TIDMHOC
RNS Number : 8198B
Hochschild Mining PLC
06 April 2017
Hochschild Mining plc
("the Company")
2016 Annual Financial Report and 2017 Annual General Meeting
("AGM")
Following the release of the Company's 2016 full year results
announcement on 8 March 2017 (the "Preliminary Announcement"), the
Company announces it has published its Annual Report and Accounts
for the year ended 31 December 2016 (the "2016 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
-- 2016 Annual Report
-- 2017 AGM circular (incorporating the Notice of 2017 AGM)
-- 2017 AGM proxy card (incorporating the Notice of Availability
of the 2016 Annual Report and 2017 AGM circular)
The 2016 Annual Report and the 2017 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 2016 Annual Report and should be read in conjunction with
the Preliminary Announcement.
All page references and cross-references in the appendices are
to the 2016 Annual Report.
APPICES
Appendix 1
Risk Management (reproduced from pages 35 to 39 of the 2016
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,
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 Group'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 reviewed which
maps the significant risks faced by the business 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.
2016 RISKS
The key business risks affecting the Group set out in this
report remain largely unchanged compared to those disclosed in the
2015 Risk Management report, with the exception that:
-- the risks associated with the Delivery of Projects are no
longer considered to be significant as the Inmaculada asset
transitioned to a core operation in the second half of 2015;
and
-- Refinancing Risk has been removed as a significant risk
following the recovery in the commodities sector and the
improvement in the Group's balance sheet.
The year-on-year changes in the profile of specific risks can be
explained as follows:
-- Operational Performance risks are considered by the Board to
have reduced following the commencement of production at
Inmaculada; and
-- Community Relations, Safety and Legal/Regulatory risks are
regarded as having heightened due to (a) the above-mentioned
transition of Inmaculada since the impact of those risks could
become more severe in the context of an operating asset and (b) the
changing social and political environment in the countries where
the Group operates.
In addition, in order to provide a more accurate view of the
change in the profile of environmental-related risks, the table
below distinguishes between changes in the level of (a) the
environmental
risks arising from operations, which are considered to have
reduced in light of the infrastructure work carried out during the
year; and (b) the risks arising from regulatory action which are
considered to have increased as a reflection of the regulator's
more stringent approach
1. FINANCIAL RISKS
Commodity Price
Change in risk profile vs 2015: UNCHANGED
Impact
Adverse movements in precious metal prices could materially
impact the Group in various ways beyond a reduction in the results
of operations. These include impacts on the feasibility of
projects, the economics of the mineral resources and heightened
personnel and sustainability related risks
Mitigation
-- Constant focus on maintaining a low cost of production and an
efficient level of administrative expense
-- Flexible hedging policy that allows the Group to contract
hedges to mitigate the effect of price movements taking into
account the Group's asset mix and forecast production
See Our Market Overview on pages 12 to 13 for further
details
Commentary
The focus on conserving capital and optimising cash flow
continued in 2016 through:
-- controlling operating and administrative costs;
-- optimising sustaining capital expenditure;
-- reducing debt; and
-- reducing working capital.
In addition to the above, the Inmaculada mine, which started
commercial production in the second half of 2015, brought about a
reduction in average production costs and diluted fixed costs.
Even though no part of 2017 production has been hedged, the
Group's flexible policy enables the Board to approve hedging
contracts to protect cashflow as and when appropriate.
2. OPERATIONAL RISKS
Operational Performance
Change in risk profile vs 2015: REDUCED
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
Commentary
2016 budgets across the Group focused on maintaining controlled
levels of administrative expenses and sustaining capital
expenditure.
Production goals at all operations were met or, in the case of
Inmaculada, exceeded with the focus on the extraction of profitable
ounces.
The Group benefited from operational flexibility through a
full-year's production at Inmaculada.
Management closely monitors the wide range of risks that could
affect operational performance to, among other things, ensure the
adequacy and safety of key mining components, such as tailing dams,
waste rock deposits and pipelines to service ongoing operations.
Close liaison between relevant departments ensures that
procurement, construction and any permitting are undertaken as
appropriate.
Business Interruption
Change in risk profile vs 2015: HIGHER
Impact
Assets used in the Group's operations may break down and cause
stoppages with material effects.
Mitigation
-- Insurance coverage to protect against major risks
-- 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
Commentary
In light of the transition of Inmaculada from project to core
asset and the high proportion of production sourced from that
asset, the change in the risk profile vs 2015 reflects its
heightened impact.
Mitigating actions during the year include the following:
-- 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.
Exploration & Reserve and Resource Replacement
Change in risk profile vs 2015: UNCHANGED
(a) Impact
The Group's operating margins and future profitability depend
upon its ability to find mineral resources and to replenish
reserves.
(a) Mitigation
-- Implementing and maintaining an annual exploration drilling plan
-- Ongoing evaluation of acquisition and joint venture
opportunities to acquire additional ounces
-- High-end software programmes implemented to improve the estimate mineral resources
(a) Commentary
In 2016 all brownfield exploration goals were achieved,
including the discovery of additional resources at the Pablo vein
at Pallancata.
The continued focus on cost control has resulted in our
exploration activity being primarily focused on current
operations.
In 2017, exploration of new projects and appraisal of
acquisition/joint venture opportunities restarted given the Group's
improved financial position.
As mentioned in the CEO's statement, the Company has undertaken
a conservative re-evaluation of its Reserves and Resources which
(a) reflects lower commodity price assumptions and (b) excludes
material that has a low probability of being mined.
(b) Impact
Reserves stated in this Annual Report are estimates.
(b) Mitigation
-- Engagement of independent experts to undertake annual audit
of mineral reserve and resource estimates
-- Adherence to the JORC Code and guidelines therein
(b) Commentary
The Group has engaged P&E Consultants to undertake the
annual audit of mineral reserve and resource estimates.
See pages 139 to 141 for further details
(a) Personnel: Recruitment and Retention
Change in risk profile vs 2015: LOWER
Impact
Inability to retain or attract personnel through a shortage of
skilled personnel.
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
Commentary
The Group has continued with its initiatives to improve the
retention of employees. These include the use of non-financial
benefits (e.g. flexible working arrangements for Head Office staff)
and tailored personal development plans.
The improvement in the sector as a whole is the principal reason
why the profile of this risk has reduced relative to 2015.
(b) Personnel: Labour Relations
Change in risk profile vs 2015: UNCHANGED
Impact
Failure to maintain good labour relations with workers and/or
unions may result in work slowdown, stoppage or strike.
Mitigation
-- Development of a tailored labour relations strategy focusing
on profit sharing, working conditions, management style,
development opportunities, motivation and communication
Commentary
Given the losses incurred in previous years by the Peruvian
operating entity, there continues to be no statutory profit sharing
for Peruvian mineworkers.
Management has conducted monthly meetings with mineworkers and
unions during 2016 to ensure a complete understanding of their
requirements and concerns and to keep all parties updated on the
Group's financial performance with the aim of preparing the
groundwork for the 2017 union negotiations.
3. MACRO-ECONOMIC RISKS
Political, Legal and Regulatory
Change in risk profile vs 2015: 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.
Mitigation
-- Local specialist personnel continually monitor and react, as necessary, to policy changes
-- Active dialogue with governmental authorities
-- Participation in local industry organisations
Commentary
As an electoral year, 2016 saw the mining industry in Peru
become the subject of heightened political debate. In the period
leading to the elections and during the transition to a new
administration, no new governmental measures were taken and various
permitting processes saw their timelines extended which continues
to be the case.
Even though the new government that assumed office in July 2016
is supportive of business, the risk of social conflicts has become
heightened in certain parts of the country to which the authorities
remain sensitive.
In addition, a number of new laws were introduced during the
year relating to, among other things (a) the permissible limits of
chemicals in stored tailings and (b) various aspects of health and
safety at mining operations.
In Argentina, 2016 was marked by relative stability following
the Presidential elections in October 2015 where the new government
placed inward investment as a key priority.
With regards to specific developments:
-- the Supreme Court agreed to hear the merits of the Company's
claim challenging the constitutionality of a proposed Reserves tax
which was subsequently withdrawn by the relevant Province; and
-- in late 2016, the Argentinian Government removed the benefit
received by those exporting through Patagonian ports.
3. SUSTAINABILITY RISKS
Health and Safety
Change in risk profile vs 2015: HIGHER
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
-- Use of world class DNV safety management systems
-- Dedicated personnel to ensure the safety of employees at the
operations via stringent controls, training and prevention
programmes
-- 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
Commentary
The change in risk profile vs 2015 primarily reflects:
-- the fact that Inmaculada was an operating asset for the whole of 2016; and
-- the increased use of less mechanised processes at Pallancata
in light of the narrower veins being mined.
In 2016, the Group achieved its on-going objective of Zero
Fatalities for the third consecutive year. As reported earlier in
the Chairman's statement and Sustainability Report, the Board was
saddened to report the fatalities that occurred at the Inmaculada
mine in the first quarter of 2017.
Further details on the accident and the steps being taken to
reinforce the Group's safety values can be read in the
Sustainability Report on page 30
Environmental
Change in risk profile vs 2015:
(a) In relation to those risks arising from the Group's
environmental performance/infrastructure: LOWER
(b) In relation to those risks arising from the increased
oversight of the environmental regulator: HIGHER
Impact
The Group may be liable for losses arising from environmental
hazards associated with the Group's activities and production
methods, ageing infrastructure, or may be required to undertake
corrective actions or 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 team responsible for environmental management
-- The Group has adopted a number of policies and procedures to
limit and monitor its environmental impact
Commentary
Environmental permitting and oversight have become more
rigorous, leading to delays in project execution and increases in
fines from the environmental regulator.
In 2016, the Group has taken a series of measures to mitigate
this risk, including:
-- establishing a Permitting Committee, with the participation
of all relevant departments, that meets bi-weekly to assess the
status of all permitting applications and ensure that the process
is carried out as efficiently as possible;
-- the launch of new Environmental Key Performance Indicators;
-- implementation of state-of-the-art water quality management
tool that allows for real time monitoring of all water discharges
from the operations;
-- completing the staffing of the environmental team with
professionals working in related operational and environmental
management roles;
-- strengthening our environmental culture, improving overall
housekeeping throughout our operations, reducing water consumption
and solid waste generation;
-- continuing to improve water treatment infrastructure, at
Pallancata, Inmaculada, Arcata and the closed Sipan mine; and
-- reviewed and updated Mine Closure Plans, in some cases with
the support of internationally renowned environmental
consultants
Community Relations
Change in risk profile vs 2015: 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 loss of productions, increased costs
and decreased revenues and in longer lead times and additional
costs for exploration and 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 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
Commentary
The higher risk profile vs 2015 reflects the increase in the
incidence of social conflicts in the areas surrounding the Group's
operations. Such conflicts have led to temporary stoppages at other
mining operations such as Las Bambas and Constancia.
Protests by a community close to the Pallancata mine resulted in
a blockade by community members from November 2016 until
mid-January 2017. Even though the mine stopped producing from 1
December, Pallancata's targeted production was not impacted.
Government intervention resulted in the lifting of the blockade
after an informal mediation between the Company and the relevant
community representatives.
Working groups with stakeholders groups near Inmaculada continue
to meet periodically.
In addition, the Group continues to actively engage with other
local communities to fully understand their needs and to implement
an action plan, to the extent possible.
The risk of additional stoppages or blockades will continue to
be present if the working groups do not reach long-term agreements
between the parties involved.
Further details on the Group's activities to mitigate
sustainability risks can be found in the Sustainability report on
pages 29 to 34
Appendix 2
Related-Party Balances and Transactions (reproduced from pages
116 and 117 of the 2016 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 2016 and 2015. The
related parties are companies owned or controlled by the main
shareholder of the parent company or associates.
Accounts receivable Accounts payable
as at 31 December as at 31 December
--------------------- --------------------
2016 2015 2016 2015
US$000 US$000 US$000 US$000
---------- --------- --------- ---------
Current related
party balances
Cementos Pacasmayo
S.A.A.(1) 71 11 94 40
Total 71 11 94 40
------------------- ---------- --------- --------- ---------
(1) The account receivable relates to reimbursement of expenses
paid by the Group on behalf of Cementos Pacasmayo S.A.A. The
account payable relates to the payment of rentals.
As at 31 December 2016 and 2015, 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
-----------------
2016 2015
US$000 US$000
------- -------
Income
Gain on sale of Asociation Sumac Tarpuy to Inversiones ASPI S.A. 811 -
Expenses
Donation to the Universidad de Ingenieria y Tecnologia "UTEC" (1,000) -
Expense recognised for the rental paid to Cementos Pacasmayo S.A.A. (200) (285)
---------------------------------------------------------------------- ------- -------
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 2016 2015
personnel (including directors) US$000 US$000
--------- --------
Short-term employee benefits 5,459 5,613
Long Term Incentive Plan,
Deferred Bonus Plan and Restricted
Share Plan 6,622 2,641
Total compensation paid to
key management personnel 12,081 8,254
------------------------------------ --------- --------
This amount includes the remuneration paid to the Directors of
the parent company of the Group of US$5,487,769 (2015:
US$4,155,759).
(c) Participation in rights issue by Pelham Investment
Corporation ("Pelham") and Inversiones ASPI SA ("ASPI")
As at the record date of the Rights Issue, Eduardo Hochschild
held his investment in the Company through Pelham. Following
receipt of its entitlement under the Rights Issue, Pelham
transferred, for nil consideration, its Nil Paid Rights in respect
of 74,745,101 new ordinary shares to ASPI an entity that is also
under the control of Eduardo Hochschild. Under the terms of an
irrevocable undertaking signed between Pelham, ASPI and the
Company, it was agreed that:
(i) ASPI would, among other things, subscribe for at least
68,887,508 new ordinary shares at an issue price of 47 pence per
new ordinary share (the "Subscription Commitment"); and
(ii) the Company would, among other things, pay ASPI a fee of 1%
of the Subscription Commitment of approximately US$500,000.
Appendix 3
Statement of Directors' Responsibilities (reproduced from page
43 of the 2016 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; 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.
On behalf of the Board
Raj Bhasin
Company Secretary
7 March 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
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