymetal % 2% 2% 2% 2% 11 Hochschild Mining 14 Hochschild 14 2% 12 Rio Tinto 13 Coeur d Alene Coeur 12 2% 2% Source: JPMorgan Cazenove/GFMS; Hochschild Mining considered a primary silver producer with approximately 60% of revenue derived from silver ¹ Assumes 2007 global production of million ounces Excludes production relating to Silver Wheaton purchases, includes attributable production from Luismin, Marlin and La Coipa Includes equity production Minera Yanacocha 8

10 and a mid-sized producer of gold Select companies 2007 production (koz Au) % of global Randgold Randgold % Peter Hambro Peter Hambro % Teck Cominco Teck Cominco % Fresnillo Fresnillo % Polymetal Polymetal % Agnico Eagle Agnico Eagle % Hochschild Mining Hochschild Mining % Oceana Oceana % BHP Billiton BHP % Aurizon Aruizon % Equigold St Barbara % Source: GFMS, Company filings Assumes 2007 global production of million ounces 9

11 Our strategy for growth 1 Maximize the potential of our existing operations through exploration and expansion 2 Bring into production new, profitable precious metal projects throughout the Americas LONG TERM PROFITABLE GROWTH 10

12 Delivering on our strategy 1 2 Expanding existing operations: San José (+100%) Arcata (+30%) Q Q Selene-Pallancata (+50%) New projects: San Felipe feasibility Lake Shore production Q Q San Felipe production Q Exploration, joint ventures, acquisitions 11

13 Highly experienced management team Eduardo Hochschild Executive Chairman Roberto Dañino Deputy Chairman & Executive Director Miguel Aramburú Chief Executive Officer Jorge Benavides Senior Vice President Corporate Development Ignacio Bustamante Chief Operating Officer Raymond Jannas Vice President Exploration & Geology Javier Durand Legal Counsel José Augusto Palma Senior Adviser, Executive Committee Ignacio Rosado Chief Financial Officer Isac Burstein Business Development Manager 12

14 Effective board structure Experienced, independent Board Committed to transparency and good corporate governance Ongoing evaluation of the Board to ensure it meets the needs of the business as it evolves as a UK listed company Combined Code requirement Chairman and Chief Executive separate roles ½ Board Independent/Non-Exec Directors Regular re-election of all board directors Formal & rigorous annual evaluation HOC Eduardo Hochschild, Executive Chairman Roberto Dañino, Deputy Chairman and Executive Director Alberto Beeck, Non- Executive Director Sir Malcolm Field, Non- Executive Director Jorge Born Jr., Non- Executive Director Nigel Moore, Non-Executive Director Dionisio Romero, Non- Executive Director 13

15 Calculating reserves & resources 14

16 Reserves & resources overview We report reserves semi-annually following the JORC Code IMC conducts a full audit of reserves and resources annually based on the JORC Code Cut off policy: Marginal cost to produce a tonne of ore Parameters used: Long term analyst consensus prices 31 December 2007 R&R assumed $600/oz Au & $10.50/oz Ag Grade is capped according to statistics for each individual deposit Reserves have an accuracy of 10 20% Inferred resources have an accuracy of 40% 15

17 Narrow vein mine versus other ore body types 16

18 Reserves & resources JORC Factors affecting indicated & measured resource to reserve conversion: Dilution: Mining works may be wider than the structures so grades mined (reserves) are lower and therefore some blocks may not make it into reserves Mining loss: Some blocks are not minable they are needed for stability or some ore may be lost in transport or cannot be extracted due to irregularities HOC mine conversion is 88 94% in terms of contained ounces 17

19 Underground mine life benchmarking 200 Mine Life (Resources < 50 M TM) Mine Life (yrs) Resource Life Reserve Life UG mines listed (<50 M TM) in the western hemisphere in all ore types 126 mines with < 20 yrs LOM based on reserves Average LOM (reserves): 5.5 yrs Average LOM (reserves + resources): 9.2 yrs Source: Mineral Economics Group Database 18

20 LOM examples in other companies Mine Company Start date Quiruvilca Pan American Orcopampa Buenaventura Lucky Friday Hecla Mining Co Fresnillo Fresnillo plc Average Source: Cazenove equity research until 2005 company filings thereafter 19

21 Increasing reserve & resource base GOAL: 4 years reserves + 4 years resources Attributable reserves (moz Ag eq.) life of mine Arcata Ares Selene Jun-06 Dec-06 Jun-07 Dec-07 Pallancata Attributable resources (moz Ag eq.) Jun-06 Dec-06 Jun-07 Dec-07 San José 2.4 Moris 2.8 San Felipe Lake shore LOM (reserves) LOM (reserves + resources) Includes 35% of Lake Shore Gold Corp s reserves and resources 2 LOM = reserves / yearly plant capacity. Both as of 31 December Based on 2,000 tpd and subject to completion of feasibility study 20

22 Mining average reserve grades Corporate policy maximizes shareholder value over the long run Not always feasible If we mine higher grade, then average grade decreases Depends on replacement grade 21

23 Policy for guidance on grades Initial reserve (31 Dec 07) 2008B production 100% kt Ag (g/t) Au (g/t) kt Ag (g/t) Au (g/t) Arcata 1, Ares Selene Pallancata 3, San José 2, Moris 2, , Comments: Reserve and resource information released on 12 March 2008 We will give guidance on grades for the current year We will publish R&R information semi-annually (prelims & interims) Based on this information market can interpret data and formulate opinion on future grades 22

24 Final grade calculation based on reserves Initial Reserve MT 1,000,000 A Ag (g/t) 500 B Production - MT 400,000 C + Ag (g/t) 750 D Additions MT 400,000 E Ag (g/t) 500 F Final Reserve Formula MT 1,000,000 G = (A - C + E) Ag (g/t) 400 = (B*A - D*C + F*E) / G 23

25 Application of calculation Based on previous methodology Calculation of 2009 reserves 100% kt Ag (g/t) Au (g/t) Arcata 1, Ares Selene Pallancata 3, San José 2, Moris 1, Comments: Assumes no reserve replenishment Ares and Selene may vary 20-30% because we could incorporate low grade material from vein splits that might be economic 24

26 Understanding the geology 25

27 Quality assets World's Leading Primary Silver Mines in 2007 Rank Mine/Country Company Prod.(m oz) 1 Cannington*, Australia BHP Billiton Fresnillo, Mexico Fresnillo Dukat, Russia OJSC Polymetal Uchucchacua, Peru Compañia de Minas Buenaventura SA Greens Creek**, U.S. Hecla Mining Co Arcata, Peru Hochschild Mining Pallancata, Peru*** Hochschild Mining San Jose, Argentina*** Hochschild Mining Imiter, Morocco Société Métallurgique d'imiter Rochester, U.S. Coeur d'alene Mines Tayahua***, Mexico Grupo Carso La Colorada, Mexico Pan American Silver Corp Huaron, Peru Pan American Silver Corp Alamo Dorado, Mexico Pan American Silver Corp Selene, Peru Hochschild Mining 3.41 *reported payable metal in concentrate; **historically a silver mine, Greens Creek's primary revenue stream sw itched to zinc in GFMS regard this as a short term anomaly and as such have maintained its classification as a primary silver mine; ***estimated. 26

28 Arcata a world class silver district In production since 1964 Total production + resources: ± 240 moz Ag, 400 koz Au to date Southern part of district mined until 2005 Mariana vein and other structures mined starting in 2005 Average grade mined: 700 grams in the past 10 years 67% of production comes from Mariana Ag & Au production up 38% and 29%, respectively (2007) Plant expansion almost completed (capacity to 618 ktpa) 27

29 Arcata 28

30 Reserve replenishment Arcata Total Year K TM Reserves Extracted Replenishment Ag eq (gr /TM) M oz Ag Eq. contained K TM Ag eq (gr /TM) M oz Ag Eq. contained K TM Ag eq (gr /TM) oz Ag eq LOM (years) 1,990 1, ,991 1, , ,992 1, ,993 1, ,994 1, ,995 1, ,996 1, , ,997 1, , , , , , , , , , , , ,006 1, ,007 1, , , ,

31 Arcata Mariana Vein cross section 30

32 Arcata reserves & resources Mariana Vein ARCATA VEINS Resources Reserves M Oz Eq Ag M Oz Eq Ag M + I Inferred Mariana Vein System- Secondary Veins Alexia Vein System NW-SE Vein System Total M + I 5.52 Inferred 7.48 M + I 0.69 Inferred 3.99 M + I Inferred M + I Inferred

33 Arcata Metal content (moz Ag Eq) Average grade (Ag Eq/TM) Cut-off (Ag Eq/TM) Cut-off (Ag Eq/TM) Graphs based on total resource (including inferred). No allowance for dilution or mine loss. 32

34 Grade variability at Arcata Current reserves 476 g/t Ag & 1.19 g/t Au Mining 2008 at 570 g/t Ag Grade in 2008 is higher than reserves and resources due to mine configuration 33

35 Arcata upside potential & exploration plans Significant exploration potential in covered areas to the north The discovery of the vein field of Mariana and the northern structures confirms that the hydrothermal system is larger than previously thought 2008 exploration plans: 40 holes (5,000 metres total) to expand resource base 2,000 metres of development and 3,000 m in short drills to convert known inferred resources into measured & indicated and hence into reserves 34

36 Ares In production since 1998 ± 80% - 90% of the production comes from the Victoria Vein and associated structures 1.9 moz Au & 26.8 moz Ag past production Tonnage mined being consistently replaced albeit with a declining grade Mature high grade gold deposit 35

37 Ares 36

38 Reserve replenishment Ares Reserves Extracted Replenishment M oz Ag M oz Ag Year Ag eq (gr Ag eq (gr Ag eq (gr LOM (years) K TM Eq. K TM Eq. K TM oz Ag eq /TM) /TM) /TM) contained contained 1,998 1,098 1, , , , , (201) 1,504.7 (9.7) , , , , , , , , , , , , ,003 1,032 1, , , , , , (33,085.2) (3.2) , , , , , , , Total 2,651 1, ,268 1,

39 Ares Victoria Vein 38

40 Ares reserves & resources Victoria Vein ARES VEINS Resources Reserves M Oz Eq Ag M Oz Eq Ag M + I Inferred 0.08 Victoria System- Secondary Veins Victoria System- oblique veins Outlying Veins Total M + I 7.58 Inferred 0.44 M + I 0.48 Inferred 0.06 M + I 2.83 Inferred 0.50 M + I Inferred

41 Exploration potential & plans Continue drilling in the Victoria structural corridor to continue replenishing tonnes New exploration model developed to look for another pristine high grade structure 2008 exploration plans: ± 20 holes (8,000 metres total) to expand resource base 800 metres of development and 4,000 m in short drills to gain reserves around the Victoria Vein 40

42 Selene In production since 2003 Total extraction: 18.9 moz Ag & 144 koz Au Mainly one structure being mined 41

43 Reserve replenishment Selene 42

44 Selene 43

45 Selene Explorador Vein 44

46 Selene reserves & resources Resources Reserves SELENE VEINS M Oz Eq Ag M Oz Eq Ag M + I 6.78 Explorador Vein 6.36 Inferred 1.09 Secondary Veins in Explorador Tumiri-Sofia Vein System and Secondary Veins Outlying Veins Total M + I 1.61 Inferred 0.89 M + I 1.59 Inferred 5.49 M + I 0.31 Inferred 0.75 M + I Inferred

47 Pallancata Acquired by IMC in late 2002 Discovery holes: % acquisition by HOC in mid 2006 In production by mid 2007 Significant exploration upside 46

48 Pallancata 47

49 Pallancata Pallancata Vein 48

50 Pallancata reserves & resources Resources Reserves PALLANCATA VEINS M Oz Eq Ag M Oz Eq Ag M + I Veta Oeste Inferred 5.91 Veta Cimoide Other veins associated with the Pallancata Vein System Total M + I 5.88 Inferred 0.43 M + I 0.26 Inferred M + I Inferred ,546,271 49

51 Pallancata Metal content (moz Ag Eq) Average grade (Ag Eq/TM) Cut-off (Ag Eq/TM) Cut-off (Ag Eq/TM) Graphs based on total resource (including inferred). No allowance for dilution or mine loss. 50

52 Pallancata exploration upside Hole ID True Width (m) Ag (gr / TM) Au (gr / TM) Ag Eq (gr / TM PAC PAC , ,455 PAC DLPL-A , ,620 PAC , , , , PAC ,349 PAC PAC ,089 PAC 67 PAC , ,

53 San José Discovered in 1998 by Minera Andes HOC acquired 51% in 2001 In production since mid thousand hectare land package Over 40 kilometres veins reported, less than 20% explored 52

54 San José 53

55 San José Huevos Verdes Vein 54

56 San José SAN JOSE VEINS Huevos Verdes Vein System Resources Reserves M Oz Eq Ag M Oz Eq Ag M + I Inferred 0.43 Frea Vein Kospi Vein Ayelen-Odin Vein System Total M + I Inferred 1.74 M + I Inferred 2.79 M + I 4.15 Inferred 9.84 M + I Inferred

57 San José exploration upside 56

58 San Felipe Consolidating ownership: acquired 100% of project for $51.5 million on 5 June 2008 Zn/Pb/Cu/Ag deposit in Sonora, Mexico Resources: Indicated: 2.32 M 7.32% Zn, 3.19% Pb, 0.41% Cu & 71 g/t Ag Inferred: 0.40 M 6.25% Zn, 2.98% Pb, 0.27% Cu & 49 g/t Ag Moving towards feasibility Only La Ventana structure explored in detail 57

59 San Felipe 58

60 El Gachi Mexico (70%) El Gachi providing additional upside to San Felipe 60 km from San Felipe 2.5 to 8.0 m manto identified in the property Historic (no JORC) resource of ± 100 K gr Ag & % Pb + Zn Significant upside potential * Measured + indicated + inferred, includes reserves 59

61 Lake Shore Gold Corp. HOC increased stake to 35% on 17 June 2008 Canadian (Timmins, Ontario) gold development company Mining friendly jurisdiction Fully financed to develop four independent gold assets over the next 18 months to feed the Bell Creek mill. These assets provide production flexibility Commissioning of the Bell Creek mill expected at the rate of 800 tpd by Q Bell Creek mill to be expanded to 3,000 tpd in ,000 Au oz expected in 2011 Relatively low cost production (lower third of the industry) Experienced management Source: Wellington West report dated 4 June

62 Lake Shore Gold Corp. 61

63 Exploring the region Exploration offices in Peru, Argentina, Mexico and Chile New opportunities Argentina Canada Feasibility completed Chile Mexico Peru Lake Shore Ares Arcata Selene San José Pallancata Moris San Felipe Existing mining operations Tres Chepas Azuca Peñón Blanco El Gachi Manantiales Claudia Gavilanes Development projects Pozos Resource delineation Target definition To Divest / Drop / JV Quevar (JV) Tignamar Calderón El Pino (JV) Sierra Mojina (JV) El Pocito (JV) Cañadón del Moro La Flora El Mosquito Encrucijada Moris Reg. Moctezuma Parihuana Cacurani Ccello Punta Prospect San Luis Cordero Paraiso 554,298 Has. 35,400 Has. 181,425 Has. 60,889 Has. Generative 62

64 Financial & political situation 63

65 2007 unit cost breakdown ($/tonne) 2007 Arcata $55 Ares $77 Selene $54 Pallancata $50 San José $189 Moris $18 Weighted average 1 $70 Note: costs do not include depreciation. According to IFRS 1 Does not consider Moris which is an open pit mine 64

66 Current operating environment Outlook for 2008 costs Peru Impact of incorporating contractor workers in payroll US dollar devaluation Consumables prices increase affecting mine and plant More materials required to support mine to enhance security More royalties given higher prices Argentina Personnel expenses increase due to higher salaries (related to market conditions) and higher transportation expenses Higher consumables prices and freight rates Local inflation pressure higher than expected Mexico Lower tonnage treated Increase of maintenance costs and tariffs of contractors Greater cement consumption for agglomeration Payroll increase due to new market conditions 65

67 Selling our product Dore versus concentrate Produced at Ares 1, San José and Moris (44% of total oz s produced) Frequent pick up from mine Risk transfers upon pick up 100% of revenue received upfront Reduced working capital requirement Stable commercial market conditions Fewer discounts Produced at Arcata, Selene, Pallancata and San José (56% of total oz s produced) Shipments made on a monthly or quarterly basis Risk transfers when mineral reaches smelter Evaluating taking concentrate to doré 85%-90% of revenue received upon arrival (30-45 days) Increased working capital requirement Volatile market conditions Higher discounts 1 Ares and Selene material treated at Ares 66

68 Discounts & selling expenses 2007 & 2008 summary & outlook: 1 Product Discounts (% gross sales) Selling exp. (% gross sales) 07 08E 07 08E Ares Arcata Doré Concentrate 0.2% 10.2% 0.2% 14.9% 0.1% 1.9% 0.1% 1.5% 2 Selene Doré (85%) / Concentrate (15%) 2.6% 1.2% 0.6% 0.3% Pallancata Concentrate 7.1% 6.4% 1.6% 1.3% San José 3 Doré (63%) / Concentrate (37%) N.A 2.3% N.A 6.0% Moris Doré 0.2% 0.2% outlook: Arcata may become doré in 2Q09 Selene and Pallancata 100% doré in 2Q09 San José 100% doré in 2Q09 Other contracts will remain the same 1 Doré: includes non payable contents. Other charges such as refining and freights are included in unit cost Concentrates: includes non payable contents, treatment charges, penalties and freights. No charges to unit cost 2 Lower because delivery point changed from Tampico (Mexico) to Callao (Peru) 3 Selling expenses include export tax (10% of net sales for concentrate and 5% of net sales for doré) 67

69 Overview of the concentrate market Negotiate annual contracts generally in Oct/Nov of preceding year Have contracts with Peñoles, Cormin, Doe Run, Norddeutsche Affinerie, and Teck Cominco Surplus base metal concentrate production and tougher environmental regulations regarding deleterious elements results in tougher concentrate market conditions Arcata concentrate most difficult to sell due to arsenic content of 0.6%, down from historic highs of 6% (ideal to have <0.3%) Outlook for concentrate market is to remain difficult as base metal markets (zinc & lead) expected to remain in a surplus state We continue to mitigate risk by increasing our production of doré vs. concentrate and increasing our customer base 68

70 Cash balance Adjusting models for investments made this year $ millions Cash and cash equivalents (Dec. 2007) 301 Less: Plus: Initial investment in LSG 1 (65) San Felipe purchase (incl. IVA) (60) Second investment in LSG 1 (80) 2007 final dividend paid (28) Capital expenditure (202) Net cash generated from operations... Debt Facility 200 We have drawn the $200 million debt facility 1 Assumes 1 CAD = 1 USD 69

71 Peru political situation No significant change Mining royalties were introduced in 2004 and dictated by Peruvian legislation Owners of mining concessions must pay 1% 3% of sales Sales<US$60m: 1% US$60m < sales < US$120m: 2% US$120 million < sales: 3% Percentage depends on the value of the mineral concentrates according to the international quoted market price published by the Ministry of Energy and Mines Voluntary social contribution implemented in 2006 Workers profit sharing 8% of pre-tax profit We include 70% in administration expenses and 30% in cost of goods sold Stability agreement at Ares Unit Currently do not pay royalties but expires in December 31,

72 Argentina political situation Export tax included in selling expense Mining Royalties vary from province to province. For San José the royalty is fixed at 1.85% of the pit-head value per year when the final product is doré and 2.55% when the final product are mineral concentrates or precipitates. National Export tax of 5% when the final product is doré and 10% when the final product are gold or silver concentrates although rebates available for the first 3 years if shipped from port (3%, 2% and 1% rebate for years 2007, 2008 and 2009, respectively Export tax included in Selling Expense line of income statement Stability certificate granted by the Ministry of Mines for San José National and provincial tax regimes are frozen for a period of 30 years No workers profit sharing 71

73 Mexico political situation No mining royalties No stability agreements Workers profit sharing equal to 10% of pre-tax profit IETU equal to 16.5% for year 2008; 17% for year 2009; and 17.5% from year 2010 and so on, over cash flow 72

74 2008 outlook Year of consolidation Stable production Focus on cost containment in inflationary environment Advancing on growth strategy through: Further expansions Feasibility at San Felipe Continue to pursue further acquisitions Positive on fundamentals for silver and gold Global macroeconomic outlook Industrial demand for silver especially from China Remain on track to achieve production targets Q production inline with forecast 73

75 Contact us Miguel Aramburú, CEO (Lima) Ignacio Rosado, CFO (Lima) Wray Barber, Head of Investor Relations (London)