Hochschild Mining Share Discussion Threads

[juju44] 27/2/2018 08:28

I think her bottom is shaping up nicely . I will keep my eye on it

[dt1010] 27/2/2018 08:24

This is a dog? A bit different?

[onedayrodders] 26/2/2018 15:53

Perhaps we need another "This is dead in the water" message ?

There is more than one type of broken record

;O)

[richkid71] 26/2/2018 15:31

We GET IT odr. Nymex happens the same time, every day. We don't need an update every day.

[onedayrodders] 26/2/2018 14:47

Nymex again

[juju44] 26/2/2018 14:46

Can I complain about daily pm smash

[juju44] 26/2/2018 09:19

I dont want to complain but ,yes, I do hate gaps

[dt1010] 26/2/2018 09:17

People should stop complaining I think

We have a chance to buy more while the price is so depressed

Long term it will be a lot higher as will gold.

When they pay off their debt the company will start paying decent dividends too.

That will attract the City and Street.

[topicel] 26/2/2018 08:35

Lol, they don't always get filled in a timely manner, do they Ju?!

We're all waiting on the 315-320p one ... the chances are it will return and these are prolonged buying ops but equally we might get a complete stocks meltdown.

Stevea reckons the Korean Peninsula thing will kick off in March, so maybe that will give PMs the final boost we really need to see to get HOC breaking out of this traders range 210-260p?

It does seem fairly well set to stay within it until then, so I'm using that as my signal to buy.

Topicel

[juju44] 26/2/2018 08:03

Gap up - I hate gaps

[edjge2] 26/2/2018 08:02

schizo market.

[juju44] 25/2/2018 16:37

Regulators are probably in on the steal

[eeza] 25/2/2018 16:06

The tail still wags the dog in PM's, & now in BTC, because of the fraudulent use of futures to control the market. Criminality hiding in full view of the Regulators (sic)

[onedayrodders] 25/2/2018 15:31

I see BITCOIN hasn't broken it's downtrend from the top in December and appears to be resuming it's descent.

[eeza] 25/2/2018 13:03

Exactly, ODR.
The dog is now starting to wag the tail.

[onedayrodders] 25/2/2018 12:52

as for Schiff .. yes those who bought into the crash and gold surge on his views would have missed the current bull run.

However in his defence and others, Not sure how anyone could gauge the impact of trillions of QE which had never been used before and the false zero/ low int rate policy for nearly a decade which has allowed record buybacks of stocks to keep the ponzi scheme going.

They have just delayed his prediction and made the eventual bubble ginormous.

Whether the race is a sprint or a marathon, it's how it ends that matters.

Long term int rates are now sticking 2 fingers up at the FED and starting to dictate the stock markets and they cannot jawbone that.

all IMHO

[onedayrodders] 25/2/2018 12:24

Errr .. didn't you filter me DT ?

[stevea171] 24/2/2018 22:03

23/2/2018. Seeking Alpha.

Hochschild Mining Has Some Problems, But It's Not The End Of The World
Summary
Last year, Hochschild delivered on its promises. But the company has taken a small step back.
However, the second half of 2017 was better than the first one.

In this article I discuss a few issues the company is struggling now (particularly the problems at Arcata).
In the final section of the article I present a simplified valuation model based on conservative assumptions.

Hochschild (OTCPK:HCHDF) is a mid-cap gold/silver producer running three mines in Peru and one mine in Argentina. Most recently this former mostly silver producer increased its exposure to gold but the company still has big exposure to silver prices (last year silver accounted for 48.4% of total production).

Yesterday, Hochschild released its 2017 annual report. This release plus the guidance for 2018 (published in January) received a cool reception. As a result, Hochschild shares are once again at their strong support making the company's investors wondering about Hochschild's future:

In my opinion, each miner has its problems, big or small, and Hochschild is no exception. However, I would not say that this company is in serious trouble.
Anyway, in this article I am discussing a few problems Hochschild has encountered most recently. In the final section I am trying to show that according to a simplified discounted cash flow model, the company's shares are slightly undervalued now.

Arcata problems
Last year, the company encountered a number of problems at its oldest Peruvian operation called Arcata. First of all, look at this chart:
Chart 2

It may be easily spotted that for many years Arcata's reserves has been going down (the red arrow). Fortunately, since 2013 the grades have been in their upward trend but a general impression is as follows -- there is less and less stuff to mine at Arcata.
The company tries to mitigate this negative impression and in its presentations very often discloses this chart:
Chart 3

I generally agree. Underground mines, particularly those exploiting epithermal deposits, are erratic. For example, it is nothing strange that a mine demonstrating the current mine life of three to five years may operate for next twenty years or even longer. By the way, Arcata started its operations in 1964, so I am not surprised to see Hochschild management playing down the problem.

But not so fast: To solve any problem you have to invest some of your resources (time, money, goodwill, etc.). In the case of a mine you have to explore it to keep it going, for instance. And here is a problem because management is spending less and less cash on Arcata. For example, in 2016 the company spent $20.8M on Arcata but last year it was only $17.6 million. This year Hochschild wants to spend only $7M so I am skeptical about this operation going forward.

What's more, here is an excerpt from the 2017 annual report (page 47):

A restructuring plan has been established for the Arcata mining unit that includes the dismissal of approximately 165 employees. This reduction is aligned with the exploitation plan 2018, which is lower than budgeted in 2017, and is scheduled to take place between the months of January and February 2018.

Well, it looks like they are going to put Arcata on care and maintenance than focus on problem solving. And I would not be surprised. According to the guidance for 2018, Arcata is supposed to burn cash this year. The all-in sustaining cost of production (AISC) is estimated to be between $18.0 and $18.5 per ounce of silver equivalent so, keeping in mind that today silver is trading at $16.5 an ounce, the mine is set to burn cash this year.

To summarize, if I were to give the company advice, I would say: "Put Arcata on care and maintenance and focus on brown-field exploration."

Other operations
The company's flagship property is Inmaculada, an excellent mine operating since 2015. Inmaculada is not only the largest producer in the company's portfolio (accounting for 46.6% of total production in 2017), but the lowest-cost one as well (AISC of $9.7 per ounce of silver equivalent in 2017). However, this year Inmaculada is supposed to slow down a little bit and deliver a similar amount of metals as last year.

On the other hand, Pallancata, the third mine located in Peru, should be a growth factor. The company plans to ramp up mining operations at a new vein called Pablo, which, according to this excerpt from the 2016 annual report (page 24), may give a major boost to Hochschild performance this year:

… the addition of resources from the Pablo vein at Pallancata which is now over 40 million ounces with silver equivalent grade improving significantly to 529 silver equivalent grams per ton.

This year Pallancata should increase its production to 9.5 million ounces of silver equivalent (from 7.7 million ounces in 2017), which is a very positive surprise. To remind readers, last year Pallancata made a big step forward increasing its production by 117% (compared to 2016), so I thought that another big jump in production was rather unlikely.

Of course, development costs money so investors should not expect particularly impressive results very soon. According to the company, this year the average AISC should stand at $13.0-$13.5 per ounce of silver equivalent. But when the mine development is over, I expect the AISC to be reduced to $10.6 per ounce, so patience is advised.

The last mine, San Jose, is shared with McEwen Mining (MUX), with Hochschild holding a 51% stake in this operation. Similarly to Inmaculada, this year San Jose is supposed to produce a similar amount of metals, compared to 2017 (7.0 million ounces of silver equivalent) but at a slightly higher cost (AISC of $14.5 - 15.0 per ounce of silver in 2018 vs. $14.0 in 2017).

Last year was worse than 2016, but the second half of 2017 was really good
An investor studying the 2017 annual report would see these unpleasant figures:
Table 1

Simply put, last year the company, despite higher revenue, incurred significantly higher costs than in 2016. As a result, all profits across the board were lower than in 2016. There were two culprits:

Arcata: a direct cost per ounce of silver equivalent went up from $8.6 in 2016 to $11.4 in 2017
San Jose: an increase in costs from $7.6 to $9.1 per ounce

However, the table below shows what an average investor cannot see -- a comparison between the first and the second half of 2017:
Table 2

I think that this picture looks a bit better than the previous one. Interestingly, in the second half of 2017 there were two mines responsible for this improvement -- San Jose (yes, this operation is really decent and in 2H 2017 it delivered a gross margin of $24.8M, compared to $18.4M in 1H 2017) and Pallancata (nothing strange, in fact).

To summarize, despite some kind of regression (2017 final results worse than in 2016), the second half of 2017 was quite decent.

Hochschild quits its hedging policy
Generally, I do not like gold/silver producers hedging their production with forward contracts, options, etc. Hochschild used to be such a company, but last year they had withdrawn from this policy. The red row on the graph below depicts the company's losses incurred due to hedging policy in 2016:

It may be easily spotted that last year the company abandoned its hedging policy. I like it.

Simple valuation model
I have no idea for how long Hochschild is going to operate. However, keeping in mind that epithermal deposits are, generally, long-term operations, I have prepared a simple valuation model to assess the value of the company's shares.
Here are my main assumptions:
Table 3

The figures disclosed in the table are taken from Hochschild reports and the guidance for 2018. There is only one exception -- I assume that Pallancata, after completing its development, is going to produce gold and silver at AISC of $10.6 per ounce of silver equivalent. This cost matches sustaining capital expenditures disclosed in 2016 when the mine was ahead of the Pablo vein development. It means that, if I am correct, a typical operating year should end with the total free cash flow of $197.3M.

Now, apart from operating four mines, the company also incurs fixed costs (administration, selling costs plus a few other issues). I roughly estimate that these costs should not be higher than $80M a year. In other words, the total free cash flow delivered by Hochschild should stand at around $117.3M a year.

Furthermore, lets assume that Hochschild is going to operate for twenty years from now on (Arcata has been operating for fifty four years, so why not to assume twenty years?). A discount rate I am using is 5% (all mines are well-established businesses located in a safe jurisdiction so a low discount rate is acceptable, in my opinion). After discounting the free cash flow of $117.3M over twenty years I have arrived at Hochschild business value of $1,458M.

Now, as of the end of 2017, the company held cash of $265M and debt of $360M; the share count was 449.5 million. As a result, one share of Hochschild is worth $3.04. Today these shares are trading at $2.83, so they are slightly undervalued.

However, note that my assumptions are conservative. First of all, I assume that Arcata will be always a laggard. I am pretty sure that in a few years (or even sooner) this mine should return to profitability driving the company's value up (if not, it should be put on care and maintenance which should drive the value up as well). Moreover, Inmaculada and Pallancata (particularly Inmaculada) present impressive upside potential (Hochschild is continuously exploring this mine), so investors should expect the good news going forward. If I am right, we should see Inmaculada operating at higher capacity soon (Hochschild plans to increase throughput at Inmaculada from the current 3,850 tons per day to 5,000 tons).

Summary
Last year Hochschild delivered on its promises -- production and costs of production (AISC) were in line with expectations. However, compared to 2016, last year the company made a small step back. As a result, Hochschild shares went out of fashion and now they are very close to the long-term support (look at Chart 1). Despite these negatives, I am still confident that Hochschild is one of best precious metals mining companies in the entire industry. It runs two excellent mines (Inmaculada and Pallancata) that should drive the company's results up in the coming years. The third mine, San Jose, is a decent operation supporting Inmaculada and Pallancata. Unfortunately, the fourth mine, a long-life operation called Arcata, is in trouble now and I do not expect it returning to profitability soon.

However, in my opinion, all these negatives seem to be already priced in. According to my simplified calculations, one share of Hochschild is worth around $3.0 so, at current share prices of $2.83, these shares are slightly undervalued.

Finally, the chart below compares the price action of Hochschild shares against its peers:
Chart 4

Note: I have created an index replicating the share price action of eleven silver producers (Endeavour Silver, First Majestic, Fortuna Silver, Pan American, Silvercorp, Great Panther, Impact Silver, Excellon, Hochschild, Frenillo and Avino Silver).

Note that since the beginning of the current bull market in precious metals, Hochschild shares have been outperforming their peers (the dotted, red line). Interestingly, now Hochschild shares are once again very close to this trendline.

[juju44] 24/2/2018 22:00

Rod , how long have you got

[dt1010] 23/2/2018 19:14

Not difficult to spot is it mike

[nav_mike] 23/2/2018 15:20

6p off the bid in an hour..blue to red in no time at all

They really love this share dont they - the trading bots are all over this on SETS looking to push lower.

[juju44] 23/2/2018 14:09

Schiff has been one of the very few that I have listened to over the years but he is mostly wrong too

[onedayrodders] 23/2/2018 13:59

cheers for that d3009

Peter Schiff called the sub prime disaster years before it happened and was ridiculed on live CNBC by various people for saying there is going to be a crash.

Trump's "roaring economy" ? annualized first year may even be under 2%

[d3009] 23/2/2018 13:19

Bought back in this morning due in most part to the dollar weakening, but also to a small degree to Jujus charting observations!

Just FYI - Peter Schaff had a rant on Fox news last night, you never know with it being on Fox Donald may just have seen these comments on the state of his economy.

“And they should be a lot higher, because we have record debt, record budget deficits coming, record trade deficits, a 10-year low in our savings rate,” he told FOX Business’ Liz Claman during an interview on Thursday. “We have to borrow tremendous amounts of money, and the world is not going to lend it to us at these ridiculously low interest rates. So rates are going to normalize quickly.”