Exercise of Option to Acquire Monte Do Carmo

Hochschild Mining PLC

30 October 2024

 

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30 October 2024

Exercise of Option to Acquire Monte Do Carmo Project

Further to its announcement on 5 March 2024, Hochschild Mining PLC ("Hochschild" or the "Company") (LSE: HOC) (OTCQX: HCHDF) is pleased to announce that its wholly-owned subsidiary, Amarillo Mineração do Brasil Ltda. ("Amarillo Mineração") has, pursuant to an option agreement entered into on 5 March 2024 (the "Option Agreement"), exercised its option (the "Option") to acquire a 100% interest in the Monte Do Carmo Project (the "Project") from Cerrado Gold Inc. ("Cerrado") (TSXV:CERT)(OTCPK:CRDO.F) (the "Transaction"). The Project is located in the mining-friendly state of Tocantins, Brazil.

In consideration of exercising the Option, Amarillo Mineração will make further cash payments to Cerrado totaling US$30 million in aggregate (the "Exercise Consideration") prior to the date of the closing of the Transaction (the "Closing"). The Exercise Consideration is in addition to the US$15 million which has been deemed paid in respect of the Transaction, and a further US$15 million payable at certain milestones following Closing, giving a total consideration of US$60 million in respect of the Transaction. Further information on the consideration paid and payable by Amarillo Mineração in respect of the Transaction is set out under the heading "Transaction Details" below.

The Transaction constitutes a significant transaction under the UK Listing Rules due to the level of the Project's Proven and Probable Reserves relative to those of Hochschild. Given the Option was exercisable at the sole discretion of Hochschild, Hochschild's entry into the Option Agreement was not a classified transaction, but the exercise of the Option constitutes a significant transaction under the new UK Listing Rules.

On 27 June 2024, Cerrado announced that its shareholders had approved the Transaction. Closing of the Transaction will be subject to a number of conditions, including: (i) the payment by Amarillo Mineração of the Exercise Consideration prior to Closing, (ii) the approval of the TSX Venture Exchange, and (iii) satisfaction of other closing conditions customary in a transaction of this nature. Closing is expected to take place on 5 November 2024 subject to satisfaction of the aforementioned conditions. A separate announcement will be made once the Closing has taken place.

Eduardo Landin, Chief Executive Officer of Hochschild, commented:

"Following the successful commissioning and ramp-up of Mara Rosa, I am delighted that we have been able to move the Monte do Carmo project, in the neighbouring state of Tocantins, from option status to a fully integrated part of our project pipeline. We have conducted an extensive exploration and twin drilling programme which has returned encouraging results giving us confidence in our ability of defining a compelling project. We believe that we have the right team in place to deliver an exciting opportunity for all stakeholders."

Information on Monte do Carmo Project

The Project, comprising 21 mineral concessions encompassing 82,542 hectares, hosts multiple identified gold targets along a 30km mineralised trend, including the principal Serra Alta gold deposit, which hosts a Measured and Indicated resource of 1,012koz gold and Inferred resource of 66koz gold and was the subject of a Feasibility Study dated 31 October 2023. The Project benefits from significant existing site infrastructure including year-round access via a paved highway and close proximity to the Isamu Ikeda hydropower plant. Permitting is substantially advanced, with the Environmental Impact Assessment approved and the Preliminary Licence granted by the Tocantins state environmental agency in May 2023.

Since the Option Agreement was entered into in March 2024, the Company has executed a 1,704m twin hole drilling programme which has validated the deposit's mineral resource estimate. In addition, the Company has conducted a 4,806m resource drilling campaign across five prospective mineralisation zones. The campaign has already incorporated additional gold resources which  confirm the strong geological potential of the Project.

The Company has also devised an exploration plan across seven new targets that will commence in November 2024. Furthermore, it is currently anticipated that, with the twin hole exploration results, further upside from additional drilling and several engineering optimisations already identified, the Company will be in a strong position to reach an eventual construction decision.

Following completion of the Transaction, the Company's programme at the Project is expected to include:

·      Ongoing drilling programs to expand the resource base

·      Advance installation license for the main project

·      Conduct any additional environmental analyses as identified during due diligence

·      Develop the detailed engineering studies

Background to and reasons for the Transaction

The Transaction is a result of Hochschild's aim to advance its overall corporate strategy of becoming a leading Americas-focused precious metals producer with top-tier operations located in mining-friendly jurisdictions. The Company believes that the Transaction is a compelling strategic opportunity to enhance Hochschild's project pipeline and growth profile through the addition of a high-quality, long-life Project. The Transaction is expected to deliver a number of key benefits to Hochschild, shareholders and other stakeholders, including:

·      High quality project: Adds a low-cost, long-life asset located in a mining-friendly jurisdiction of Brazil, within close proximity to the Mara Rosa mine

·      Significant exploration upside: Offers compelling near-mine exploration opportunities underpinned by a large land package which remains relatively underexplored

·      De-risked permitting: Project permitting significantly advanced with the Installation License expected to be obtained in the near future

·      Leverages Hochschild's expertise and presence in Brazil: Aligned with Hochschild's core strengths and long-term strategy of acquiring and optimising development stage projects in Latin America, specifically in Brazil, a country where the Company has robust management and technical teams

·      Enhances Hochschild's portfolio: Provides the next leg of growth for Hochschild following the recent completion of the Mara Rosa mine

Financial effects of the Transaction

The consideration in respect of the Transaction will be funded from existing resources. It is expected that by year-end, there will be no increase in Hochschild's net debt as a result of the Transaction (which, as of 30 September 2024, was US$226.7 million).

Hochschild has provided a guarantee of the obligations of Amarillo Mineração under the Transaction Agreements (as defined below).

As at 30 June 2024, the Project had gross assets of US$49 million and generated a loss of US$167k in the period between January and June 2024.

Given the Project is currently in pre-development stage, Hochschild is not expecting any immediate incremental revenues to be generated by the Project following the Transaction.

Transaction Details

The principal terms of the key agreements in respect of the Transaction (the "Transaction Agreements") are summarised below.

On 4 March 2024, in connection with the Transaction, Amarillo Mineração entered into (i) the Option Agreement granting Amarillo Mineração the option to purchase 100% of the outstanding equity interests (quotas) in Serra Alta Mineração Ltda. ("SAML"), Cerrado's subsidiary in Brazil which holds the Project, and (ii) an agreement to advance US$15 million to Cerrado by way of 10% interest-bearing secured loan (the "Signing Loan"). The Option Agreement entitled Amarillo Mineração to exercise the Option at its sole discretion at any time prior to 19 March 2025, and requires Amarillo Mineração to incur a minimum of US$5 million in exploration expenditures at the Project (the "Qualifying Expenditures") during such period. While the Company expects that Amarillo Mineração will incur the remaining minimal outstanding amount of the Qualifying Expenditures by the Closing, it intends to seek a waiver of the condition from Cerrado..

On 27 July 2024, upon obtaining the requisite approval of the shareholders of Cerrado in respect of the Transaction, the Signing Loan, together with all accrued and unpaid interest thereon and expenses relating thereto, were deemed to be repaid in full by Cerrado by the concurrent set off of an amount of consideration equal to the Signing Loan, which was payable by Amarillo Mineração to Cerrado pursuant to the Option Agreement (the "Set-Off Consideration", and together with the Exercise Consideration, the "Consideration").

In addition to the Set-Off Consideration, Amarillo Mineração shall be required to pay to Cerrado the Exercise Consideration of US$30m prior to Closing, comprising the following payments (the "Closing Consideration"):

·      US$10 million payable following exercise of the Option; and

·      US$20 million payable by Closing.

Following Closing, Amarillo Mineração shall be required to make further payments to Cerrado totaling US$15 million in aggregate as follows:

·      US$10 million payable within 14 days of the second anniversary of the date of the Cerrado shareholder approval (being 27 July 2026); and

·      US$5 million within 14 days of the earlier of (i) the commencement of commercial production from the Project, and (ii) 31 March 2027.

All amounts owing by Cerrado to, or advanced to Cerrado by, the Company or Amarillo Mineração, are secured by (i) a first lien on all of the outstanding equity interests (quotas) in SAML, and (ii) a second lien on the assets relating to the Project (the "Security"), until the Closing. The Security is subject to a security sharing agreement with another secured creditor.

Prior to the Closing, either Amarillo Mineração or Cerrado may terminate the Option Agreement upon material breach by the other party which has not been cured within 30 days, or if the conditions to Closing in favour of such terminating party have not been waived or satisfied or it is reasonably apparent such conditions will not be satisfied by the date that is 60 days from the date of the exercise of the Option (other than as a result of the failure of the terminating party to perform its material obligations). Upon termination by Cerrado for material breach or non-satisfaction of conditions to Closing in favour of Cerrado, Amarillo Mineração shall be required to pay to Cerrado any shortfall between the Qualifying Expenditures actually incurred to such date of termination and the US$5 million Qualifying Expenditure requirement under the Option Agreement. Upon termination by Amarillo Mineração for material breach by Cerrado, Cerrado shall pay to Amarillo Mineração an amount equal to the Consideration paid to such date of termination, all Qualifying Expenditures incurred by Amarillo Mineração or Hochschild to such date of termination, and all other amounts owing by Cerrado to Amarillo Mineração or Hochschild, together with interest accrued thereon. Upon termination by Amarillo Mineração for the non-satisfaction of conditions to Closing in favour of Amarillo Mineração, Cerrado shall pay to Amarillo Mineração all amounts owing by Cerrado to Amarillo Mineração or Hochschild, other than (i) the Set-Off Consideration and (ii) any Qualifying Expenditures incurred by Amarillo Mineração or Hochschild in excess of US$5 million.

Closing will be subject to a number of conditions, including: (i) the payment by Amarillo Mineração of the Exercise Consideration prior to Closing, (ii) the approval of the TSX Venture Exchange, and (iii) satisfaction of other closing conditions customary in a transaction of this nature. Closing is expected to take place by 5 November 2024, subject to satisfaction of the aforementioned conditions.

Additional Information

Your attention is drawn to the further information contained in Appendix I (Risk Factors) and Appendix II (Additional Information) of this document.  The whole of this announcement should be read and not solely the information summarised in the front end of this announcement.

Board Statement

The board of directors of the Company (the "Board") unanimously considers the Transaction to be in the best interests of the shareholders of the Company (the "Shareholders") as a whole.

Advisors and Counsel

Hochschild and Amarillo Mineração are being advised by RBC Capital Markets as financial advisor, Stikeman Elliott LLP as Canadian legal counsel, Bichara Advogados as Brazilian legal counsel, and Linklaters LLP as UK legal counsel in connection with the Transaction.

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Enquiries:

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About Hochschild Mining PLC

Hochschild Mining PLC is a leading precious metals company listed on the London Stock Exchange (HOCM.L / HOC LN) and crosstrades on the OTCQX Best Market in the U.S. (HCHDF), with a primary focus on the exploration, mining, processing and sale of silver and gold. Hochschild has over fifty years' experience in the mining of precious metal epithermal vein deposits and operates two underground epithermal vein mines: Inmaculada, located in southern Peru; and San Jose in southern Argentina, and an open pit gold mine, Mara Rosa, located in the state of Goiás, Brazil.  Hochschild also has numerous long-term projects throughout the Americas.

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APPENDIX I

RISK FACTORS

Below is a summary of the risk factors to the Company in relation to the Transaction which the Company considers to be material. If any of the following risks were to materialise, the business, financial condition, results of operations and prospects of the Company or any of its subsidiary undertakings (the "Hochschild Group") following Closing (the "Enlarged Group") could be materially adversely affected and the value of the ordinary shares in the Company could decline and Shareholders could lose all or part of their investment in those ordinary shares.

This should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties which may affect the Company or the ordinary shares in the Company. Additional risks and uncertainties, which are currently unknown to the Company or that the Company does not currently consider to be material, may adversely affect the business of the Hochschild Group and/or the Enlarged Group and could have a material adverse effect on the business, financial condition, results of operations and future prospects of the Hochschild Group and/or the Enlarged Group. Further information on the material risks which generally affect the Company are set out in the Company's 2023 Annual Report.

1.               Material risk related to the Transaction

1.1.          The Transaction is subject to the satisfaction or waiver (where capable of being waived) of a number of conditions and there can be no assurance that the Transaction will proceed if the conditions are not satisfied or waived

Completion under the Transaction Agreements is subject to, and can only occur upon satisfaction or waiver (where capable of being waived) of, a number of conditions, including the payment by Amarillo Mineração of the Closing Consideration and the approval of the TSX Venture Exchange.

Although Amarillo Mineração and Cerrado have certain obligations in relation to the satisfaction of the remaining conditions to the Transaction under the Transaction Agreements, these remaining conditions may not be fulfilled or waived (where capable of being waived) and the Transaction may therefore not be completed. Should this occur, it may result in an adverse impact on Hochschild's reputation.

2.               Material risks related to the Enlarged Group if the Transaction completes

2.1.            Pre-production stage of development

The exploration for, and development of, mineral deposits involve significant financial, operational and geological risks which even a combination of careful evaluation, experience and knowledge may not eliminate. At present, the Project does not have any mineral production. If the Transaction completes, the Enlarged Group will initially focus on finalising the permitting required, building the Project on schedule and on budget and preparing for initial production. However, there can be no assurance of the commercial viability of the Project or that the Project will be brought into production or that the Project will ever be profitable.

Given the early-stage nature of the Project, there are other related risk factors which could result in a material adverse effect on the Enlarged Group's business, including:

·        that the Project may not perform in line with the Company's expectations and there can be no assurance that the Transaction will achieve the financial benefits that Hochschild anticipates as quickly or to the extent anticipated or at all;

·        challenges may be experienced by the Enlarged Group in integrating the Project which could result in higher than expected costs;

·        the value of the Project may be less than the Consideration paid; and

·        the Transaction costs may be higher than anticipated by Hochschild.

2.2.          The level of the Project's resources and reserves and their quality, production volumes and expected cash flows are inherently uncertain and may be lower than estimated or expected

There are numerous uncertainties inherent in estimating Mineral Resources and Mineral Reserves and such estimation is a subjective process. The resources and reserves information published in respect of the Project are estimates only, and do not reflect events and activities subsequent to the date of the announcement. In general, estimates of resources and reserves and the future revenues derivable therefrom are inherently uncertain, as they are based on a number of factors and assumptions made as of the date on which the resources and reserves estimates were determined which may vary considerably from actual results.

The Mineral Resources and Mineral Reserves information referred to in this document may not reflect actual resources and reserves or be comparable to similar information reported by other companies.

2.3.            If the Transaction completes, the Enlarged Group will have greater exposure to the political, legal and regulatory risks of operating in Brazil

Hochschild has established operations in Peru and Argentina, and has recently started production from its first mine in Brazil, Mara Rosa which is located in the state of Goiás. Following Closing, Hochschild's exposure to Brazil will increase. As such, the Enlarged Group will have increased exposure to the political, legal, tax and regulatory landscape in Brazil, which is subject to change in a manner that may be materially adverse to the Enlarged Group. Such changes could involve changes to (a) legislation relating to safety, health, the environment and social matters and (b) state and local regulations relating to the production and sale of metals.

2.4.           There can be no assurance that the Enlarged Group will receive, be able to locate and/or be able to renew all necessary licences, certificates, approvals and permits for operations

The operations of the Enlarged Group, including the Project, are subject to various licences, certificates, approvals and permits. There is no assurance that the Enlarged Group will be able to renew its licences, certificates, approvals and permits upon their expiration. There is also no assurance that the Enlarged Group will receive necessary licences, certificates, approvals and permits which are required and have not yet been granted. In particular, it is noted that the Project has not yet received all the licences required to build the Project nor the operating licence, the final licence which it requires under the local permitting framework.

2.5.          There can be no assurance that the Enlarged Group will be able to secure financing to bring the Project into production, or generally to execute its growth strategy

The Hochschild Group's access to further financing as a source of funding for the Project and other projects is subject to various factors, many of which are outside of its control, such as political instability, an economic downturn or social unrest, which could result in an increase in the cost of borrowing of the Hochschild Group or restrict its ability to obtain financing.

There is no assurance that the Hochschild Group will be able to arrange financing on acceptable terms, if at all. The Hochschild Group's operations are highly capital intensive. If the Hochschild Group were unable to obtain financing from banks and other financial institutions or from capital markets this would adversely affect the ability of the Hochschild Group to bring the Project into production and, more generally, would affect its ability to execute its expansion and growth strategies as well as its financial condition and prospects. 

APPENDIX II
ADDITIONAL INFORMATION

1.               Material contracts

1.1.            Hochschild Group

Other than the Transaction Agreements (as summarized above), no contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Hochschild Group: (i) within the two years immediately preceding the date of this announcement which are or may be material; or (ii) which contain any provision under which the Hochschild Group has any obligation or entitlement which is material to the Hochschild Group as at the date of this announcement, in each case the details of which the Board considers that Shareholders reasonably require for the purpose of making a properly informed assessment of the Transaction and its impact on the Company and the Hochschild Group.

1.2.            Project

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by SAML, Serra Alta Participações Imobiliárias S.A. ("SAPI") (being an entity owned by Amarillo Mineração and SAML),  or by Cerrado in respect of the Project: (i) within the two years immediately preceding the date of this announcement which are or may be material; or (ii) which contain any provision under which SAML, SAPI or Cerrado has any obligation or entitlement which is material to SAML, SAPI or the Project as at the date of this announcement, in each case the details of which the Board considers that Shareholders reasonably require for the purpose of making a properly informed assessment of the Transaction and its impact on the Company and the Hochschild Group:

·        Monte Sinai Agreement

The Project was acquired by Cerrado from Monte Sinai Mineração Ltda. ("Monte Sinai") in April 2018 pursuant to an acquisition agreement between (among others) Cerrado and Monte Sinai (the "Monte Sinai Agreement"). Pursuant to the Monte Sinai Agreement, the previous sellers of the Project have the right to a payment of US$1.5 million if an aggregate of 2.5 million ounces of gold are identified in a mineral resource estimate in respect of the Project in accordance with NI 43-101. This contingent liability will be assigned to and assumed by Amarillo Mineração as a consequence of the Transaction.

·        Bortoloti Purchase Agreement

On May 16, 2023, SAPI entered into a purchase agreement with Luiz Antonio Bortoloti and Donira Alves Bortoloti for the acquisition of the Fazenda Bortoloti rural property (the "Bortoloti Property") (the "Bortoloti Purchase Agreement"). In addition to the purchase price payable for the Bortoloti Property (part of which has been paid and part of which is payable as deferred consideration), the Bortoloti Purchase Agreement provides for the payment of royalties in favor of the former landowners of the Bortoloti Property corresponding to 50% of the amount due to the Brazilian authorities as statutory tax (Compensação Financeira pela Exploração Mineral ("CFEM")). CFEM is an ongoing mineral tax, calculated based on the revenue arising from the sales of ore, with the deduction of marketing taxes.

These perpetual royalty payments will be due on a quarterly basis once mining operations have commenced. The requirement to make such royalty payments will be assigned to and assumed by Amarillo Mineração as a consequence of the Transaction. According to the most recent estimates available to the Company, approximately 25% of the gold reserves of the Project are located within the area comprised by the Bortoloti Property and would accordingly be subject to the payment of such royalties.

·        Sprott Stream Agreement

On March 14, 2022, Cerrado, SAML and SAPI entered into a US$20 million metals purchase and sale agreement with Sprott Private Resource Streaming and Royalty Corp. ("Sprott") in respect of the Project (the "Stream Agreement"). The Stream Agreement provides for the sale and physical delivery to Sprott of 2.25% of metals produced from the Project, for the duration of the Project. The price payable for the metals is calculated by reference to the LBMA price for gold or silver as applicable (the "Reference Price"). Until such time as the US$20 million deposit received from Sprott has been repaid (the "Deposit"), Sprott shall pay an amount equal to 10% of the relevant Reference Price (the "Variable Price") to Cerrado with the balance equal to 90% of the relevant Reference Price being applied to reduce the Deposit. Once the Deposit balance has been repaid, Sprott shall pay the relevant Variable Price for each delivery of gold or silver (as the case may be). Until June 30, 2026, there is a one-time option to buy back 50% of the 'stream' (i.e., to reduce the percentage of production required to be sold to Sprott by 50%) for a price of between US$12.5 million and US$13.5 million.

In connection with the Stream Agreement, Cerrado has issued a US$20 million secured note to Sprott (the "Sprott Note") that bears interest at a rate of 10% per annum, calculated and payable quarterly which will mature on the earlier of the achievement of commercial production together with certain other conditions, or March 14, 2031. The security in respect of the Sprott Note is the assets of SAML, and the shares of SAPI. The Stream Agreement and the Sprott Note will be assigned to and assumed by Amarillo Mineração as a consequence of the Transaction, and accordingly, any future production will be subject to the Stream Agreement and the Sprott Note.

2.                   Litigation and arbitration proceedings

2.1.            Hochschild Group

During the period covering the previous 12 months, there have been no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have, or have had, a significant effect on the Company and/or the Hochschild Group's financial position or profitability.

2.2.            Project

During the period covering the previous 12 months, there have been no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have, or have had, a significant effect on SAML or the Project's financial position or profitability.

3.               Related Party Transactions

Other than those matters disclosed in previously published annual reports and financial statements of the Company and/or otherwise disclosed in this announcement, there were no related party transactions entered into by the Hochschild Group during the period commencing on 1 January 2022 and terminating on the date of this announcement which are relevant to the Transaction.

4.               Significant Change

Other than the reduction in Net Debt as reported by the Company on 23 September 2024, there has been no significant change in the financial performance or financial position of the Company since 30 June 2024, being the end of the last financial period for which unaudited preliminary annual financial statements were published.

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Forward-looking statements

Certain statements contained in this announcement that are not historical fact may be "forward-looking" statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control and all of which are based on the Company's current beliefs and expectations about future events. Forward-looking statements are typically identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "could", "should", "intends", "estimates", "plans", "assumes" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements orally or in writing. Furthermore, such forward-looking statements may be included in, but are not limited to, press releases or oral statements made by or with the approval of an authorised executive officer of the Company. These forward-looking statements, and other statements contained in this announcement regarding matters that are not historical facts, involve predictions. No assurance can be given that such future results will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing the Company and its subsidiaries. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements.

The forward-looking statements reflect knowledge and information available at the date of preparation of this announcement. Except as required by applicable law and/or regulatory obligations, the Company does not undertake any obligation to update or change any forward-looking statements to reflect events occurring after the date of this announcement. Nothing in this announcement is intended as a profit forecast or estimate for any period and no statement in this announcement should be interpreted to mean that earnings or earnings per share or income, cash flow from operations or free cash flow for the Company for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share or income, cash flow from operations or free cash flow for the Company.

LEI: 549300JK10TVQ3CCJQ89

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