Annual Financial Report
Hochschild Mining plc ('the Company')
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Documents lodged with the Financial Services Authority in accordance with
LR 9.6.1
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Annual Report & Accounts for the year ended 31 December 2008 ('2008 Annual Report')
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AGM Circular (incorporating the Notice of Annual General Meeting)
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Proxy Card
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Notice of Availability of 2008 Annual Report and AGM Circular on website
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 2008 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 2008 Annual Report and should be read in conjunction with the Company's announcement of results for the year ended 31 December 2008 published on 25 March 2009.
All page references and cross-references in the following extracts are to the 2008 Annual Report.
a. The following has been reproduced from pages 36 and 37 of the 2008 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 significantly improved its risk framework over the past few years, with good progress being made in better understanding and managing the Group's significant risks. The Group has a risk management system in place to support the identification and management of the Group's significant risks. This is supported by a Risk Committee which was established during the year and comprises the CEO, the Vice Presidents, 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.
The key business risks affecting the Group are set out in the table opposite. 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 the prices of silver and gold could have a material impact on the Group's results of operations.
Mitigating Steps
Silver and gold prices continuously monitored with steps taken in late 2008 to mitigate the impact of changes in commodity prices within Board-approved parameters.
- CREDIT RISK
Description of risk
Loss of Group revenue resulting from a customer's inability to pay.
Mitigating steps
The Group has identified the following actions which it has implemented/is in the process of implementing:
> Amendments to the contractual terms of sale which, amongst other things, provide for advance payments and delay the transfer of title
> obtaining parent company guarantees
> 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 Group constantly monitors the Group's level of short and medium term liquidity and access to credit lines to ensure appropriate level of financing.
- FOREIGN CURRENCY RISK
Description of Risk
With the Group's products generally priced in US dollars, and its cost base spread across several different countries and currencies, fluctuations in exchange rates of local currencies against the US dollar may impact the Group's results.
Mitigating Steps
Impact of fluctuations on revenues kept under constant review by management and periodically reviewed by the Board.
Further information on financial risks can be found in note 36 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, whenever possible, long-term supply contracts 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 currently 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.
- 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
For many years the Group has accomplished an excellent track record of reserve and resource replacement.
- 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 considers its ability to attract and retain highly qualified personnel as critical to success. To this end, the Group seeks to provide competitive compensation
arrangements and well-defined career plans.
3. 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 on consideration of investment in new countries incorporating 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 risks are 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
In 2008, the organisation began implementation of a safety management information system in partnership with DNV.
- 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, the Environmental Department engages the services of external consultants to perform periodic audits of the Group's operations with findings reported to senior management and corresponding recommendations implemented under agreed action plans.
- 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 permanent dialogue and cooperation with communities surrounding the Group's operations. A number of sustainability programmes have been developed by the Group to promote self-dependence.'
b. The following has been reproduced from pages 99 and 100 of the 2008 Annual Report:
'29 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 2008 and 2007. 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
2008 2007 2008 2007
US$000 US$000 US$000 US$000
Trade
Cementos Pacasmayo S.A.A. - - - 119
Mauricio Hochschild & Cía. Ltda. S.A. - - - 1
_______________________________________
- - - 120
Other
Compañía Minera Corianta S.A. - - 1 -
Cementos Selva S.A. - - 43 -
_______________________________________
- - 44 -
Joint ventures
Cabo Sur 1,005 - 992 -
Minas Pacapausa S.A.C. 2 - - -
_______________________________________
1,007 - 992 -
Dividends payable
Dona Ltd. - - - 200
_______________________________________
- - - 200
Loans
Cementos Pacasmayo S.A.A. 41 - - -
_______________________________________
41 - - -
Total 1,048 - 1,036 320
________________________________________________________________________
Comprised of:
Dividends payable to Dona Ltd - - - 200
Current related party balances 1,048 - 1,036 120
Total 1,048 - 1,036 320
As at 31 December 2008 and 2007 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
31 December
2008 2007
US$000 US$000
Income
Recovery of expenses 34 -
Services provided - 24
Proceeds from sale
Sales of Colorada shares to Cementos Pacasmayo - 14
Expenses
Purchase of supplies 39 -
Services received 2 28
During the year, 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.
Year ended
31 December
2008 2007
US$000 US$000
Salaries and bonuses 8,718 9,910
________________________________________________________________________________________
Total compensation paid to key management personnel 8,718 9,910__
This amount includes the remuneration paid to the Directors of the parent company of the Group of US$3,847,865 (2007: US$6,268,000), out of which US$463,218 (2007: US$600,000) relates to pension payments.'
c.The following has been reproduced from page 44 of the 2008 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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