Annual Financial Report

RNS Number : 2135F

Hochschild Mining PLC

22 April 2014

 



Hochschild Mining plc ("the Company")

2013 Annual Financial Report and 2014 Annual General Meeting ("AGM")

Following the release of the Company's 2013 full year results announcement on 12 March 2014 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for the year ended 31 December 2013 (the "2013 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.Hemscott.com/nsm.do

·      The 2013 Annual Report

·      The 2014 AGM Circular (incorporating the Notice of 2014 AGM) 

·      The 2014 AGM Proxy Card (incorporating the Notice of Availability of the 2013 Annual Report and 2014 AGM Circular)

The 2013 Annual Report and the 2014 AGM Circular are also available on the Company's website at www.hochschildmining.com

The appendices to this announcement contain the information required to be disclosed under DTR 6.3.5 which has been reproduced from the 2013 Annual Report and should be read in conjunction with the Preliminary Announcement.

All page references and cross-references in the appendices are to the 2013 Annual Report.

APPENDICES

Appendix 1

Risk Management (reproduced from pages 50 to 55 of the 2013 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 and 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 Company's business objectives. It meets four times a year and more frequently if required. The Risk Committee comprises the CEO, the Vice Presidents and the head of the internal audit function. A 'live' risk matrix is compiled 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.

The key business risks affecting the Group set out in this report differ from those disclosed in the 2012 Risk Management report in that counterparty credit risk with respect to defaulting customers and liquidity risk have been removed as they are no longer considered to be principal risks for the Group.

This year, the perceived change in the profile of each of the Group's principal risks relative to 2012 has been described to assist the reader in assessing how the risk has evolved during the course of the year under review.

 1. FINANCIAL RISKS

(i)  Commodity Price

Change in risk profile vs 2012: HIGHER

Impact

Adverse movements in precious metals' prices could have a material impact on the Group's results of operations.

Mitigation

·      Constant focus on maintaining low cost base and low leverage policy

·      Initiatives identified for implementation in the event of a low price environment (included within the Cash Optimisation Plan - see 2013 Commentary)

·      Conservative, but flexible hedging policy that allows the Company to approve hedges to mitigate the effect of price movements on specific projects and transition periods

See Market Overview on pages 12 and 13 for further details

2013 Commentary

This risk became much more pronounced during 2013 given the unprecedented steep falls in precious metal prices. In response, the Company implemented the Cash Optimisation Plan, a pre-designed series of initiatives to counter the impact on profitability by conserving capital and

optimising cash flow.

The Cash Optimisation Programme sought to:

•     reduce operating and administrative costs

•     minimise sustaining capital expenditure

•     refocus the Group's exploration strategy

(ii) Counterparty credit risk

Change in risk profile vs 2012: UNCHANGED

Impact

The Group may lose financial resources through the failure of financial institutions

Mitigation

•     Surplus cash invested with a diverse list of select highly rated financial institutions within investment limits set by the Board

2013 Commentary

Management has continued to operate its policy with oversight by the Board without any change during the year.

2. OPERATIONAL RISKS

(i)  Operational Performance

Change in risk profile vs 2012: HIGHER

Impact

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

Mitigation

•     Close monitoring by management of operational performance, costs and capital expenditure

•     Negotiation of long-term supply contracts where appropriate

•     Exploration to increase high quality resources

2013 Commentary

As stated in the Operating and Financial reviews, unit costs trended downwards during 2013, primarily as a result of the financial benefits of the cost savings initiatives implemented under the Cash Optimisation Plan and the devaluation of local currencies.

(ii) Delivery of Projects

Change in risk profile vs 2012: HIGHER

Impact

Unanticipated delays in delivering projects could have negative consequences including delaying cash inflows and increasing capital costs, which could ultimately reduce profitability

Mitigation

•     Teams comprising specialist personnel and world class consultants and contractors are involved in all aspects of project planning and execution including the commissioning of an independent feasibility study and the securing of permits and financing

•     Project teams meet on a weekly basis to monitor ongoing progress against project schedules with a Procurement Committee ensuring timely sourcing of materials and services to meet project schedules

2013 Commentary

Notable developments at Inmaculada include:

•     completion of detailed civil engineering and underground engineering

•     construction of the camp and exploration tunnels

•     the approval of the construction permit

•     procurement of the main plant equipment

•     the continued construction of the necessary infrastructure for a dedicated electricity supply

The perceived increase in the profile of this risk is to reflect the fact that the Group acquired a 100% interest in the Inmaculada Advanced Project during the year and hence the higher impact on the Group of any delay in its commissioning.

The risks associated with the delivery of projects also include those risks relating to Community Relations and the Political, Legal and Regulatory environment.

See how we mitigate these risks in the separate sections of this report

(iii) Business Interruption

Change in risk profile vs 2012: UNCHANGED

Impact

Assets used in operations may break down and insurance policies may not cover against all forms of risks

Mitigation

•     Adequate insurance coverage

•     Management reporting systems to support appropriate levels of inventory

•     Annual inspections by insurance brokers and insurers with recommendations addressed in order to mitigate operational risks

•     Availability of contingency power supplies at all operating units

2013 Commentary

Insurance advisors 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, are in place at the operating units.

(iv) Exploration & Reserve and Resource Replacement

Change in risk profile vs 2012: HIGHER

Impact 1

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

Mitigation

•     Implementing and maintaining an annual exploration drilling plan

•     An ongoing strategy to retain and incentivise world class geologists

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

See Mitigating steps for Personnel risks for further information

2013 Commentary

The implementation of the Cash Optimisation Plan resulted in a reduction in the 2013 exploration budget from $77 million to $50 million.

The Group's 2014 exploration budget has been set at $30 million and is focused on brownfield exploration at current operations and Inmaculada.

The 2013 drilling plan was revised on a quarterly basis with exploration targets continually evaluated and new targets incorporated.

Impact 2

Reserves stated in this Annual Report are estimates

Change in risk profile vs 2012: UNCHANGED

Mitigation

• Develop internal expertise and processes in managing mineral reserves and resources

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

2013 Commentary

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

See page 181 for further details

(v)(a) Personnel: Recruitment and Retention

Change in risk profile vs 2012: HIGHER

Impact

Inability to retain or attract personnel either through a shortage of skilled personnel or the commencement of mining operations in the vicinity of the Group's core operations or projects

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

2013 Commentary

Due to the extent of the lower price environment, the implementation of the Cash Optimisation Plan necessitated a significant headcount reduction across the Group. To mitigate the impact of this,

the Group has identified a number of initiatives to improve the retention of key employees during this period. Such initiatives include the Deferred Bonus Plan, which is being proposed to shareholders for

approval at the forthcoming AGM (see Directors' remuneration report for further information).

In addition to the Long Term Incentive Plans, the Group has adopted an Exploration Incentive Plan which provides additional rewards for geologists based on the significant discovery of mineral content at a given project that proceeds to commercial production.

(v)(b) Personnel: Labour Relations

Change in risk profile vs 2012: UNCHANGED

Impact

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

Mitigation

•     A tailored labour relations strategy focusing on profit sharing, working conditions, management style, development opportunities, motivation and communication

2013 Commentary

The reduced level of profitability resulting from the precious metal price falls in 2013 means that the levels of statutory profit share payable to Peruvian mineworkers will be significantly lower than in 2012.  Management has therefore ensured that monthly meetings with workers and unions continued during 2013 to ensure the Company had a complete understanding of their requirements and concerns and to keep all parties updated on the Group's financial performance.

See pages 44 and 45 of the Sustainability report for specific examples of how the Group has invested in its people and plans to develop its recruitment strategy

3. MACROECONOMIC RISKS

(i) Political, Legal and Regulatory Risks

Change in risk profile vs 2012: HIGHER

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. Implementation of exchange controls could impede the Group's ability to convert or remit hard currency out of its operating countries

Mitigation

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

• Active dialogue with Governmental authorities

• Participation in local industry organisations

2013 Commentary

The year saw a sustained programme of legislative measures enacted by the Peruvian Government impacting the mining sector including with respect to health & safety, the environment and labour relations. In addition, there remains some uncertainty as to the operation of new laws enacted after the Peruvian Government's election in 2011, including laws that require the prior consultation of indigenous communities in the mine planning process and the designation of new protected nature

reserves.

In Argentina:

•     the province of Santa Cruz created a new tax on mining companies, levying a charge equal to 1% of the market value of its mineral reserves. As reported earlier in the year, the Company is challenging the constitutionality of this tax

•     at a national Federal Government level, foreign exchange controls remained in place during the year affecting the Company's ability to access and remit hard currency abroad

4. SUSTAINABILITY RISKS

(i) Health and Safety

Change in risk profile vs 2012: UNCHANGED

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 and occupational illnesses

•     Use of world class DNV safety management systems

•     Dedicated personnel not only assure the safety of employees at the operations but, through the Health & Hygiene team, there is continued focus on the prevention of accidents and occupational illness

•     Rolling 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

2013 Commentary

During the year, the Group achieved a reduction of about 38% in the accident frequency rate and a 43% reduction in the accident severity rate. Furthermore, there were no incidences of occupational illness.

In addition, the Group retained the same sustainability rating levels of the DNV safety management information system across the operations and San Jose achieved a Level 7 rating.

The internal competition for the Luis Hochschild Safety Innovation Award was held in 2013.

A working group comprising representatives from the HR, Occupational Psychology and Safety teams

has been formed to develop a behaviour-based safety tool for implementation across the Group.

(ii) Environmental

Change in risk profile vs 2012: HIGHER

Impact

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 or be subject to fines and/or penalties

Mitigation

•     The Group has a dedicated and specialised team of professionals with an allocated budget for environmental management

•     Robust procedures and policies have been adopted to monitor and limit the Group's environmental impact

•     Investment in leading environmental management information systems

•     The Group conducts annual reviews of its mine closure plans for its operating units

2013 Commentary

During the year, the Peruvian Government established a new regulator for environmental affairs

which, amongst other things, established a new scale of fines for non-compliance with environmental requirements.

During the year, the Company:

•     succeeded in recertifying the operations in Peru and Argentina as compliant with ISO 14001

•     obtained the approval of the Environmental Impact Study for the Crespo Growth Project

(iii) Community Relations

Change in risk profile vs 2012: HIGHER

Impact

Communities living in the areas surrounding Hochschild's operations may oppose the activities carried out by the Group 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 in longer lead times and additional costs in bringing assets into production and lead to an adverse impact on the Group's

ability to obtain the relevant permissions for current or future projects

Mitigation

•     Constructive engagement and management of relationships with local communities

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

•     Allocation of budget and personnel for the provision of community support activities

•     Policy to actively recruit workers from local communities

2013 Commentary

Despite the reduction of budgets for the Group's community welfare activities as part of the Cash Optimisation Plan, the Group continued to pursue a number of initiatives benefiting the communities

including:

•     'Maestro Líder', a training programme for community teachers

•     Digital Inclusion, a programme promoting the use of technology as an educational tool to teachers and students

•     Medico de Cabecera, a scheme providing healthcare to the rural communities, progressed through partnerships established with the Ministry of Health with a view to extending the programme's reach.

Further details on the Group's activities to mitigate sustainability risks can be found in the Sustainability report on pages 36 to 49

Appendix 2

Related-Party Transactions (reproduced from pages 151 and 152 of the 2013 Annual Report)

30 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 2013 and 2012. The related parties are companies owned or controlled by the main shareholder of the parent company, joint ventures or associates.

	Accounts receivable as at 31 December				Accounts payable as at 31December
	2013		2012		2013		2012
	US$000		US$000		US$000		US$000
Current related party balances
Cementos Pacasmayo S.A.A.	111		139		16		-
Gold Resource Corp (note 18)	-		878		-		-
Total	111		1,017		16		-

As at 31 December 2013 and 2012 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
	2013		2012
	US$000		US$000
Income
Dividend recognised for Gold Resource Corp. investment (note 18)	2,633		10,093
Expenses
Expense recognised for the rental paid to Cementos Pacasmayo S.A.A.	(164)		(164)

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)	2013   US$000		2012   US$000
Short-term employee benefits	5,781		6,742
Termination benefits	77		-
Long Term Incentive Plan	(434)		2,789
Workers' Profit Sharing	-		44
Others	1		556
Total compensation paid to key management personnel	5,425		10,131

This amount includes the remuneration paid to the Directors of the parent company of the Group of US$4,410,956 (2012: US$5,467,700), out of which US$193,831 (2012: US$199,606) relates to pension payments.

(c) Participation in placing by Inversiones Pacasmayo S.A. ("IP SA")

IP SA, a company controlled by Eduardo Hochschild, participated in a placing of the Company's Ordinary Shares ("Shares") in October 2013 by subscribing for 16,905,066 Shares at the price of 155p per Share.

Appendix 3

Statement of Directors' Responsibilities (reproduced from page 59 of the 2013 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

• the Management report (which comprises the Strategic report, this Directors' report and the other parts of this Annual Report incorporated therein by reference) 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

11 March 2014

 

END

 

 

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