Annual Financial Report
22 April 2010
Hochschild Mining plc ("the Company")
1. Documents lodged with the Financial Services Authority in accordance with
LR 9.6.1
· Annual Report & Accounts for the year ended 31 December 2009 ("2009 Annual Report")
· AGM Circular (incorporating the Notice of AGM)
· Proxy Card (incorporating the Notice of Availability of 2009 Annual Report and AGM Circular on website)
· Proposed New Articles of Association
Copies of the above documents have been submitted to the UK Listing Authority and will be available for inspection at the Document Viewing Facility, which is situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Tel. 020 7066 1000
The 2009 Annual Report and the AGM Circular are also available on the Company's website at www.hochschildmining.com
2. Information required to be disclosed in accordance with DTR 6.3.5
The following information has been reproduced from the 2009 Annual Report and should be read in conjunction with the Company's announcement of results for the year ended 31 December 2009 published on 24 March 2010.
All page references and cross-references in the following extracts are to the 2009 Annual Report.
a. The following has been reproduced from pages 40 and 41 of the 2009 Annual Report:
"RISK MANAGEMENT
Overview
As with all businesses, management of the Group's operations and execution of the Group's growth strategies are subject to a number of risks, the occurrence of any one of which may adversely affect the execution of growth strategies and hence the performance of the Group. The Group has made significant developments in the management of the Group's risk environment which seeks to identify and, where appropriate, implement the controls to mitigate the impact of the Group's significant risks. This effort is supported by a Risk Committee with the participation of the CEO, the Vice Presidents, the Country General Managers and the head of the internal audit function.
The Risk Committee is responsible for implementing the Group's policy on risk management and internal control in support of the Company's business objectives, and monitoring the effectiveness of risk management within the organisation. A review of the most significant risks is carried out by the Audit Committee, further details of which are given in the Corporate Governance Report on pages 49 to 53.
The key business risks affecting the Group are set out in the table below. The steps the Group has taken to mitigate these risks, when they are within its control, are also described.
1. FINANCIAL RISKS
- COMMODITY PRICE RISK
Description of risk
Adverse movements in precious metals' prices could have a material impact on the Group's results of operations.
Mitigating Steps
Whilst committed to being unhedged, management continuously monitors silver and gold prices and, where appropriate, shall take the necessary action, within Board approved parameters.
- CREDIT
Description of risk
Loss of revenue resulting from defaulting customers
Mitigating steps
As a result of the global economic downturn, management has taken a number of steps to protect the Group against defaulting customers, by amending sales contracts to provide for advance payment and delaying the transfer of title to goods sold, by obtaining parent company guarantees and implementing risk profiling of key and new customers.
- LIQUIDITY
Description of risk
The Group may be unable to raise funds to meet its financial commitments as they
fall due.
Mitigating Steps
The Board and the Executive Committee monitor the Group's requirements for short and medium-term liquidity and access to credit lines to ensure appropriate level of financing. In 2009 the Group increased its short-term bank lines by over 30% in addition to accessing further long-term financing through the issue of equity and convertible bonds
- FOREIGN CURRENCY
Description of Risk
The combination of US dollar denominated sales and a cost base spread across local currencies may impact the Group's results in the event of adverse currency movements against the US dollar.
Mitigating Steps
The relationship between the US dollar and local currencies, and gold and silver prices provide the company with a natural hedge. Management periodically reviews this relationship to ensure the company is properly protected.
- INTEREST RATE
Description of Risk
Movements in interest rates could impact the Group's results from financings.
Mitigating Steps
Given the low interest rate environment, management has taken measures to fix the interest rate exposure of the Group stemming from its debt balance.
Further information on financial risks can be found in note 38 to the Consolidated Financial Statements
2. OPERATIONAL RISKS
- COSTS
Description of Risk
Increase in production costs will impact on the Group's profitability.
Mitigating Steps
The Group seeks to enter into long-term supply contracts where possible, and at favourable prices.
- BUSINESS INTERRUPTION
Description of Risk
Assets used in operations may break down and insurance policies may not cover against all forms of risks due to certain exclusions and limitations.
Mitigating Steps
The Group has combined property damage and business interruption insurance policies for all operations, and adequacy of coverage is regularly reviewed in conjunction with consultants to ensure appropriate level of cover for the industry and for operations in Latin America. Contingency planning has also led to the Group compiling stock of critical parts and access to back-up power supplies
- RESERVE AND RESOURCE REPLACEMENT
Description of Risk
The Group's future profitability and operating margins depend upon its ability to replenish reserves with geological characteristics to enable mining at competitive costs. Reserves stated in this Annual Report are estimates.
Mitigating Steps
The Group has an annual drilling plan which is revised on a quarterly basis. Exploration targets are continuously being defined with new targets incorporated.
- PERSONNEL
Description of Risk
Loss of key senior management and personnel; in particular, highly skilled engineers and geologists. Lack of availability of individuals with relevant mining experience situated in the locality of the Group's operations, or the inability of the Group to obtain all necessary services or expertise locally or to conduct operations on projects at reasonable rates.
Mitigating Steps
The Group seeks to provide competitive compensation arrangements and well-defined career plans for positions of strategic importance. In respect of mining personnel, a dedicated labour relations strategy has been developed to meet employees' needs and to facilitate open dialogue between key stakeholders.
3. MACRO ECONOMIC RISKS
- POLITICAL, LEGAL AND REGULATORY RISKS
Description of Risk
Costs associated with ensuring compliance with all relevant laws and regulations are substantial and future changes may require additional expense, restrictions on or suspensions of, the Group's operations and may result in delays in the development of its properties.
Mitigating Steps
Regional risk assessments are performed when investment in new countries are considered. These incorporate reviews of political environments and likelihood of changes in relevant royalties and taxes. Local teams in each country of operation monitor and react, as necessary, to policy changes impacting on the business. Further mitigation is achieved through broadening of the geographic spread of the Group's assets, ensuring risk is diversified across a number of countries.
4. CORPORATE SOCIAL RESPONSIBILITY RELATED RISKS
- HEALTH AND SAFETY
Description of risk
Group employees working in the mines may be exposed to health and safety risks. Failure to manage these risks may result in a work slowdown, stoppage or strike and/or may damage the reputation of the Group and hence its ability to operate.
Mitigating Steps
Attainment of Level 4 of the DNV safety management information system at all operating units.
- ENVIRONMENTAL
Description of risk
The Group may be liable for losses arising from environmental hazards associated with the Group's activities and production methods, or may be required to undertake extensive remedial clean-up action or pay for governmental remedial clean-up actions.
Mitigating Steps
As part of the Group's approach to environmental risk management, periodic audits of the Group's operations are carried out with findings reported to senior management, and corresponding recommendations implemented under agreed action plans. Air and water quality is monitored on a weekly and monthly basis.
- SOCIAL
Description of risk
Communities living in the localities of the Group's operations may oppose the activities carried out by the Group at existing mines or development projects and prospects which may also impact on the Group's ability to obtain concessions for current or future projects.
Mitigating Steps
The Group's Community Relations Department maintains continuous dialogue and cooperation with communities surrounding the Group's operations. New high impact plans have been developed focusing on health, education and technical assistance. Tailored risk matrices are monitored on a monthly basis.
b. The following has been reproduced from pages 119 and 120 of the 2009 Annual Report:
"31 Related-party balances and transactions
(a) Related-party accounts receivable and payable
The Group had the following related-party balances and transactions during the years ended 31 December 2009 and 2008. The related parties are companies owned or controlled by the main shareholder of the parent company, joint ventures or associates.
Accounts receivable Accounts payable
at 31 December at 31 December
2009 2008 2009 2008
US$000 US$000 US$000 US$000
Other
Fosfatos del Pacífico S.A. 28 - - -
Compañía Minera Corianta S.A. - - - 1
Cementos Selva S.A. - - - 43
28 - - 44
Joint ventures
Cabo Sur 968 1,005 902 992
Minas Pacapausa S.A.C. - 2 - -
968 1,007 902 992
Loans
Cementos Pacasmayo S.A.A. - 41 - -
- 41 - -
Total 996 1,048 902 1,036
Current related party balances 996 1,048 902 1,036
Total 996 1,048 902 1,036
As at 31 December 2009 and 2008 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:
As at 31 December
2009 2008
S$000 US$000
Income
Recovery of expenses - 34
Expenses
Purchase of supplies - 39
Services received - 2
During 2008, in addition to the normal arrangements the Group has with its related parties, the Group purchased a building from Cementos Pacasmayo, a company under common control to that of the Group, for US$3,622,000 representing an arm's length purchase price.
Transactions between the Group and these companies are on an arm's length basis.
(b) Compensation of key management personnel of the Group
Key management personnel include the members of the senior management team and Directors who receive remuneration.
As at 31 December
2009 2008
US$000 US$000
Salaries and bonuses 8,596 8,718
Total compensation paid to key management personnel 8,596 8,718
This amount includes the remuneration paid to the Directors of the parent company of the Group of US$5,870,520 (2008: US$3,847,865), out of which US$399,117 (2008: US$463,218) relates to pension payments.
The Group made a loan to one of the Directors of US$200,000 with an interest rate of 7.45% until 30 April 2009, 3.50% from 1 May 2009 to 31 July 2009 and 3.00% from 1 August 2009. The balance as at 31 December was US$227,214, composed of principal of US$200,000 and interest of US$27,214. The Group did not collect any amount of this loan.
(c) Participation in placing by Pelham Investment Corporation ("Pelham")
Pelham, a company controlled by Eduardo Hochschild, participated in a placing of the Company's Ordinary Shares ("Shares") in October 2009 by subscribing for 1,064,780 Shares at a price of 295p per Share.
c. The following has been reproduced from page 48 of the 2009 Annual Report:
"Statement of Directors' Responsibilities
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 or loss 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."
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