www.hochschildmining.com
Hochschild Mining plc
1 Grosvenor Crescent
London
SW1X 7EF
2006
Hochschild Mining plc
Annual Report & Accounts
For the year ended 31 December 2006
H
o
c
h
s
c
h
i
l
i
i
d
M
n
n
g
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
F
o
r
t
h
e
y
e
a
r
e
n
d
e
d
3
1
D
e
c
e
m
b
e
r
2
0
0
6
Hochschild Mining plc
is a leading precious metals
company operating in Latin
America with a primary focus
on silver and gold.
01 Highlights
02 About Us
14 Chairman’s Statement
16 Business Review
36 Board of Directors
38 Corporate Structure
39 Corporate Governance Report
45 Directors’ Remuneration Report
48 Directors’ Report
53 Statement of Directors’ Responsibilities
54 Independent Auditors’ Report
56 Group Income Statement
57 Group Balance Sheet
58 Group Cash Flow Statement
59 Group Statement of Changes in Equity
60 Notes to the Group Financial Statements
100 Parent Company Income Statement
101 Parent Company Balance Sheet
102 Parent Company Cash Flow Statement
103 Parent Company Statement of Changes in Equity
104 Notes to the Parent Company Financial Statements
110 Reserves and Resources
115 Production
116 Glossary
118 Shareholder Information
Forward looking statements
The documents in this Annual Report, including those that make up the Directors’ Report,
contain certain forward looking statements, particularly those relating to the business,
strategy, investments, production, major projects and their contribution to expected
production and other plans of Hochschild Mining plc and its current goals, assumptions and
expectations relating to its future financial condition, performance and results.
By their nature, forward looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that will or may occur in the future. Actual
results, performance or achievements of Hochschild Mining plc may be materially different
from any future results, performance or achievements expressed or implied by such forward
looking statements. Past performance is no guide to future performance and persons
needing advice should consult an independent financial adviser.
The forward looking statements reflect knowledge and information available at the date of
preparation of this Annual Report. Except as required by the Listing Rules and applicable law,
the Board of Hochschild Mining plc does not undertake any obligation to update or change
any forward looking statements to reflect events occurring after the date of this Annual Report.
Nothing in this Annual Report should be construed as a profit forecast.
Highlights
US$211m
Revenue
2% decrease
US$108m
Weighted average cost per tonne
Adjusted EBITDA*
89% increase
Attributable after tax profit*
US$0.19
25% increase
Earnings per share (pre-exceptionals)
Attributable stated reserves
Revenue
Revenue up 31% from US$161 million in 2005 to US$211 million in 2006.
Costs
Weighted average cost per tonne for our three operating mines decreased 2% in 2006.
Adjusted EBITDA*
Adjusted EBITDA up 52% from US$71 million in 2005 to US$108 million in 2006 equating
to an adjusted EBITDA margin of 51%.
Attributable after tax profit*
Attributable after tax profit up 89% from US$25 million in 2005 to US$47 million in 2006.
Reserve base
Increased attributable stated reserves by 25% in the second half of 2006.
Stable production
Stable production in 2006 with production of 11.6 million ounces of silver and 196 thousand
ounces of gold.
Project development
The three advanced development projects are on schedule to commence production
in 2007 and expansions at the three operating mines are progressing according to plan.
Listing
Successfully listed on the London Stock Exchange raising gross proceeds of US$515 million
in November 2006.
*Full definitions of adjusted EBITDA and attributable after tax profit may be found in the Glossary on page 116.
Hochschild Mining plc
Annual Report & Accounts 2006
01
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
About Us
A leading underground precious metals
producer: We have a consistent record of high
profitability and sustained growth underpinned
by professional and responsible mining practices.
Who we are
We are the fourth largest primary silver producer
globally and a mid-cap sized gold producer. We have over
40 years of experience in the exploration, evaluation and
extraction of precious metal epithermal vein deposits.
Currently, we have three operating underground mines
(Arcata, Ares and Selene) located in Southern Peru and
four development projects in Argentina, Peru and
Mexico. We also have over 20 long-term prospects
throughout Latin America. In addition to potential
acquisitions, we believe these projects provide substantial
potential for long-term growth.
In 2006 we produced 11.6 million ounces of silver and
196 thousand ounces of gold, which amounts to a total
of 23.3 million silver equivalent ounces. We are targeting
50 million silver equivalent ounces (830,000 gold
equivalent ounces) by 2011, more than doubling our 2006
production.
We focus on mid-sized, high-grade underground mining
operations and projects in Latin America. Our knowledge
of the region’s geological, cultural and political
landscape allows us to build on our track record of
achieving a high standard of operational efficiency.
11.6moz
Silver produced in 2006
196koz
Gold produced in 2006
23.3moz
Silver equivalent produced in 2006
Silver Exchange
Traded Fund (ETF)
Introduction of the silver ETF in
April 2006 has created a significant
amount of investment demand
totalling approximately 125 million
ounces at the end of January 2007.
Source: The Silver Institute; GFMS
Hochschild Mining plc
Annual Report & Accounts 2006
A proven track record: We have an established
reputation of consistent reserve replacement,
high-grade deposits and impressive margins.
Proven track record
Since commencing production at Arcata in the early
1960s, we have been able to replace and grow our
high-grade reserve base and have identified new and
profitable projects in the region. We seek to build
on this strong platform going forward.
We also have a proven financial track record of high
profitability and cash generation. This is based on our
focus on high-grade deposits and low cash costs. Our
sustained low costs allow us to maintain our strong
cash flow generation and profitability at all times,
independent of high mineral prices.
Although we have legacy forward sale contracts
in place which expire in mid 2007, the corporate
policy going forward is to remain 100% unhedged.
Our greatest hedge is our low costs.
Hochschild Mining plc
Annual Report & Accounts 2006
Reserves replacement*
(cid:62)(cid:101)(cid:89)(cid:94)(cid:105)(cid:89)(cid:94)(cid:95)(cid:98)(cid:90)(cid:1)(cid:64)(cid:69)(cid:72)(cid:57)(cid:1)(cid:87)(cid:90)(cid:101)(cid:102)(cid:106)(cid:95)(cid:101)(cid:100)(cid:1)(cid:27)
(cid:39)(cid:43)(cid:38)
(cid:39)(cid:38)(cid:38)
(cid:43)(cid:38)
(cid:38)
(cid:30)(cid:43)(cid:38)(cid:31)
(cid:55)(cid:108)(cid:91)(cid:104)(cid:87)(cid:93)(cid:91)(cid:1)(cid:104)(cid:91)(cid:102)(cid:98)(cid:87)(cid:89)(cid:91)(cid:99)(cid:91)(cid:100)(cid:106)(cid:1)(cid:104)(cid:87)(cid:106)(cid:95)(cid:101)(cid:1)(cid:1)
(cid:42)(cid:39)(cid:27)(cid:1)(cid:30)(cid:202)(cid:47)(cid:38)(cid:197)(cid:202)(cid:38)(cid:44)(cid:31)
(cid:40)(cid:45)
(cid:41)(cid:43)
(cid:42)(cid:38)
(cid:39)(cid:41)
(cid:39)(cid:43)
(cid:43)
(cid:47)(cid:40) (cid:47)(cid:41)
(cid:47)(cid:42) (cid:47)(cid:43) (cid:47)(cid:44) (cid:47)(cid:45) (cid:47)(cid:46)
(cid:39)
(cid:47)(cid:38) (cid:47)(cid:39)
(cid:39)(cid:41)(cid:43)
(cid:55)(cid:108)(cid:91)(cid:104)(cid:87)(cid:93)(cid:91)(cid:1)(cid:104)(cid:91)(cid:102)(cid:98)(cid:87)(cid:89)(cid:91)(cid:99)(cid:91)(cid:100)(cid:106)(cid:1)(cid:104)(cid:87)(cid:106)(cid:95)(cid:101)(cid:1)
(cid:43)(cid:41)(cid:27)(cid:1)(cid:30)(cid:1)(cid:202)(cid:38)(cid:39)(cid:197)(cid:202)(cid:38)(cid:44)(cid:31)
(cid:46)(cid:38)
(cid:45)(cid:43)
(cid:43)(cid:45)
(cid:40)(cid:44)
(cid:42)(cid:39) (cid:43)(cid:44)
(cid:44)(cid:39)
(cid:47)(cid:47) (cid:38)(cid:38) (cid:38)(cid:39) (cid:38)(cid:40) (cid:38)(cid:41) (cid:38)(cid:42) (cid:38)(cid:43)
(cid:30)(cid:43)(cid:31)(cid:27)
(cid:38)(cid:44)
(cid:69)(cid:104)(cid:91)(cid:1)(cid:104)(cid:91)(cid:105)(cid:91)(cid:104)(cid:108)(cid:91)(cid:1)(cid:104)(cid:91)(cid:102)(cid:98)(cid:87)(cid:89)(cid:91)(cid:99)(cid:91)(cid:100)(cid:106)(cid:1)
(cid:73)(cid:101)(cid:107)(cid:104)(cid:89)(cid:91)(cid:48)(cid:1)(cid:63)(cid:67)(cid:57)(cid:34)(cid:1)(cid:57)(cid:101)(cid:99)(cid:102)(cid:87)(cid:100)(cid:111)
(cid:32)(cid:60)(cid:107)(cid:98)(cid:98)(cid:1)(cid:90)(cid:91)(cid:92)(cid:95)(cid:100)(cid:95)(cid:106)(cid:95)(cid:101)(cid:100)(cid:1)(cid:101)(cid:92)(cid:1)(cid:104)(cid:91)(cid:105)(cid:91)(cid:104)(cid:108)(cid:91)(cid:105)(cid:1)(cid:104)(cid:91)(cid:102)(cid:98)(cid:87)(cid:89)(cid:91)(cid:99)(cid:91)(cid:100)(cid:106)(cid:1)(cid:104)(cid:87)(cid:106)(cid:95)(cid:101)(cid:1)(cid:99)(cid:87)(cid:111)(cid:1)(cid:88)(cid:91)(cid:1)(cid:92)(cid:101)(cid:107)(cid:100)(cid:90)(cid:1)(cid:95)(cid:100)(cid:1)(cid:106)(cid:94)(cid:91)(cid:1)(cid:61)(cid:98)(cid:101)(cid:105)(cid:105)(cid:87)(cid:104)(cid:111)(cid:1)
(cid:32)(cid:101)(cid:100)(cid:1)(cid:102)(cid:87)(cid:93)(cid:91)(cid:1)(cid:39)(cid:39)(cid:44)(cid:36)
Adjusted EBITDA margin
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:27)
(cid:43)(cid:39)(cid:27)
(cid:42)(cid:42)(cid:27)
(cid:42)(cid:42)(cid:27)
(cid:42)(cid:46)(cid:27)
03
About Us continued
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
A low cost producer: We have a sustained track
record of low cash costs positioning us in the lowest
quartile of the global cash cost curve for both silver
and gold.
High-grade, low cost producer
Despite industry wide cost pressure, our weighted average
cost per tonne for our three operating mines decreased
2% in 2006. This decrease was principally driven by a
significant cost reduction at our Selene mine resulting
from increased mechanisation and productivity.
Historically, our low cash costs and high cash flow results
from our strategy of acquiring and exploiting high-grade
ore reserves and our commitment to operational efficiency.
This has fostered a corporate culture focused on productivity,
underpinned by a rigorous system of cost control.
Internally, we measure operating performance on a dollar
per tonne basis. However, we recognise the importance
of comparability against our peers and as such, we
calculate silver cash costs on a co-product basis and
gold on both a co-product and by-product basis.
2006 cash costs
Co-product
By-product
US$3.57/oz
US$153/oz
US$(2.52)/oz
US$(273)/oz
Silver
Gold
Silver’s antibacterial
properties
Use of silver to prevent infection
dates to ancient Greece and Rome.
Today silver, a natural antibacterial
agent, is being used in clothing and
sportswear, amongst other things,
to prevent the growth of bacteria.
Hochschild Mining plc
Annual Report & Accounts 2006
Underground mining expertise: Our unique
focus on mid-sized underground mining, a
strategy not typically pursued by the major
mining companies, has given us a broad
platform for significant growth opportunities
in the Americas.
Our experience and expertise
We have been mining and exploring in Latin America
since the early 1920s and currently have exploration offices
in Peru, Mexico, Argentina, Chile and the United States.
This gives us invaluable local expertise in addition to our
geological familiarity with the region.
Our approach
We consistently update our digital geo-database and
regularly offer training for our exploration and geology
department. In addition, we maintain research
agreements with geology universities. Our approach
also consists of daily tracking of activity and continuous
re-evaluation of projects and targets to ensure they are
meeting our criteria.
Our reputation
Our profound knowledge of the region, our underground
mining expertise and our professional approach to
partnership makes us a ‘partner of choice’ for junior
mining companies seeking to develop properties in
the Americas. Our joint venture strategy is to maintain
majority ownership and secure the operational rights to
our projects. We have successfully entered joint venture
arrangements with various partners including Minera
Andes Inc., International Minerals Corporation, and
Exmin Resources Group.
A team of over 80
geologists apply a
consistent and rigorous
approach to the
exploration of high-grade,
underground epithermal
vein deposits.
Hochschild Mining plc
Annual Report & Accounts 2006
05
About Us continued
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Significant growth opportunities: In addition
to our three operating mines, we have four
development projects in Peru, Argentina
and Mexico, three of which will commence
production in 2007. Our growth pyramid,
together with potential acquisitions, forms
a strong platform for growth.
Our growth pyramid
Existing mining operations
Advanced development
projects
Feasibility completed
Early stage development
projects
2011
50 million silver
equivalent ounces
or (830,000 gold
equivalent ounces)
Selene
Arcata
Ares
San José
Pallancata
Moris
San Felipe
Target definition
(Number by country)
Mexico
x6
Peru
x2
Prospects
(Number
by country)
Argentina Chile Mexico
x5
x2
x4
Peru
x1
Incremental
growth
Potential Acquisitions
Our growth strategy
In order to achieve our 2011 target of 50 million silver
equivalent ounces, we intend to complete planned
expansions at our existing operations and to bring our
four development projects into production on time.
In addition to any potential acquisitions, our extensive
pipeline of prospects will provide incremental growth
above and beyond the 2011 target.
06
Hochschild Mining plc
Annual Report & Accounts 2006
Corporate social responsibility: Our commitment
to the health and safety of our employees, respect
for the environment, and active engagement with
local communities, is an intrinsic part of our culture.
Our philosophy
We believe that corporate social responsibility (‘CSR’)
is fundamental to our business in the long term.
Respect for the environment, commitment to our
communities and a healthy and safe workforce are not
only ethical imperatives but an essential requirement for
the sustained viability of our Group.
Oversight of these important issues at Board level lies
with the Corporate Social Responsibility Committee,
which was installed in January 2007 and began an
assessment of the Group’s current CSR performance, to
ensure that we maintain our high standards and comply
with best practices.
Our CSR objectives
Zero fatalities
•
Lowest quartile in accidents
•
World Bank environmental standards in our
•
operations
Peaceful and constructive relations with the
communities surrounding our operations
A workforce that is motivated, healthy and
committed to excellence
•
•
*
*National Environment Commission Award for the
cleanest and most eco-efficient production.
Hochschild Mining plc
Annual Report & Accounts 2006
07
About Us continued
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Our region: Latin America is a vast region
with enormous potential. In the last few years,
it has once again grown at a vigorous pace
with low inflation.
The economies of most of the key mining countries in
Latin America are growing strongly, and have regulatory
frameworks which promote appealing mining
opportunities. The region has thus attracted investment
from many of the major global mining companies.
Our current operations and our advanced projects are
located in three countries in Latin America: Peru, Mexico,
and Argentina. We also have exploration offices in Chile
and the United States (Nevada), and a corporate office
in London.
Mexico
Mexico is the most populous Spanish-speaking country
in the world. Mexico covers an area of approximately
1.97 million square kilometres and has a total population
of approximately 107 million. Mexico is the second largest
silver producing country in the world and has an enabling
mining regulatory framework. Mexico ranks 13th in the
world in terms of GDP and had the fourth largest per
capita income in Latin America after Argentina, Chile and
Costa Rica. Mexico’s GDP grew at rates of 4.1% in 2004,
3.0% in 2005 and 4.8% in 2006.
Peru
Peru is the third largest country in South America with
a territory that spans approximately 1.28 million square
kilometres and a population of approximately 28 million
people. Peru has a history of mining dating back to the
time of the Incas and is the largest silver producing
country in the world. In recent years, the economy has
been growing strongly in real terms with GDP growth of
5.2%, 6.4% and 7.2% in 2004, 2005 and 2006, respectively.
Peru’s recent economic stability and low inflation rate
have helped to promote foreign direct investment
in the country.
Source: Economic Commission for Latin America and the Caribbean.
Argentina
Argentina is the second largest country in South America
and the eighth largest country in the world. Covering an
area of approximately 2.7 million square kilometres,
Argentina has a population of approximately 39 million.
Since its financial crisis in 2001/02, Argentinian GDP has
grown in 2004, 2005 and 2006 at rates of approximately,
9.0%, 9.2% and 8.5%, respectively. Although not traditionally
a mining country, Argentina has strong mining potential
and favourable mining legislation. This has led to a
significant inflow of mining investments.
08
Hochschild Mining plc
Annual Report & Accounts 2006
Geographic locations: We focus on underground
mining throughout the Americas and will
continue to exploit our mid-sized precious metals
niche, while achieving geographic diversification.
(cid:66)(cid:69)(cid:68)(cid:58)(cid:69)(cid:68)
(cid:68)(cid:59)(cid:76)(cid:55)(cid:58)(cid:55)
(cid:72)(cid:91)(cid:100)(cid:101)
San Felipe
Moris
(cid:67)(cid:59)(cid:78)(cid:63)(cid:57)(cid:69)
(cid:73)(cid:87)(cid:100)(cid:1)(cid:66)(cid:107)(cid:95)(cid:105)
(cid:70)(cid:101)(cid:106)(cid:101)(cid:105)(cid:95)
(cid:68)(cid:59)(cid:76)(cid:55)(cid:58)(cid:55)
(cid:72)(cid:91)(cid:100)(cid:101)
San Felipe
Moris
(cid:67)(cid:59)(cid:78)(cid:63)(cid:57)(cid:69)
(cid:73)(cid:87)(cid:100)(cid:1)(cid:66)(cid:107)(cid:95)(cid:105)
(cid:70)(cid:101)(cid:106)(cid:101)(cid:105)(cid:95)
(cid:76)(cid:59)(cid:68)(cid:59)(cid:80)(cid:75)(cid:59)(cid:66)(cid:55)
(cid:57)(cid:69)(cid:66)(cid:69)(cid:67)(cid:56)(cid:63)(cid:55)
(cid:59)(cid:57)(cid:75)(cid:55)(cid:58)(cid:69)(cid:72)
Existing mining operations
Advanced development
(cid:70)(cid:59)(cid:72)(cid:75)
(cid:66)(cid:95)(cid:99)(cid:87)
projects
Early stage development
Pallencata
projects
Arcata
Regional office
Exploration offices
(cid:56)(cid:72)(cid:55)(cid:80)(cid:63)(cid:66)
Ares
Selene
(cid:56)(cid:69)(cid:66)(cid:63)(cid:76)(cid:63)(cid:55)
(cid:70)(cid:55)(cid:72)(cid:55)(cid:61)(cid:75)(cid:55)(cid:79)
(cid:55)(cid:72)(cid:61)(cid:59)(cid:68)(cid:74)(cid:63)(cid:68)(cid:55)
Our geographic diversification
We only invest in those countries that offer an enabling
(cid:73)(cid:87)(cid:100)(cid:106)(cid:95)(cid:87)(cid:93)(cid:101)
environment for foreign investment.
(cid:67)(cid:91)(cid:100)(cid:90)(cid:101)(cid:112)(cid:87)
(cid:75)(cid:72)(cid:75)(cid:61)(cid:75)(cid:55)(cid:79)
(cid:66)(cid:69)(cid:68)(cid:58)(cid:69)(cid:68)
(cid:76)(cid:59)(cid:68)(cid:59)(cid:80)(cid:75)(cid:59)(cid:66)(cid:55)
(cid:57)(cid:69)(cid:66)(cid:69)(cid:67)(cid:56)(cid:63)(cid:55)
(cid:59)(cid:57)(cid:75)(cid:55)(cid:58)(cid:69)(cid:72)
(cid:70)(cid:59)(cid:72)(cid:75)
(cid:66)(cid:95)(cid:99)(cid:87)
Ares
(cid:56)(cid:72)(cid:55)(cid:80)(cid:63)(cid:66)
Pallencata
Arcata
Selene
(cid:56)(cid:69)(cid:66)(cid:63)(cid:76)(cid:63)(cid:55)
(cid:70)(cid:55)(cid:72)(cid:55)(cid:61)(cid:75)(cid:55)(cid:79)
(cid:55)(cid:72)(cid:61)(cid:59)(cid:68)(cid:74)(cid:63)(cid:68)(cid:55)
(cid:67)(cid:91)(cid:100)(cid:90)(cid:101)(cid:112)(cid:87)
(cid:73)(cid:87)(cid:100)(cid:106)(cid:95)(cid:87)(cid:93)(cid:101)
(cid:75)(cid:72)(cid:75)(cid:61)(cid:75)(cid:55)(cid:79)
(cid:57)(cid:62)(cid:63)(cid:66)(cid:59)
San José
We aim to consolidate our regional leadership and
aspire to become a global mining company.
(cid:57)(cid:62)(cid:63)(cid:66)(cid:59)
Hochschild Mining plc
Annual Report & Accounts 2006
San José
09
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
About Us continued
Our workplace: Our people and their safety
are a pillar of our strategy and a deep personal
conviction of the Board and employees.
Our employees
By the end of 2006, we had a total workforce of 3,456 at
our operating sites, development projects and head office,
of which 2,128 were contracted personnel. We are proud
to provide quality working conditions to our workforce.
We have, for over 40 years maintained good and peaceful
relations with our workforce at all operations.
Our approach
We have in place a local safety and mining hygiene
committee at each of our operating units that meets
to review, promote and monitor the Group’s health
and safety policies.
We strive to comply with the most stringent safety
standards in the industry.
Health and safety
Given the nature of our industry, health and safety is
of critical importance and we have made considerable
investments in the operating controls and processes at
our facilities to ensure that exacting health, safety and
environmental standards are met. We are in the process
of obtaining the health, safety and risk management
system accreditation, OHSAS 18001, to monitor our
performance in our underground and surface mining
operations and aim to qualify for certification this year.
3,456
Total workforce
2,128
Contracted personnel
10
Hochschild Mining plc
Annual Report & Accounts 2006
Our environment: We are committed to
minimising our impact on the environment
and observing the highest international
standards of compliance.
Our environmental standards
We endeavour to minimise the impact of our business
on the environment and have implemented an
Environmental Management System ISO 14001 at all
our operating sites. We also use an international
certification firm, Deutsche Gesellschaft zur Zertifizierung
von Management systemen in Germany (‘DQS’), to carry
out yearly audits of our performance and management
systems. We are proud to report that DQS has consistently
found us to be in full compliance with international
standards.
Our current environmental standards not only comply
with local regulations in Peru, Mexico and Argentina
but also exceed the requirements laid down by the World
Bank in its ‘Environmental, Health and Safety Guidelines
for the Mining Industry.’ Our intention is to maintain
similar standards at all operations as our project
pipeline develops.
In our view, underground mining drastically reduces
the potential environmental impact as we have been
able to backfill a significant proportion of our tailings.
Nonetheless, we are committed to environmental
initiatives to minimise this effect further. We budget
and prepare for mine closure over the life of the operation.
Our reforestation programme at both Arcata and Selene,
where the Group has planted in excess of 35,000
indigenous plants and our substantial investment in
technology to reduce air emissions and control waste
disposal, illustrates our commitment and ongoing effort
to environmental sustainability.
35,000
Indigenous plants replaced at Arcata and Selene
Hochschild Mining plc
Annual Report & Accounts 2006
11
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
About Us continued
Our community: We believe that active long-
term engagement with our local communities
is fundamental to our being able to operate
in the region and we devote considerable time
and resources to such activities.
Commitment
Our long-term community projects seek to improve
the lives of local communities on a sustainable basis.
We believe that the three fundamental requirements
for achieving this goal are healthcare, education, and
sustainable economic activities.
Healthcare
Given the level of poverty in the region, healthcare is
of prime importance to improving living standards.
We invest in healthcare campaigns that are conducted
with local communities, giving them access to
healthcare facilities and medicines. Our Community
Relations team has improved the infrastructure of
health facilities and community houses and carried out
health, vaccinations and cold weather campaigns to aid
the community.
Education
We believe in the importance of a high standard
of education in our local communities and seek to
improve the level of general education for both
adults and children. Our commitment to education
is best exemplified by TECSUP, a project founded and
substantially funded by the Hochschild Group. TECSUP
has become the leading non-profit technical institute
in the country, with over 4,000 graduates and an
impressive 95% employment rate.
Economic activities
Our programmes include:
•
•
•
•
•
•
•
rehabilitation of agricultural land;
provision of greenhouses for community production;
education on irrigation techniques;
alpaca wool breeding and marketing programme;
guinea pig farms on a commercial scale;
trout farming and marketing; and
roadbuilding and community employment
on road maintenance.
95%
Of TECSUP graduates enter employment
12
Hochschild Mining plc
Annual Report & Accounts 2006
Silver and gold: We believe in the positive
fundamentals behind these metals.
Silver
Silver is traded in its physical form over-the-counter on
the London Bullion Market and on Comex in New York,
a futures and options exchange. 2006 was an exciting
year for silver with the launch of the Silver Exchange
Traded Fund (ETF) in April and the subsequent increase
in investment demand. In 2006, the average silver price
was US$11.59 per ounce, up 45% year-on-year.
In addition to investment demand, silver can be found
in many electrical applications, including conductors,
switches and contacts. The ease of electro-deposition
of silver accounts for its widespread use in plating. The
joining of materials using silver is facilitated by the
metal’s fluidity and strength.
Global silver demand
Historically, demand has been dominated by three
factors: jewellery and silverware; industrial; and
photographic fabrication, although the recent
introduction of the ETF has generated incremental
investment demand. In 2005, total demand amounted
to 869 million ounces which was, according to CRU
Strategies:
•
•
•
•
45% industrial;
33% jewellery and silverware;
18% photography; and
4% coinage.
Global silver supply
Mine production, scrap supply and government sales are
the three primary drivers of silver supply. In 2005, mine
production accounted for 78% of supply, of which only
30% came from primary sources.
Gold
The price for gold is determined on the open market and
a procedure known as the Gold Fixing in London provides
a daily benchmark figure. In 2006, the average gold price
was US$604 per ounce up 25% year-on-year.
Gold, a superior store of value, is driven more by
investment demand rather than physical buying in the
market. Gold also maintains a role as an alternative
investment as it tends to be inversely correlated to the
US dollar. In addition, gold’s enhanced electrical
conductivity, its malleability, and its resistance to
corrosion have made it vital to the manufacture of
components used in a wide range of electronic products,
including computers, telephones, cellular phones, and
home appliances.
Global gold demand
In addition to investment demand, gold is fabricated for
various markets such as jewellery, electronics, dentistry,
industrial, coins and bars with jewellery being by far the
most important. India was the world’s largest consumer
of gold jewellery in volume terms, whilst the United
States was the largest market in terms of value in 2005.
Industry and medical uses are another important source
of consumption.
Global gold supply
Mine production, scrap supply and central bank sales
are the three primary constituents of gold supply
accounting for 65%, 22% and 17%, respectively, in 2005
according to CRU Strategies .
Silver production by country (2005)
Gold production by country (2005)
(cid:47)
(cid:46)
(cid:45)
(cid:44)
(cid:43)
(cid:39)
(cid:40)
(cid:41)
(cid:42)
1 Peru 15%
2 Mexico 15%
3 Chile 6%
4 Australasia 12%
5 Asia 15%
6 CIS 11%
7 East Europe 6%
8 Africa 2%
9 Other 18%
(cid:46)
(cid:45)
(cid:44)
Source: CRU Strategies, GFMS, World Gold Council, The Silver Institute (latest available data)
1 South Africa 12%
2 Australia 10%
3 USA 10%
4 Other Latin America 10%
5 Africa less South Africa 9%
6 China 9%
7 Peru 8%
8 Other 32%
(cid:39)
(cid:40)
(cid:41)
(cid:42)
(cid:43)
Hochschild Mining plc
Annual Report & Accounts 2006
13
Chairman’s Statement
Our strategy: To enhance overall value for our
shareholders through a strong growth strategy
based on high-margin, cash generative, precious
metals production in the Americas.
I am pleased to be presenting Hochschild Mining plc’s
first set of results following our successful Listing on the
London Stock Exchange in November 2006, when we
raised approximately US$500 million. It has been a
landmark year for the Company and I must extend my
thanks to all those who made it possible: our workers,
management, office staff and our shareholders. Our
Listing marks the beginning of a new stage in the Group’s
development. We are now well placed to substantially
increase our capacity to build on our track record of
successful financial, operational and social performance.
Over the last 12 months, we have seen good operational
performance and strong financial results that demonstrate
the strengths of our business. In 2006, our revenues for
the year amounted to US$211 million, a 31% increase on
2005, and adjusted EBITDA for the year increased by 52%
to US$108 million. We continue to achieve low cash costs
and high margins in our extraction of precious metals
due to our focus on exploiting high-grade deposits and
our rigorous system of cost controls at all our operations.
Whilst costs across the industry have been rising and
production has been constrained in many parts of the
world by escalating prices for mining machinery, we
have seen a 2% reduction in the weighted average cost
per tonne at our existing operations.
Our production for 2006 was steady, with 11.6 million
ounces of silver and 196 thousand ounces of gold,
contributing to a combined total of 23.3 million silver
equivalent ounces, a slight decline on last year due to
the anticipated grade decline at our Ares mine. We
expect this decline to continue into the first quarter of
2007 as we continue to extract lower grades at Ares, but
to be more than fully reversed over the course of the
year as we ramp-up throughput at our three operating
mines and as we bring three new mines into production
starting at the end of the second quarter of 2007.
Consequently, for 2007, we are targeting production in
excess of 26 million silver equivalent ounces. The
benefits of increasing the number of producing mines
from three to six in 2007 will be fully reflected, both
operationally and financially, in 2008. This will also keep
us on course to reach our target of producing 50 million
silver equivalent ounces (or 830,000 gold equivalent
ounces) by 2011.
Market prices for both gold and silver were strong during
2006, with the prices rising 25% and 45%, respectively, on
the back of significant investment demand notably in the
wake of inflation concerns, a weak dollar and geopolitical
influences, in addition to the introduction of the iShares
Silver ETF in April 2006. The average spot price for gold
in 2006 was US$604.65 per ounce and for silver it was
US$11.59 per ounce. Looking forward, we continue to
favour precious metals and believe the silver price trend
is set to continue into 2007 for two primary reasons. First,
we expect the investment demand growth to continue
and second, industrial demand is targeted to remain
robust largely driven by continued strength within the
electronics fabrication sector coupled with the new and
expanding antibacterial uses of silver.
The strong cash flow demonstrated in this set of results
– with cash from operations of approximately US$126
million, combined with the net cash of US$406 million
Beginning and consolidation of the business
1910-1970s
Beginning and consolidation
of the mining business.
1980s-2000
Business approach/aggressive
exploration process.
2000-2006
Beginning of Latin American
diversification.
2006 onwards
Listing on the London Stock
Exchange. Focus on delivering
growth and regional
consolidation.
14
Hochschild Mining plc
Annual Report & Accounts 2006
“ We aim to produce 50 million silver
equivalent ounces (or 830,000 gold
equivalent ounces) by 2011, more
than doubling our current production.”
at the Group level – gives us the financial strength to
deliver on our growth strategy and to partake in the
expected industry consolidation in the region. I am
happy to announce our maiden dividend for the two
months of 2006 during which we were listed totalling
US$2.3 million.
Exploration continues to be a strong focus of the Group
and we made significant progress during 2006. Since
the half-year figures reported at the time of our Listing,
we have increased our attributable reserves by 25% and
extended our overall mine life, after discounting our
increased production in 2007. Furthermore, our Listing
has increased our visibility within the region and has
given us access to more acquisition and joint venture
opportunities. For 2007, we have increased our
exploration budget as we look to enhance further our
reserve and resource base, explore new properties and
continue to build on the progress made last year.
It is with deep regret that we report that in the last
year there have been fatalities in our business – three
in 2006 and one more in the first quarter of 2007 –
a substantial aberration from our previous track record.
The Board has taken steps to support the families of
the people involved and the CSR Committee has ordered
a comprehensive review of safety procedures and
reporting with the leading consultants in the industry.
We will continue to exert every effort to ensure the
safety of all our employees.
with local communities are fundamental to our business
in the long term. Responsibility for these important
issues at Board level has now been entrusted to the
Deputy Chairman, Roberto Dañino, who chairs the
Corporate Social Responsibility Committee.
As a newly listed company on the London Stock
Exchange, my Board colleagues and I are also firmly
committed to delivering high standards of corporate
governance. We believe that our combination of a strong
management team and experienced independent
Directors will provide the best opportunities for growth
and strategic direction for the Company.
In summary, we are well poised to build on our proven
operational strengths to deliver value for all our
shareholders. The combination of our low cost assets
with the ability to grow reserves and production whilst
remaining focused on underground precious metals
mining in Latin America, form a strong base for future
growth. The Listing proceeds, together with our strong
yearly cash flow, provide us with the necessary resources
to expand our existing operations, develop our pipeline
of projects and consider potential acquisitions. We thus
remain on course to deliver on our target of 50 million
silver equivalent ounces (or 830,000 gold equivalent
ounces) by 2011.
I extend a warm welcome to all our new shareholders
and thank you for your support.
We take corporate social responsibility very seriously and
believe that the health and safety of our employees, the
respect for the environment and our active engagement
Eduardo Hochschild
Executive Chairman
Silver Industrial demand
increased 11% in 2005
Silver is the best electrical conductor
of all metals and is therefore used
in many electrical applications,
particularly conductors, switches
and fuses. Industrial fabrication
accounted for 409moz of silver
demand in 2005.
Source: The Silver Institute
Hochschild Mining plc
Annual Report & Accounts 2006
Business Review
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Key performance indicators: We measure our
performance based on six key performance
indicators, which also assist the comparability
with other international mining companies.
Revenue
(cid:75)(cid:73)(cid:26)(cid:1)(cid:99)(cid:95)(cid:98)(cid:98)(cid:95)(cid:101)(cid:100)
Adjusted EBITDA
(cid:75)(cid:73)(cid:26)(cid:1)(cid:99)(cid:95)(cid:98)(cid:98)(cid:95)(cid:101)(cid:100)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:40)(cid:39)(cid:39)
(cid:39)(cid:44)(cid:39)
(cid:39)(cid:43)(cid:47)
(cid:47)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:39)(cid:38)(cid:46)
(cid:45)(cid:39)
(cid:45)(cid:39)
(cid:42)(cid:43)
Revenue is defined as net ounces sold multiplied by the
realisable commodity price. Revenue is a measure of the
Group’s production growth as well as an indication of
the general commodity price environment. We believe
in our ability to grow production throughout the cycle
while recognising that our financial performance is
dependent on metal prices.
Adjusted EBITDA is defined as profit from continuing
operations before exceptional items, net finance costs
and income tax plus depreciation, amortisation and
exploration costs other than personnel and other
expenses. EBITDA is a measure of the cash profits of
the business and provides a metric to measure our
ability to maintain our low cost profile over time.
Attributable after tax profit
(cid:75)(cid:73)(cid:26)(cid:1)(cid:99)(cid:95)(cid:98)(cid:98)(cid:95)(cid:101)(cid:100)
EPS (pre-exceptionals)
(cid:75)(cid:73)(cid:26)(cid:1)(cid:102)(cid:91)(cid:104)(cid:1)(cid:105)(cid:94)(cid:87)(cid:104)(cid:91)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:42)(cid:45)
(cid:40)(cid:43)
(cid:39)(cid:42)
(cid:39)(cid:38)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:38)(cid:36)(cid:39)(cid:47)
(cid:38)(cid:36)(cid:39)(cid:39)
(cid:38)(cid:36)(cid:38)(cid:44)
(cid:38)(cid:36)(cid:38)(cid:42)
Attributable after tax profit is defined as the profit for
the year attributable to the equity shareholders of the
Group from continuing operations and before
exceptional items. Attributable after tax profit provides
a measure of the total profits available to equity
shareholders.
EPS (pre-exceptionals) is defined as the per share profit
(using the weighted average number of shares
outstanding for the period) available to the equity
shareholders of the Group from continuing operations
and before exceptional items. EPS provides a measure for
the amount of attributable profit available to equity
shareholders of the Group taking into account any
changes in the weighted average number of
shares outstanding.
16
Hochschild Mining plc
Annual Report & Accounts 2006
Silver co-product cash costs
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:75)(cid:73)(cid:26)(cid:37)(cid:101)(cid:112)
(cid:41)(cid:36)(cid:43)(cid:45)
(cid:40)(cid:36)(cid:45)(cid:45)
(cid:40)(cid:36)(cid:43)(cid:47)
(cid:39)(cid:36)(cid:45)(cid:38)
Silver co-product cash costs is defined as total cash costs
multiplied by the percentage of revenue from silver,
divided by the number of silver ounces sold. Cash costs
include cost of sales, commercial deduction and selling
expenses, less depreciation included in cost of sales. This
metric allows us to benchmark ourselves versus our peer
group in a consistent manner over time; however, we
must consider any revenue contribution shift.
Gold co-product cash costs
(cid:75)(cid:73)(cid:26)(cid:37)(cid:101)(cid:112)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:39)(cid:43)(cid:41)
(cid:39)(cid:43)(cid:47)
(cid:39)(cid:44)(cid:45)
(cid:39)(cid:40)(cid:47)
Gold co-product cash costs is defined as total cash costs
multiplied by the percentage of revenue from gold,
divided by the number of gold ounces sold. Cash costs
include cost of sales, commercial deductions and selling
expenses less depreciation included in cost of sales. This
metric allows us to benchmark ourselves versus our peer
group in a consistent manner over time; however, we
must consider any revenue contribution shift.
Hochschild Mining plc
Annual Report & Accounts 2006
17
Business Review continued
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Operational review: We continue to deliver on
the promises made at the time of our Listing.
Production
In line with expectations at the time of the Listing
and as disclosed in our quarterly production report in
January 2007, the second half of 2006 production was
slightly above that of the first half with a total production
of 11.6 million silver ounces and 196 thousand gold
ounces for the full year ended 31 December 2006. This
amounts to a total of 23.3 million silver equivalent
ounces. Silver production for the year was up 10% as a
result of an increase from both Arcata and Selene while
gold was down 16% due to the anticipated decrease in
grade at the Ares mine.
Costs
Our weighted average cost per tonne decreased 2%,
despite industry wide cost pressure. This decrease was
principally driven by a significant cost reduction at the
Selene mine. However, our silver cash cost increased on
a co-product basis from US$2.77 per ounce in 2005 to
US$3.57 per ounce in 2006 (cash cost on a co-product
basis must be considered in conjunction with the co-
product commodity because, as the percentage sales
of one product increases, the other decreases, resulting
in a similar effect on the respective cash costs). This was
primarily driven by a higher percentage of silver sales
(68% increase in revenue from silver and 2% increase in
revenue from gold). Consequently a greater amount of
cost was attributed to silver production. This increase
was also due to a lesser extent to a decrease in average
head grades mined for both silver and gold. On the other
hand, co-product cash cost for gold decreased from
US$159 per ounce in 2005 to US$153 per ounce in 2006
while by-product cash cost for gold went from negative
US$21 per ounce to negative US$273 per ounce. We do
not typically look at silver on a by-product basis.
Global gold supply
declining
Total gold supply in 2006 fell by 5%
from its 2005 level, mainly due to
the 346 tonne decline in official
sector sales.
Source: GFMS
18
Hochschild Mining plc
Annual Report & Accounts 2006
Exploration
With a team of over 80 geologists, exploration remains
at the core of our business as we seek to expand our
existing operations and add to our project pipeline
through the discovery of new properties. In 2006, we
increased our capital expenditure on mine site
exploration and will do the same in 2007. We typically
capitalise exploration capital expenditure once the
project has passed feasibility stage. In 2007, we have
budgeted US$35 million for exploration at our operations,
projects and prospects.
Reserves and resources
We have increased our attributable stated reserves by
25% in the second half of 2006. We plan to continue to
increase our reserve and resource base in order to bring
our reserve life more in line with those of other publicly
traded precious metal companies.
Silver equivalent content (moz)
June
2006 Depletion1 Addition2 2006 % Att.3 Att.3 %
Dec
June Dec
2006 2006
233.4
105.6
34.2 267.5 15
177.8 202.2 14
(11.7)
49.4
143.3 36 83.4 103.9 25
Category
Resource
Reserve
Gold equivalent content (moz)
June
2006 Depletion1 Addition2 2006 % Att.3 Att.3 %
Dec
June Dec
2006 2006
3.9
1.8
0.6
0.8
4.5 15
2.4 36
3.0
1.4
3.4 14
1.7 25
(0.2)
Category
Resource
Reserve
Notes: Resources are inclusive of reserves; reserves and resources are reported
according to the JORC code developed by the Australasian Joint Ore Reserves
Committee; Gold/Silver equivalency: 1 ounce Au= 60 ounces Ag.
1 Depletion: reduction in reserves based on ore delivered to the mine plant.
2
3 Attributable reserves based on our percentage ownership at our joint
Increase in reserves due mainly to mine site exploration but also to price increase.
venture projects.
Hochschild Mining plc
Annual Report & Accounts 2006
19
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Arcata Mine: The Arcata mine is an underground
epithermal vein system that has been in
production since 1964, and is our flagship
operation. It is located in Southern Peru near
Arequipa on a 47,000 hectare site.
Production
Year ended 31 December
2006
2005
% change
Ore production (tonnes)
Average head grade silver (g/t)
Average head grade gold (g/t)
Concentrate produced (tonnes)
Silver grade in concentrate (kg/t)
Silver produced (koz)
Gold produced (koz)
Net silver sold (koz)
Net gold sold (koz)
313,688
536.61
1.39
12,407
11.92
4,754
11.89
4,046
9.8
282,199
538.55
1.19
10,787
12.31
4,271
7.19
4,194
7.2
11
0
17
15
(3)
11
65
(4)
36
Arcata’s processing capacity will be increased to 420
ktpa in the second quarter of 2007 and we envisage
undertaking a further expansion to 530 ktpa in 2009.
At Arcata we experienced a timing difference between
production and sale of concentrate which was
significantly above that of previous years and, as such,
we anticipate a shipment of approximately 692
thousand ounces of silver and 1.7 thousand ounces of
gold that was mined in 2006 to be recognised as revenue
in 2007. We recognise revenue from concentrate when
the risk passes to the customer which under the contract
with Peñoles is when the concentrate is loaded onto the
ship in Peru. We anticipate the magnitude of this effect
will normalise in 2007 to that of previous years.
Revenue and costs
Year ended 31 December
2006
2005
% change
Revenue (US$000)
Percentage of consolidated revenue
55,020
26
32,587
20
69
Unit costs per tonne at Arcata increased 6% in 2006
principally resulting from an increase in mine costs, up
10%, and royalties, up 137%, although offset by a decrease
in geology costs, down 33%. Mine costs increased
because of less low cost open stopping in the Macarena
Vein, more fill transport due to new areas of operation,
and to a lesser extent, a greater expense for ventilation.
Royalties are dictated by Peruvian legislation whereby
owners of mining concessions must pay for the
exploitation of metallic and non-metallic resources.
Mining royalties, of 1%-3% of sales, are calculated
depending on the value of the mineral concentrates
according to the quoted market price published by the
Ministry of Energy and Mines. Accordingly, as mineral
prices have increased, so have the applicable royalties.
Nevertheless, we do not foresee a significant change in
the cost profile of Arcata in 2007.
Capital expenditure
US$ million
Total capital expenditure
Sustaining
Expansion
Exploration
Year ended 31 December
2006
2007 budget
14.6
2.1
10.6
1.9
24.8
8.5
12.2
4.0
The increase in sustaining capital expenditure at the
Arcata unit in 2007 is due to the necessary replacement
of the integral pump system for tailings, heavy
equipment purchases, the replacement of the pump
system in the mine and some infrastructure
improvements. Additionally, we have significantly
increased the budget for mine site exploration, which
will permit us to continue to prove up additional
reserves and resources at Arcata while increasing
production capacity.
Exploration and geology
Stated on an attributable basis
As of
31 December
2006
As of
30 June
2006
% change
Resource (moz Ag eq)
Reserve (moz Ag eq)
60.6
20.4
43.6
16.1
39
27
Note: Contains only the percentage of reserves or resources attributable to our
ownership in the mine/project; resources are inclusive of reserves; reserves and
resources are reported according to the JORC code developed by the Australasian
Joint Ore Reserves Committee; Gold/Silver equivalency: 1 ounce Au= 60 ounce Ag.
Exploration and development has centred on the Mariana
Vein system at the northern margin of the mineralised
area, which includes the majority of reserves and which
currently supports the greater part of production.
Exploration in and around the Mariana Vein system will
continue in order to convert additional resources into
reserves, expand the mine life, and build a strong platform
for production growth at our flagship mine.
20
Hochschild Mining plc
Annual Report & Accounts 2006
Ownership
100%
Product
Silver concentrate with gold content
Mining method
Conventional and mechanised cut and fill breast or
overhand stoping methods with a flotation plant
Planned expansions
Increase capacity to 420 ktpa by Q2, 2007
Further increase to 530 ktpa in 2009
Hochschild’s Licensed Area
784,000
786,000
788,000
790,000
792,000
0
0
0
0
5
3
8
0
0
0
0
4
3
8
0
0
0
0
3
3
8
0
0
0
0
2
3
8
0
0
0
,
4
4
3
,
8
760000
770000
780000
790000
800000
N
Arcata
Mine
Chumile Vein
Arcata
Mine
Julia Vein
0
1.5
3
6
9
12 15
Kilometres
Alexia Vein
Chumille Vein
Julia Vein
Alexia Vein
West Mariana
Vein
N
I
E
V
Mariana Vein
R A M A L P I S O
L I A
U
J
?
E
L
L
I
M
U
H
C
R
A
M
A
L
?
M
A
R
I
O
N
V
E
I
N
Pullallu
West Mariana Vein
Ramal Marion Vein
Ramal Marion Vein
MACARENA VEIN
M
-
1
V
E
I
N
M-3 V
EIN
M
-
2
V
E
I
N
Macarena
BAJA VEIN
TRES REYES NW
Macarena 2 Vein
,
0
0
0
2
4
3
8
,
,
0
0
0
0
4
3
8
,
Mariana Vein
East Mariana
Vein
I N
E
I A V
X
L E
A
A
M
I N
E
V
R I A N A
East Mariana Vein
E A S T M A R I A N A V E I N
P U C A R A V E I N
V E I N
A L E X A N D R A
Pucara
Consuelo
P R I M A V E R A
SANTA ROSA 2
Pucara
S A N T A R O S A 1
Consuelo
E I N
V
O
L
E
U
S
N
O
C
V E I N
L O O B Y
Looby
M A R I O N V E I N
Looby
D VEIN
V E I N
L U I S A
Macarena
M A R C I A N O V E I N
Macarena 2 Vein
RAMAL 4
ARCATA MINE
Surface Map
N
0
0
0
,
4
4
3
,
8
,
0
0
0
2
4
3
8
,
Legend
Reserve/Resource area
Target
Concession boundary
Underground workings
Vein
,
0
0
0
0
4
3
8
,
Ramal 2 Vein
Ramal 2 Vein
R
A
M
RAMAL 3
L 2
A
0
250
500
1,000
1,500
2,000
Metres
R
A
M
A
L
1
784,000
786,000
788,000
790,000
792,000
Hochschild Mining plc
Annual Report & Accounts 2006
21
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Ares Mine: The Ares mine is an underground
epithermal vein system that has been in
production since 1998. It is located in Southern
Peru near Arequipa on a 22,700 hectare site.
Production
Year ended 31 December
2006
2005 % change
Ore production (tonnes)
Average head grade silver (g/t)
Average head grade gold (g/t)
Doré total (koz)
Silver produced (koz)
Gold produced (koz)
Net silver sold (koz)
Net gold sold (koz)
289,138
310.61
17.37
2,850
2,688
155.5
2,651
152.9
281,095
355.28
22.81
3,151
2,944
198.55
2,895
196.4
3
(13)
(24)
(10)
(9)
(22)
(8)
(22)
As anticipated, the average grade at the Ares mine is
declining due to the geologic nature of the ore body and,
as such, we expect that we will mine at a lower average
head grade in 2007. In 2006, we completed the planned
expansion of the plant at Ares taking its capacity from
280 ktpa to 325 ktpa. Results from the testing were positive
and we are currently producing at a rate of 325 ktpa.
in January 1999 for a ten year term, and consequently,
we do not make any royalty payments. Nevertheless, we
do not foresee a significant change in the cost profile
of Ares in 2007.
Capital expenditure
US$ million
Total capital expenditure
Sustaining
Expansion
Exploration
Year ended 31 December
2007 budget
2006
4.1
2.3
0.3
1.5
11.1
4.2
2.9
4.0
The increase in sustaining capital expenditure at the
Ares operation in 2007 is due to the replacement of
heavy equipment and other equipment used in
operational areas. We have also increased the budget
for mine site exploration at the Ares operation to focus
on new exploration targets.
Revenue and costs
Year ended 31 December
2006
2005
% change
Exploration and geology
Revenue (US$000)
Percentage of consolidated revenue
92,368
44
90,943
56
2
Stated on an attributable basis
As of
31 December
2006
As of
30 June
2006
% change
24.9
22.3
30.5
28.5
(18%)
(22%)
Resource (moz Ag eq)
Reserve (moz Ag eq)
See note on p.20.
As anticipated, the stated reserves and resources at
Ares have decreased as a result of production, declining
grades and limited geological developments in 2006.
In response to this change, we have increased our
exploration efforts in prospective areas around the high-
grade Victoria Vein looking for a deposit of a similar, high-
grade nature and will continue to do so in 2007. We are
also exploring areas adjacent to the already exploited
parts of the Victoria Vein system at higher elevations. This
exploration has shown positive results in identifying
minable high-grade splays and cymoid veins that went
previously undetected. We expect to produce a reserve
and resource replacement in 2007 from this effort which
should offset production depletion.
Despite higher prices, revenue was offset by a decrease
in the ounces produced and thus sold from Ares.
Unit costs per tonne at Ares increased by a modest 2% in
2006. This change was principally driven by an increase
in plant costs, up 26%, and administrative costs, up 14%,
and offset by a decrease in mine costs, down 8%, and
general services costs, down 6%. Plant costs increased as
a result of higher prices of sodium cyanide, more
detoxification cycles in 2006 and an increase in steel
prices. Administrative costs were affected by the
implementation of a revamped catering service. Mine
costs decreased because of a higher proportion of
mechanised stopes and a decrease in the number of
stopes compared to 2005 resulting from the integration
of smaller stopes within larger ones, leading to greater
efficiency and cost reduction. General services decreased
as a result of an overall reduction in energy consumption
and operational supplies. We have a legal stability
agreement at the Ares operation which was granted
22
Hochschild Mining plc
Annual Report & Accounts 2006
Ownership
100%
Product
Doré containing gold and silver
Mining method
Conventional and mechanised cut and fill breast stoping
methods with cyanidation and Merrill Crowe plant
Planned expansions
Capacity was increased to 325 ktpa in Q4, 2006
Hochschild’s Licensed Area
800,000
802,000
804,000
806,000
808,000
810,000
ARES MINE
Surface Map
Ares
Mine
N
0
0
0
,
0
4
3
,
8
0
0
0
,
8
3
3
,
8
Alexia Vein
Mariana Vein
East Mariana Vein
Pocoæopausa System
Chumile Vein
Julia Vein
Paola Vein
West Mariana Vein
Isabel System
Ramal Marion Vein
Ramal Sur Vein
Pucara
Tania Vein
Consuelo
Maruja Vein
Victoria Vein System
Looby
796000
800000
804000
808000
812000
816000
0
0
0
4
4
3
8
0
0
0
0
4
3
8
0
0
0
6
3
3
8
0
0
0
2
3
3
8
0
1
2
4
6
8
10
Kilometres
N
0
0
0
,
0
4
3
,
8
0
0
0
,
8
3
3
,
8
,
0
0
0
6
3
3
8
,
,
0
0
0
4
3
3
8
,
Diana Vein
Machucocha Lake
Macarena
Lula Vein
Macarena 2 Vein
Guadalupe Vein
Ramal Victoria Vein
Legend
Reserve/Resource area
Target
Maria Vein
Claudia System
Projection of Dome intrusion
Ramal 2 Vein
0
500
1,000
2,000
3,000
Metres
Concession Boundary
Geology
Recent volcanic
Dome rocks
Rocks pre-dating Dome intrusion
Vein identified only in depth
Reserve/Resource Area
Target
800,000
802,000
804,000
806,000
808,000
810,000
,
0
0
0
6
3
3
8
,
,
0
0
0
4
3
3
8
,
Hochschild Mining plc
Annual Report & Accounts 2006
23
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Selene Mine: The Selene mine is an underground
epithermal vein system that has been in
production since 2003. It is located in Southern
Peru in Apurimac on a 19,500 hectare site.
Production
Year ended 31 December
2006
2005 % change
Ore production (tonnes)
Average head grade silver (g/t)
Average head grade gold (g/t)
Concentrate produced (tonnes)
Silver grade in concentrate (kg/t)
Silver produced (koz)
Gold produced (koz)
Net silver sold (koz)
Net gold sold (koz)
359,686
397.76
2.85
3,812
33.96
4,162
28.34
3,705
26.9
288,919
399.11
3.43
3,559
29.15
3,335
27.48
3,277
26.4
24
0
(17)
7
17
25
3
13
2
The capacity at the Selene concentrator will be expanded
to 700 ktpa in the third quarter of 2007 to accommodate
for the extension of the Selene mine and for the
commencement of production at the Pallancata project.
In the first half of 2007, Selene will produce approximately
424 ktpa and in the second half 75% of plant capacity will
be used to treat ore from Selene while the remaining 25%
will be used to treat ore from Pallancata. The basic and
detailed engineering work for the expansion has been
compiled and construction is currently in progress and
on schedule.
As in Arcata, we also experienced a timing difference
between production and sale of concentrate at the
Selene mine which was above that of previous years.
Approximately 635 thousand ounces of silver and 3.5
thousand ounces of gold from the Selene mine remained
in inventory in December 2006 and will add to revenue
in 2007. We are converting the Selene concentrate into
silver/gold doré at Ares which will reduce the future
magnitude of the timing difference between production
and sales.
Revenue and costs
Year ended 31 December
2006
2005
% change
Revenue (US$000)
Percentage of consolidated revenue
63,713
30
37,307
23
71
Unit costs per tonne at Selene decreased by 20% in
2006, principally resulting from an increase in production
coupled with further development and mechanisation of
the operation. This effect significantly impacted our total
cost per tonne. Mine costs decreased by 33% as we were
able to improve productivity with technical solutions most
notably stope mechanisation. In addition, general services’
costs decreased by 24% as we were able to connect to the
national grid in 2006 as opposed to running the unit off
generators which had been the case previously. Finally,
administrative costs, a fixed cost, were 14% lower on a per
unit basis due to the increased tonnage of production and
a reduction in personnel services due to a decrease in the
workforce. The decrease in costs was offset by an increase
in royalties, up 64%, given higher average selling prices.
We do not anticipate any significant change in the per unit
cost at the Selene unit in 2007.
Capital expenditure
US$ million
Total capital expenditure
Sustaining
Expansion
Exploration
Year ended 31 December
2007 budget
2006
4.9
4.2
0.3
0.4
14.1
5.5
4.7
4.0
Sustaining capital expenditure will increase due to the
replacement of heavy equipment and a new pump
station in the mine. The increase in the expansion capital
expenditure at Selene is to fund mine developments.
Exploration and geology
Stated on an attributable basis
Resource (moz Ag eq)
Reserve (moz Ag eq)
See note on p.20.
As of
31 December
2006
As of
30 June
2006
% change
25.2
12.3
18.6
13.6
35
(10)
We significantly increased the resource base at Selene
and are now poised to increase Selene’s reserves in 2007.
In 2007, exploration expenses will be focused in
converting resources to reserves mainly by deepening
the Explorador mine workings. Additionally, we plan to
explore, with underground workings and drilling, a set
of parallel tensional veins which cross diagonally
between the Explorador and Tumiri Vein systems, as well
as the Tumiri and Timida Veins where we anticipate
expanding our reserve and resource base significantly.
We have also a number of exploration targets within the
Selene mining concession which will be explored using
surface drills during 2007. For more information on
Selene Mine Vein systems see page 117.
24
Hochschild Mining plc
Annual Report & Accounts 2006
Ownership
100%
Product
Doré and silver concentrate with gold content
Mining method
Conventional and mechanised cut and fill breast or
overhand stoping methods with a flotation plant
Planned expansions
Increase capacity to 700 ktpa by Q3, 2007
696,000
698,000
700,000
702,000
704,000
706,000
708,000
710,000
712,000
714,000
0
0
0
,
0
9
3
,
8
0
0
0
,
8
8
3
,
8
0
0
0
,
6
8
3
,
8
0
0
0
,
4
8
3
,
8
,
0
0
0
2
8
3
8
,
,
0
0
0
0
8
3
8
,
,
0
0
0
8
7
3
8
,
SELENE MINE
Surface Map
Huachuhuillca Breccia
Structures
N
Cuello Cuello
Caylloma
Pucanta
Explorador Vein System
0
500
1,000
2,000
3,000
4,000
5,000
Metres
Lola
Intermedia
Tumiri
Sofia Vein System
685000
690000
695000
700000
705000
710000
715000
0
0
0
0
9
3
8
0
0
0
5
8
3
8
0
0
0
0
8
3
8
0
0
0
5
7
3
8
1.25
0
2.5
5
7.5 10 12.5
Kilometres
N
0
0
0
,
0
9
3
,
8
0
0
0
,
8
8
3
,
8
0
0
0
,
6
8
3
,
8
0
0
0
,
4
8
3
,
8
,
0
0
0
2
8
3
8
,
Legend
Reserve/Resource area
Target
Concession boundary
Geology
Rhyodacitic dome
Vein outcrop
,
0
0
0
0
8
3
8
,
,
0
0
0
8
7
3
8
,
696,000
698,000
700,000
702,000
704,000
706,000
708,000
710,000
712,000
714,000
Hochschild Mining plc
Annual Report & Accounts 2006
25
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Development projects: We have three advanced
stage development projects scheduled to
commence production in 2007. These projects
exemplify our ability to execute our growth
strategy and enter new countries in the region.
Advanced stage development projects
Pallancata
The Pallancata silver/gold property is jointly owned with
International Minerals Corporation. We have a 60%
ownership interest and are the operator. Pallancata is
located in Southern Peru approximately 11 kilometres
from the Selene Vein system and is considered part of
the same geological environment.
Capital expenditure
US$ million
Total capital expenditure
Sustaining
Expansion
Exploration
Year ended 31 December
2007 budget
2006
1.6
–
1.6
–
23.0
–
19.0
4.0
We have commenced construction of the tunnels to
reach the Pallancata Vein which we plan to mine in the
third quarter of 2007. Future exploration targets exist
around the Mariana, Mercedes and San Javier structures.
We will need to build a 22 kilometre road to transport
the ore from Pallancata to Selene where we anticipate
commencing construction in March 2007. We are well
advanced in the process of building an electrical line
between the Selene mine and the Pallancata property,
which will completely supply the Pallancata property
with power.
The majority of the personnel at the Pallancata
mine will be contracted, similar to our other Peruvian
operations, and we are in the process of ramping
up on-site mine personnel.
We have applied for all the relevant mining permits
and although we have not received all approvals,
we are confident in our ability to ascertain these
before we begin production. We have submitted our
Environmental Impact Assessment to the regulatory
authority and having received some suggestions, are in
the process of implementing their recommendations.
We do not, however, anticipate any significant issues.
The expansion at the Selene plant to accommodate for
the ore from Pallancata is progressing according to the
original schedule. Initial production from Pallancata
is scheduled to begin in the third quarter of 2007 and
will amount to approximately 175 ktpa. In the current
expansion at the Selene plant, we are allowing for a
further expansion to be implemented in due course
and are constructing the plant accordingly. In the near
future, the ore from Pallancata will be sold from Selene
in the form of concentrate although we will evaluate the
possibility of converting the Pallancata concentrate into
doré at Ares, as we do with the Selene concentrate.
The overall budget for the Pallancata project has
increased due to an increase in the costs associated with
road construction to transport the concentrate from
Pallancata to Selene and costs associated with more
exploration to increase further the reserve base.
Exploration and geology
Stated on an attributable basis
Resource (moz Ag eq)
Reserve (moz Ag eq)
See note on p.20.
As of
31 December
2006
As of
30 June
2006
% change
29.5
14.3
21.7
6.8
36
110
The increase in reserve and resource is the result of
significant drilling activity on the Pallancata Vein and
the extension of the previously known mineralisation
along the vein both east and west with significant
widths. The mineralisation appears still open to the
west and further drilling is planned in 2007.
San José
The San José silver/gold property, located in southern
Argentina, is jointly owned with Minera Andes, S.A. We
have a 51% ownership interest and are the operator. We
plan to commence production at San José in the second
quarter of 2007.
In 2006, we completed a 21,241 metre drill programme
which increased our resources and reserves by 37% and
54% respectively and in 2007 we plan to complete an
additional 32,000 metre drill programme.
This year we plan to mine the Huevos Verdes Vein and
the nearby Frea Vein where we have developed
approximately nine kilometres of underground workings
and have completed the required infrastructure. While
construction of the underground mine is finished, we
26
Hochschild Mining plc
Annual Report & Accounts 2006
Pallancata attributable reserves
San José attributable reserves
June 2006
December 2006
+111%
6.8 moz
Ag Eq
June 2006
+54%
14.3 moz
Ag Eq
December 2006
18.4 moz
Ag Eq
28.3 moz
Ag Eq
are completing construction of the plant. We are
building the plant to accommodate approximately
275 ktpa. However, the plant has been designed to be
upgraded to 550 ktpa in the future. We have also
completed a significant portion of the construction of
the plant that will produce a silver/gold doré.
Initially, we project working with diesel generators at the
San José property; however, we are currently evaluating
alternative sources of energy in order to reduce our
future cost base.
During the last four months, we have hired all personnel
for the mine and are currently in the process of hiring
plant personnel. Unlike our Peruvian operations where
the majority of our personnel are contracted, the
majority of the workforce at San José will be employed
by the Group as is standard practice in Argentina.
All relevant mining permits in respect of the San José
property have been obtained. On the corporate social
responsibility front, we have established contact with
the local communities in order to begin forging a long
lasting, mutually beneficial relationship following the
approach taken at our Peruvian operations which over
time has proven successful.
Despite the difficulties of entering a new country,
especially one not characterised by an extensive mining
history, we are proud of the accomplishments made
thus far.
Capital expenditure
US$ million
Total capital expenditure
Sustaining
Expansion
Exploration
Year ended 31 December
2006
2007 budget
32.8
–
32.8
–
64.7
4.4
56.9
3.4
The overall budget for the San José project has increased
due to a more aggressive drilling campaign in the Kospi
vein and a planned increase in infrastructure. The
increase in infrastructure mainly includes more camps
and offices as well as an increase in the size of the
laboratory all of which were not considered in the
original scope.
Hochschild Mining plc
Annual Report & Accounts 2006
Exploration and geology
Stated on an attributable basis
Resource (moz Ag eq)
Reserve (moz Ag eq)
See note on p.20.
As of
31 December
2006
As of
30 June
2006
% change
35.9
28.3
26.3
18.4
37
54
At San José, reserves and resources have increased
significantly due to the drilling performed in the newly
discovered Kospi Vein. We will continue to explore the
property in 2007 focusing on the Kospi, Frea and Odin
veins where we have found positive results. Furthermore,
we have identified other structures which have been
initially tested and where we will drill in 2007 in order to
increase our reserve base further at the San José property.
Mina Moris
In early December 2006, we exercised our option to acquire
a 70% stake in the Mina Moris open pit mine in Chihuahua,
Mexico, which was owned and operated by Manhattan S.A.
de C.V. between 1996 and 1999. Exmin Resources Inc. (‘Exmin’),
our current partner, initially acquired the asset and currently
owns the remaining 30%.
Our current strategy with Mina Moris initially focuses on
bringing the open pit mine back into production in a very
cost efficient manner and mining the remaining surface
ore. However, we are most interested in the surface and
underground potential and geological characteristics of
the surrounding 30,000 hectare property package we
own, with our partner Exmin, plus an additional 50,000
hectare claim under approval by the authorities. This
property package is in one of Mexico’s most prolific gold
belts and is host to the most recent exploration and new
mine developments, namely Ocampo (Barrick Rio Tinto),
Mulatos (Gammom Lake) and Dolores (Minefinders). We
are committed to explore the area with increasing
intensity over the coming years.
We expect to commence production at Mina Moris in
the third quarter of 2007 at an initial capacity of 1,060
ktpa. The ore will be processed at a plant which came
with the property and is currently being refurbished.
Since the operation was initially commissioned in 1996,
some of the permits and licences have lapsed. However,
we have obtained the majority of the necessary permits
and licenses except for the health licence, blasting
licence and the authorisation to purchase explosive
material, for which we have already applied.
27
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Development projects continued: In addition
to our advanced stage development projects,
we have an extensive pipeline of other projects
and prospects, some of which we are confident
will become producing assets.
Mexico is a country with a long history of mining. The
local reaction to our entering the region has been positive
with the people of the local village optimistic about the
opportunities which will arise from our recommissioning
the mine. The local village provides a skilled workforce
having worked at the same operation not so long ago. In
line with our corporate culture, we believe in an emphasis on
social responsibility and have already begun a dialogue
with the local communities near the mine.
Capital expenditure
US$ million
Total capital expenditure
Sustaining
Expansion
Exploration
Exploration and geology
Stated on an attributable basis
Resource (m ounce Ag eq)
Reserve (m ounce Ag eq)
See note on p.20.
Year ended 31 December
2007 budget
2006
–
–
–
–
7.2
–
7.2
–
As of
31 December
2006
As of
30 June
2006
% change
8.6
6.2
8.9
0.0
(3)
–
Reserves and resources in the Mina Moris were
calculated based on a validation of data delivered by the
vendor. Our drilling and sampling has validated existing
data and has confirmed the reliability of the data to
calculate reserves and resources. However, we will
undertake a full audit in 2007 similar to those
undertaken at our other operations.
Early stage development project
San Felipe
The San Felipe project is located approximately six
kilometres west of San Felipe de Jesús in northern Sonora,
Mexico and consists of seven mining concessions covering
a total of approximately 548 hectares as well as two other
nearby projects, El Gachi and Moctezuma.
In mid-2006, we entered into an agreement with the
underlying owner Grupo Serrana whereby we have an
option to acquire up to 70% of all mining rights and
ownership of the San Felipe, Moctezuma and El Gachi
properties through an investment of US$33.3 million in
the property within five years of the date of the agreement.
Since late 2006 and into early 2007, we have engaged in
an accelerated and promising exploration project, including
regional surface mapping and confirmation drilling on
the original resource block in La Ventana ore body.
La Ventana ore body, based on information we received
from the previous owner, contained 4.5 million tonnes of
inferred resources averaging 7.5% zinc, 3.5% lead, 0.5%
copper and 80 g/t silver. After the initial drilling
campaign in excess of 8,000 metres on a portion of the
ore body (42 holes drilled of which 33 had assays at the
time of resource calculation), we have been able to confirm
inferred and indicated resources of 2.7 million tonnes
containing 6.8 % zinc, 3.2% lead, 0.4% copper and 71 g/t
silver. The ore body is still open at depth and to the west
and we expect to increase this resource significantly
during 2007 with an additional 8,000 metres drilling
programme during the first half of 2007. We expect to
deliver measured and indicated resources that will
justify the initial feasibility work in July 2007.
Additionally, we have identified, mapped and sampled
a number of exploration targets within the San Felipe
project. Two of them hold significant new potential.
In the Las Lamas ore body initial exploration drilling
has started and we have two wide intercepts with high-
grade zinc mineralisation. The previously explored San
Felipe ore body, has also returned high-grade results
in rehabilitated underground workings which suggest
significant potential still exists at depth. We will commence
exploration drilling on this target in due course.
Many other surface exposures of mineralisation have been
evidenced by regional surface mapping which indicates
that the San Felipe project is facing a mineralised district
with great exploration potential. We are currently in
advanced negotiations to secure the surrounding property
blocks to expand the scope of this very exciting project.
Review of prospects
El Gachi
Together with the San Felipe joint venture, we have
acquired rights on the El Gachi project located 70
kilometres northeast from San Felipe. El Gachi was
explored by Anaconda and Peñoles in the 1960s and
1970s and unverified historic information indicates
28
Hochschild Mining plc
Annual Report & Accounts 2006
The Santa Rita silver project is located south east of
our San José project in southern Argentina. At Santa Rita,
reconnaissance exploration has resulted in the discovery
of a mineralised structural breccia system localised by a
regional structural trend that hosts several other gold/
silver showings in the area. In keeping with similar low-
sulphidation epithermal precious metals occurrences,
the quartz vein textures and stratigraphic position
at Santa Rita are permissive for gold/silver grades
increasing at depth. We plan to drill both these properties
in the coming months.
Other prospects
At the San Luis del Cordero property in Mexico, we
completed mapping last year and expect to commence
drilling in 2007. According to the terms of the contract
with Exploraciones del Altiplano S.A. de C.V. where we
have agreed to undertake exploration with an option
to acquire all rights and ownership, we must spend
US$2.7 million over the next four years, of which we
have spent US$0.3 million within the first year.
We are seeking prospective partners for our San Martin
site in Peru as results were encouraging but below our
expectations and specified hurdle rates, and are
currently in negotiations with prospective partners.
At the Sierra de las Minas property in Argentina, we
encountered high-grade intercepts but due to a lack of
continuity we have decided to cease mapping, sampling
and drilling programmes.
grades of 400 to 900 g/t silver and greater than 12%
combined lead and zinc. We presently envision a
potential ranging from a minimum of two metres to
upwards of 10 metres at similar grades. Currently we are
reviewing the existing information and mapping the
area to design an initial drill programme to fast track
this high-grade silver and base metal project.
Claudia and Santa Rita
We signed a definitive joint venture agreement with
Mirasol Resource Ltd on 21 February 2007. The joint
venture agreement provides us with the option to
earn a 51% interest in each of the Claudia and Santa
Rita properties by spending US$6 million on exploration
at the Claudia Project and US$3 million on exploration
at the Santa Rita project over four years, and by
making cash payments totalling US$950,000. We
may increase our interest to 65% in either, or both,
projects by completing a bankable feasibility study,
and may further increase our ownership to 75% by
providing mine financing on commercial terms to
Mirasol. At each decision point, Mirasol may elect
to retain its participating interest and fund its share
of expenditures.
The Claudia property is adjacent to the producing Cerro
Vanguardia mine in Argentina and is hosted in a similar
regional setting. The principal vein system at Claudia
is exposed within an erosional window exposing
prospective Chon Aike volcanic rocks. Exploration to date
has identified three gold/silver mineralised zones, where
each hosts multiple quartz veins or veinlets of classic,
epithermal style. The three zones lie within a structurally
complex area some three kilometres in strike length
and one kilometre wide, and appear to represent distinct
erosional levels exposed by block faulting. At this
point in time, the property has not undergone
any drilling activity.
Hochschild Mining plc
Annual Report & Accounts 2006
29
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Financial Review: Strong financial results with
revenue up 31%, EBITDA up 52%, profits up 89%,
and cash flow up over 300%.
Background
The consolidated financial statements have been prepared
in accordance with International Financial Reporting
Standards (‘IFRS’) as adopted for use in the European
Union (‘EU’). The Group’s Financial Statements are also
consistent with IFRS issued by the IASB. The Group’s transition
date to IFRS is 1 January 2005. The key accounting policies
adopted by the Group are set out on pages 61 to 67.
Key financial performance indicators
(stated before exceptional items)
US$000 (unless stated)
2006
2005 % change
Year ended 31 December
Revenue
Attributable after tax profit1
EPS2
Adjusted EBITDA3
Cash costs (US$/ounce Ag co-product)4
Cash costs (US$/ounce Au co-product)4
Silver production (koz)
Gold production (koz)
211,246
46,646
0.19
107,617
3.57
153
11,604
196
161,235
24,719
0.11
70,650
2.77
159
10,550
232
31
89
73
52
29
(4)
10
(16)
Notes
1
Attributable after tax profit is calculated as the profit for the year attributable
to the equity shareholders of the Company from continuing operations before
exceptional items.
EPS is calculated using the weighted average number of shares outstanding
for the period (2006: 24 2.9 million; 2005: 230.0 million). EPS from continuing
operations after exceptional items was US$0.17 and US$0.15 per share for 2006
and 2005, respectively.
Adjusted EBITDA is calculated as profit from continuing operations before
exceptional items, net finance costs and income tax plus depreciation,
amortisation and exploration costs other than personnel and other expenses
(see reconciliation on page 32).
Cash costs are calculated to include cost of sales, treatment charges, and selling
expenses less depreciation included in cost of sales.
2
3
4
Summary of financial performance
In our discussion of financial performance we remove
the effect of exceptional items and in our income
statement show the results both pre and post such
exceptional items. We consider events to be exceptional
when they are significant and which, due to their nature
or the expected infrequency of the events giving rise to
them, need to be disclosed separately.
Revenue for the year ended 31 December 2006
amounted to US$211 million, a 31% increase from 2005
principally driven by an increase in realisable commodity
prices and offset by the number of gold ounces sold. Our
average realisable price for silver and gold increased 68%
and 25%, respectively in 2006. The number of silver
ounces sold was flat in 2006 while gold ounces sold
decreased 18% year-over-year.
Profit from continuing operations before exceptional
items, net finance costs and income tax was up 133%
from US$32 million in 2005 to US$75 million in 2006
with the margin expanding from 20% to 36% during
the same period. Adjusted EBITDA, a key performance
indicator for measuring underlying operating efficiency,
rose 52% from 2005 to US$108 million in 2006
corresponding to an adjusted EBITDA margin of 51%. The
increase in profit and adjusted EBITDA was fuelled by
higher commodity prices and a decrease in the weighted
average cost per tonne of our three operating mines as
is evidenced by the significant margin expansion.
Attributable after tax profit from continuing operations
increased by 89% to US$47 million in 2006. Our overall
strong performance is attributable to an increase in
commodity prices across both silver and gold, stable
production and strong cost control at each of the three
operating mines.
Despite industry wide cost pressure, our weighted average
cost per tonne decreased 2% in 2006 principally driven
by a significant cost reduction at the Selene operation.
However, our silver cash cost increased on a co-product
basis. Cash costs on a co-product basis must be considered
in conjunction with the co-product commodity because
as the percentage sales of one commodity increase
the other decreases, resulting in a similar effect on the
respective cash costs. In 2006, we experienced an increase
in co-product cash cost for silver from US$2.77 per ounce
in 2005 to US$3.57 per ounce principally driven by a
higher percentage of silver sales (68% increase in revenue
from silver and 2% increase in revenue from gold) and
consequently a greater amount of cost attributed to
silver production, and to a lesser extent, by a decrease in
average head grades mined for both silver and gold. On
the other hand, co-product cash cost for gold decreased
from US$159 per ounce in 2005 to US$153 per ounce in
2006 while by-product cash cost for gold went from
negative US$21 per ounce to negative US$273 per ounce.
We do not typically look at silver on a by-product basis.
Net debt (see page 33) decreased significantly in 2006
as we raised net proceeds of US$469 million from the
Listing and used a portion of the proceeds to pay down
long-term debt.
30
Hochschild Mining plc
Annual Report & Accounts 2006
2006 revenue breakdown by operation
2006 revenue breakdown by commodity
1 Ares 44%
2 Selene 30%
3 Arcata 26%
(cid:39)
(cid:40)
1 Silver 56%
2 Gold 44%
(cid:39)
(cid:41)
(cid:40)
Our working capital position improved in 2006 as a
result of an increase in trade payables which was offset
by the increase in inventory.
Cash flow from operations increased over 300% in
2006 from US$30 million in 2005 to US$126 million
in 2006. This increase is largely due to higher
realisable commodity prices, increased profitability
and a release of cash from working capital, most
notably trade receivables and trade payables.
Dividends
The Directors recommend a final dividend of
US$0.00740 per share which represents one third
of the Company’s attributable profit after tax post
exceptional items in respect of the two month
period from Listing until 31 December 2006.
Dividend dates
Ex-dividend date
Record date
Deadline for return of currency election forms
Payment date
2007
13 June
15 June
19 June
6 July
As stated at the time of the Listing, the Company’s
dividend policy takes into account the profitability of
the business and underlying growth in earnings of the
Company, as well as its capital requirements and cash
flows, while maintaining an appropriate level of dividend
cover. Interim and final dividends will be paid
in the approximate proportions of one-third and
two-thirds of the total annual dividend, respectively.
Dividends will be declared in US dollars. Unless a
shareholder elects to receive dividends in US dollars,
they will be paid in UK pounds sterling with the US
dollar dividend being converted into UK pounds sterling
at exchange rates prevailing at the time of payment.
Revenue
Our full year revenue from continuing operations
increased 31% to US$211 million (2005: US$161 million)
due to higher realised commodity prices and offset
by a decrease in the number of gold ounces sold.
We recognise revenue from concentrate when the risk
passes to the customer which under the contract with
Peñoles is when the concentrate is loaded onto the ship
Hochschild Mining plc
Annual Report & Accounts 2006
in Peru. We were not able to recognise the sale of
approximately 1.3 million ounces of silver and 5.3
thousand ounces of gold as revenue in 2006. However,
we anticipate the magnitude of this timing effect will
normalise in 2007 to that of previous years.
Silver
Revenue from silver increased by 68% in 2006 to US$118
million (2005: US$70 million). This change reflects a
higher realised silver price, US$11.4 per ounces in 2006
(2005: US$6.8 per ounce). Total net silver ounces sold
were flat in 2006 with 10,403 thousand ounces sold
versus 10,366 thousand ounces in 2005. A timing
difference between production and sales of concentrate
at the Arcata and Selene units left approximately 1.3
million ounces of silver in stock, most of which will
be sold in 2007. In 2006, revenue from silver accounted
for 56% of consolidated revenue compared to only
44% in 2005.
Gold
Revenue from gold was up modestly in 2006 to US$92
million (2005: US$90 million). This change in gold
revenue was driven by a 18% decrease in the number of
gold ounces sold and offset by a higher realisable gold
price, US$487 per ounce in 2006 (2005: US$391 per
ounce). Total net ounces of gold sold decreased from
231 thousand ounces in 2005 to 190 thousand ounces
in 2006 as a result of the anticipated decrease in
the ore grade at Ares. Similar to silver, we also
experienced an increase in gold stocks in concentrate
with approximately 5.3 thousand ounces remaining,
most of which will likely be sold in 2007. In 2006,
revenue derived from the sale of gold accounted for
44% of consolidated revenue compared to 56% in 2005.
Hedging
We have a number of forward sales contracts in place for
both silver and gold which were entered into as part of
the security package for a loan facility in 2003, the last of
which is scheduled to expire in June 2007.
Silver sales hedged (koz)
Gold sales hedged (koz)
Silver average sale price (US$/ounce)
Gold average sale price (US$/ounce)
2006
2005
2,468
102
11.4
487
2,037
143
6.8
391
31
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Financial Review: We believe our exploration
budget exemplifies our commitment to
increasing our reserve life and discovering
new prospects in our region.
In the first half of 2007, approximately 60 thousand
ounces of gold sales and 880 thousand ounces of silver
sales from Ares were hedged at an average hedge price
of US$418 per ounce and US$10.7 per ounce, respectively.
Our current policy is not to hedge exposure to the
underlying commodity prices.
Gross profit
Our gross profit increased 53% to US$136 million in 2006
(2005: US$89 million). This was driven not only by higher
commodity prices but also by increased efficiencies,
which is evidenced by the significant gross margin
expansion. Our gross margin increased from 55% in
2005 to 64% in 2006 and is principally a reflection of
our weighted average production cost decreasing 2% in
2006. At the Arcata operation the increase in unit costs
per tonne was driven principally from an increase in
mine costs and royalties although offset by a decrease
in geology costs. Furthermore, as mentioned above,
we experienced a modest increase in the per unit
cost at Ares as a result of an increase in plant and
administrative costs and offset by a decrease in mine
and general services costs. At Selene, the unit cost
decreased significantly as a result of an increase in
production coupled with further development and
mechanisation of the operation although offset by
an increase in mining royalties. It is our fundamental
corporate focus on operational efficiency and a rigorous
system of cost controls that makes us one of the lowest
cash cost producers globally, and historically has enabled
us to remain profitable throughout the commodity cycle.
Administrative expenses
Administrative expenses increased in 2006 to US$39
million (2005: US$25 million). Our administrative costs
include all those costs associated with the corporate
headquarters as well as certain indirect costs associated
with the operating mines. The increase in administrative
expenses was driven principally by an increase in
personnel expenses, workers’ profit sharing and third-
party services. Personnel expenses increased mainly due
to a special bonus payment to management. Workers’
profit sharing is a function of an increase in profit before
tax and is not considered a metric over which we have
significant control. Workers’ profit sharing is governed by
Peruvian legislation and is equivalent to 8% of taxable
income each year. The expenses associated with
third-party services were incurred during the Listing
process to restructure the Company and ultimately
increase efficiencies both at operating and managerial
levels. We believe this increase represents a step
change in overhead costs and is a reflection of the
incremental annual costs associated with being a
public company.
Exploration expenses
Exploration expenses decreased 29% in 2006 to US$20
million (2005: US$28 million). This decrease was due
principally to the winding down of the exploration
phase of the San José project and the fact that we
capitalise underground development and expense costs
associated with pre-feasibility exploration. In addition,
we had a lower level of mine site exploration at Selene,
offset by an increased effort in exploring the Pallancata
project as we prepare for production start-up and an
increase in mine site exploration at Arcata, as we are
placing additional emphasis on proving up additional
reserves at the Arcata site.
Profit from continuing operations and adjusted EBITDA
Adjusted EBITDA was up 52% from 2005 to US$108
million in 2006 (2005: US$71 million) with margins
expanding from 44% in 2005 to 51% in 2006. Below
is a reconciliation of the adjusted EBITDA calculation:
Adjusted EBITDA reconciliation
(US$000, unless stated)
2006
2005
% change
Year ended 31 December
Profit from continuing operations
before exceptional items,
net finance and income tax
Operating margin, %
Plus:
Depreciation in cost of goods sold
Depreciation in admin expenses
Exploration expenses
Less:
Personnel and other in
exploration expense
75,063
36
16,435
993
19,863
32,281
20
14,605
2,001
28,057
4,737
6,294
133
Adjusted EBITDA
Adjusted EBITDA margin, %
107,617
51
70,650
44
52
32
Hochschild Mining plc
Annual Report & Accounts 2006
Net cash 2005
Net cash 2006
(cid:75)(cid:73)(cid:26)(cid:38)(cid:38)(cid:38)
(cid:30)(cid:45)(cid:47)(cid:34)(cid:44)(cid:43)(cid:39)(cid:31)
(cid:40)(cid:34)(cid:42)(cid:44)(cid:45)
(cid:30)(cid:41)(cid:39)(cid:34)(cid:38)(cid:46)(cid:47)(cid:31)
(cid:30)(cid:43)(cid:38)(cid:34)(cid:47)(cid:47)(cid:41)(cid:31)
(cid:75)(cid:73)(cid:26)(cid:38)(cid:38)(cid:38)
(cid:42)(cid:38)(cid:43)(cid:34)(cid:43)(cid:42)(cid:39)
(cid:42)(cid:41)(cid:43)(cid:34)(cid:43)(cid:42)(cid:41)
(cid:30)(cid:40)(cid:45)(cid:34)(cid:39)(cid:39)(cid:42)(cid:31)
(cid:30)(cid:40)(cid:34)(cid:46)(cid:46)(cid:46)(cid:31)
(cid:68)(cid:91)(cid:106)(cid:1)(cid:89)(cid:87)(cid:105)(cid:94)(cid:1)
(cid:66)(cid:101)(cid:100)(cid:93)(cid:35)(cid:106)(cid:91)(cid:104)(cid:99)(cid:1)(cid:88)(cid:101)(cid:104)(cid:104)(cid:101)(cid:109)(cid:95)(cid:100)(cid:93)(cid:1)
(cid:57)(cid:87)(cid:105)(cid:94)(cid:1)(cid:87)(cid:100)(cid:90)(cid:1)(cid:89)(cid:87)(cid:105)(cid:94)(cid:1)(cid:91)(cid:103)(cid:107)(cid:95)(cid:108)(cid:87)(cid:98)(cid:91)(cid:100)(cid:106)(cid:105)
(cid:73)(cid:94)(cid:101)(cid:104)(cid:106)(cid:35)(cid:106)(cid:91)(cid:104)(cid:99)(cid:1)(cid:88)(cid:101)(cid:104)(cid:104)(cid:101)(cid:109)(cid:95)(cid:100)(cid:93)(cid:1)
(cid:68)(cid:91)(cid:106)(cid:1)(cid:89)(cid:87)(cid:105)(cid:94)(cid:1)
(cid:66)(cid:101)(cid:100)(cid:93)(cid:35)(cid:106)(cid:91)(cid:104)(cid:99)(cid:1)(cid:88)(cid:101)(cid:104)(cid:104)(cid:101)(cid:109)(cid:95)(cid:100)(cid:93)(cid:1)
(cid:57)(cid:87)(cid:105)(cid:94)(cid:1)(cid:87)(cid:100)(cid:90)(cid:1)(cid:89)(cid:87)(cid:105)(cid:94)(cid:1)(cid:91)(cid:103)(cid:107)(cid:95)(cid:108)(cid:87)(cid:98)(cid:91)(cid:100)(cid:106)(cid:105)
(cid:73)(cid:94)(cid:101)(cid:104)(cid:106)(cid:35)(cid:106)(cid:91)(cid:104)(cid:99)(cid:1)(cid:88)(cid:101)(cid:104)(cid:104)(cid:101)(cid:109)(cid:95)(cid:100)(cid:93)(cid:1)
Finance income
Finance income increased significantly in 2006 to US$7
million (2005: US$4 million) principally due to additional
interest earned on the net proceeds from the Listing.
This increase was offset by a decrease in the interest
on loans to related parties as the loans were repaid
mid way through the year prior to the Listing.
Income tax
The weighted average statutory income tax rate was
25% for 2005 and 30% for 2006. This change is due to a
change in the weighting of profit/(loss) before tax in the
various jurisdictions in which the Company operates.
The effective tax rate for 2006 was 42% which was
significantly higher than that of the previous year at 19%
principally due to our recognising a significant deferred
tax asset in 2005 related to tax losses incurred during
the development of San José and Arcata, in addition
to the introduction of taxable interest in the United
Kingdom, an increased weighting of income arising
in Peru and more withholding tax paid as a result of
dividends declared in Peru.
Minority interest
The loss attributable to minority interest in both 2005
and 2006 consists predominantly of that portion of the
pre-feasibility costs for the San José project of which the
Company has a 51% ownership with Minera Andes S.A.
owning the remaining 49%.
Exceptional items
We consider events to be exceptional when they
are significant and which, due to their nature or
the expected infrequency of the events giving rise
to them, need to be disclosed separately.
In 2006, prior to Listing, exceptional items in other
expenses principally included a US$3.0 million asset
impairment at Sipan, one of our former operations
which was closed in 2003, and a loss on the sale of
investments of US$2.2 million which was incurred when
the Company disposed of shares in Inversiones
Pacasmayo prior to the Listing.
In addition, there was a US$1.0 million loss on the
sale of the Group’s wholly owned subsidiary, Mauricio
Hochschild & Cia. Ltda. S.A.C.
Cash flow and balance sheet review
Our operations generated US$126 million of cash flow
in 2006 which was up 314% from 2005 (2005: US$30
million). This increase is principally driven by an increase
in the underlying profit from continuing operations
coupled with a shift in working capital which was
primarily due to an increase in payables and a decrease
in receivables.
Working capital
US$000
Current assets
Year ended 31 December
2005
2006
Inventories
Trade and other receivables
16,405
49,726
Current liabilities
Trade and other payables
Pre-shipment loans
Working capital
64,140
26,894
(24,903)
10,499
81,1 06
31,664
18,800
41,1 41
Net debt
In 2006, as a result of the proceeds raised in the Listing
and the repayment of long-term debt at the end of
2006, we were able to improve the strength of our
balance sheet. The majority of the long-term debt
currently outstanding corresponds to a loan at one of
our subsidiaries from our joint venture partner as a way
of financing its 49% share of the San José project. Upon
consolidation we account for the portion of the loan
outstanding to our partner. We exclude short-term
pre-shipment loans from net debt as we consider
these loans to be more closely related to working
capital requirements as they are secured by inventory
and receivables.
US$000
Cash and cash equivalents
Long-term borrowings
Short-term borrowings less
pre-shipment loans
Net debt/(net cash)
Year ended 31 December
2005
2006
( 435,543)
27,114
2,888
(405,541)
(2,467)
31,089
50,993
79,615
Hochschild Mining plc
Annual Report & Accounts 2006
33
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Business Review continued
Financial Review: Our risk management
framework aims to achieve best practices
and internal controls in line with other
international mining companies listed
on the London Stock Exchange.
Risk management
Overview
The Group is exposed to a variety of risks and
uncertainties which may have a financial impact on
the Group and which also impact the achievement
of social, economic and environmental objectives.
These risks include strategic, commercial,
operational and financial risks and are further
categorised into risks areas to facilitate consolidated
risk reporting across the Group.
A high level review of major risks faced by the Company
was conducted prior to the IPO and has been further
refined since. The resulting risk matrix has been reviewed
by the Executive Committee and further processes for
more detailed identification, evaluation and management
of risks are under consideration. A risk manager responsible
for identifying potential risks and proposing procedures
and controls to mitigate such risks is being recruited. The
Board via the Audit Committee continues to monitor the
internal control environment of the Group alongside the
development of risk management processes.
Foreign currency risk
The Group principally produces silver and gold which
are typically priced in US dollars. A proportion of the
Group’s costs are incurred in Nuevo Sol. Accordingly, the
Group’s financial results may be affected by exchange
rate fluctuations between the US dollar and the Nuevo
Sol. The Group does not use derivative instruments
to manage its foreign currency risks. As of 31 December
2006, the Group has acquired liquidity funds in
UK pounds sterling which generate foreign
exchange movements.
Commodity price risk
Silver and gold prices have a material impact on the
Group’s results of operations. Prices are significantly
affected by changes in global economic conditions
and related industry cycles. Generally, producers of
silver and gold are unable to influence prices directly;
however, the Group’s profitability is achieved through
the control of its cost base and the efficiency of its
operations. The Group manages its commodity price risk
mainly with fixed price sales commitments or with caps
and floors built into sales contracts. The Group is going
to end its current fixed price sales commitments during
the first six-month period of 2007. Management has
decided that the Group will not enter into additional
commitments in order to obtain full benefit from
possible price increases in the future, maintaining its
efforts of lowering costs in order to assure profitability
in case of an eventual decrease in the prices.
Credit risk
Credit risk arises from debtors’ inability to make
payment of their obligations to the Group as they
become due (without taking into account the fair value
of any guarantee or pledged assets); and by non-
compliance by the counterparties in transactions in cash,
which is limited to balances deposited in banks and
accounts receivable at the balance sheets date. To manage
this risk, the Group deposits its surplus funds in highly-
rated financial institutions, establishes conservative
credit policies and constantly evaluates the conditions of
the market in which it conducts its activities. Consequently,
the Group does not expect to incur significant losses on
account of credit risk. Credit risk concentrations exist
when changes in economic, industrial or geographic
factors take place, affecting in the same manner the
Group’s counterparties whose added risk exposure is
significant to the Group’s total credit exposure. The
Group’s portfolio of customers is concentrated in three
customers domiciled in foreign countries that represent
85% of the total net sales during the year 2006. Derivatives
are executed with different counterparts to avoid
concentrations of credit risk.
Liquidity risk
Liquidity risk arises from the Group’s inability to obtain
the funds it requires to comply with its commitments
under financial instruments including the inability to
sell a financial asset quickly at a price close to its fair
value. Management believes that it will have access to
adequate credit on reasonable terms from highly rated
financial instruments.
Interest rate risk
The Group has financial assets and liabilities which are
exposed to interest rate risk. Changes in interest rates
impact primarily loans and borrowings by changing
either their fair value (fixed rate debt) or their future cash
flows (variable rate debt). The Group does not have a
formal policy of determining how much of its exposure
should be at fixed or at variable rates. However, at the
34
Hochschild Mining plc
Annual Report & Accounts 2006
time of taking new loans or borrowings management
uses its judgment to decide whether it believes that a
fixed or variable rate borrowing would be more favourable
to the Group over the expected period until maturity.
on financial instruments classified as fixed rate is fixed
until the maturity of the instrument. The other financial
instruments of the Company are non-interest bearing
and are therefore not subject to interest rate risk.
Interest on financial instruments classified as floating
rate is re-priced at intervals of less than one year. Interest
US$000
Fixed rate
Amounts due to minority shareholders
Floating rate
Cash
Time deposits
Liquidity funds
Secured bank loans
Loans to minority shareholders
Assigned funds
US$000
Fixed rate
Amounts due to minority shareholders
Floating rate
Cash
Time deposits
Liquidity funds
Secured bank loans
Loans to minority shareholders
Assigned funds
As of 31 December 2006
Within
1 year
Between
Between
1 and 2 years 2 and 5 years
Over
5 years
Total
(1,445)
(80)
(26,738)
–
(28,263)
997
3,542
414,527
(28,017)
2,436
–
–
–
–
(296)
8,166
6
–
–
–
–
–
–
–
–
–
–
–
–
997
3,542
414,527
(28,313)
10,602
6
As of 31 December 2005
Within
1 year
Between
Between
1 and 2 years 2 and 5 years
Over
5 years
–
(13,108)
–
33,102
(160)
125
91
–
(48,310)
–
–
–
–
1,699
(17,676)
–
–
–
–
–
(295)
–
–
–
–
–
–
Total
(13,108)
33,102
(160)
125
91
1,699
66,281
Hochschild Mining plc
Annual Report & Accounts 2006
35
Board of Directors
Job:
08724 H_ANNUAL_FNT_AW
Proof: 12
Proof Read by:
Operator: tim
Server: Studio II
Date:
04/05/07
Set-up: Gemma
First Read/Revisions
Board of Directors: We have established a world
class Board combining Latin American business
expertise with significant UK plc knowledge.
Alberto Beeck (50)
Executive Director, Strategy & Corporate Development
Alberto Beeck commenced working with the
Hochschild Mining Group in 1998. Prior to this, he
served as managing director and head of Latin
American Investment Banking for Barings, Inc. in New
York and Baring Brothers, in London. From 1988 to 1992,
Alberto served in the London Corporate Finance Group
of Dillon, Read Ltd, as vice president with responsibility
for Spain and Portugal. He also served as vice president
of Lehman Brothers, New York, from 1982 to 1988 in
the International Corporate Finance and Government
Advisory Group. He received a BSc in Mechanical
Engineering from Purdue University in 1978, and
an MBA in Finance and International Business from
Columbia University in 1982.
Eduardo Hochschild (43)
Executive Chairman
Eduardo Hochschild joined the Hochschild Mining
Group in 1987 as safety assistant at the Arcata unit,
becoming head of the Hochschild Mining Group in
1998 and Chairman in 2006. He graduated from Tufts
University in Boston with a Bachelor of Science degree
in Physics and Mechanical Engineering. He holds
numerous directorships with COMEX Peru, the
Banco de Crédito del Peru, the Sociedad Nacional
de Minería y Petróleo, the Asian Pacific Economic
Council Business Advisory Committee, the
Conferencia Episcopal Peruana, Pacífico Peruano
Suiza, TECSUP, the Universidad Nacional de Ingeniería
and the Universidad de Ciencias Aplicadas.
Roberto Dañino (55)
Deputy Chairman and Executive Director
Roberto Dañino joined the Hochschild Mining Group in
1995, where he remained until 2001 when he left to
serve in the Peruvian Government as Prime Minister
and later as Peru’s Ambassador to the United States.
From 2003 to 2006, he was Senior Vice President and
General Counsel of the World Bank Group and
Secretary General of ICSID. Previously, he was a partner
of Wilmer, Cutler & Pickering in Washington DC.
He was also founding General Counsel of the
Inter-American Investment Corporation (IIC). He
holds Law degrees from Harvard Law School and
the Pontificia Universidad Católica del Peru.
36
Hochschild Mining plc
Annual Report & Accounts 2006
Sir Malcom Field (69)
Senior Non-Executive Director
Nigel Moore (62)
Non-Executive Director
Nigel Moore is a Chartered Accountant. Since 2003,
he has been chairman of TEG Environmental plc. He is
currently a non-executive director of The Vitec Group
plc, IntelligentComms Limited and Ascent Resources
plc. From 1973 to 2003, Nigel was a partner at Ernst
& Young and was the managing partner of Ernst &
Young’s London office from 1985 to 1987, a senior
partner attached to the Chairman’s Office (Europe)
from 1987 to 1989 and the regional managing partner
for Eastern Europe and Russia from 1989 to 1996. From
1996 to 2003, he was a client service partner for the oil
and gas sector.
Dionisio Romero (70)
Non-Executive Director
Dionisio Romero is chairman and chief executive
officer of the financial services holding company,
Credicorp Ltd. He is chairman of Banco de Crédito del
Peru, Banco de Crédito de Bolivia and Atlantic Security
Bank, and vice chairman of Pacífico Peruano Suiza.
Dionisio is also a director of Cementos Pacasmayo.
He graduated with a BA degree in Economics from
Pomona College, California in 1957, and earned an MBA
from Stanford University in 1959.
Sir Malcolm Field is currently the senior non-executive
director of Aricom plc and a non-executive director of
both Odgers Ray & Berndtson and Linden Homes.
From 2002 to 2006, Sir Malcolm served as chairman
of Tube Lines Limited, one of the London Underground
consortia, and from 2001 to 2006, was an external
policy adviser to the Department of Transport in the
United Kingdom. From 1982 to 1993, he was group
managing director of WH Smith plc and from 1993
to 1996 he served as chief executive. From 1996 to
2001, Sir Malcolm was chairman of the Civil Aviation
Authority and he has also held appointments as a non-
executive director in a number of companies, including
Scottish and Newcastle plc, MEPC, The Stationery Office
and Evolution Beeson Gregory.
Jorge Born Jr. (44)
Non-Executive Director
Jorge Born Jr. joined Bomagra S.A. in 1997 as chief
executive officer, and since 2001 has been president
and chief executive officer of the same organisation.
Jorge is also deputy chairman of Caldenes S.A., a
subsidiary of Bomagra S.A. Prior to joining Bomagra
S.A. in 1997, he served as head of Bunge Limited’s
European operations from 1992 to 1997 and as head
of Bunge Limited’s UK operations from 1989 to 1992.
He has been a director and deputy chairman of Bunge
Limited since 2001 and director of Mutual Investment
Limited since 1997 and its deputy chairman since 2001.
Jorge has also been a director of Brasif (Brazil Duty
Free) of Rio de Janeiro since 2006. He received a BSc in
Economics from the Wharton School of the University
of Pennsylvania in 1983.
Hochschild Mining plc
Annual Report & Accounts 2006
37
Corporate Structure
Board
Executive Committee
Chief Executive
of Exploration
Chief Operating Officer
Chief Financial Officer
Legal Manager
* Members of Executive Committee: Messrs Hochschild, Dañino, Beeck, Aramburu, Benavides, Rosado and Bustamante.
Mr Palma serves as Senior Adviser to the Executive Committee.
Miguel Aramburú (43)
Chief Operating Officer
Javier Durand (40)
Legal Manager
Mr Aramburú joined the Hochschild Mining Group
in 1995, when he was appointed General Manager of
Compañia Minera Pativilca. He was appointed Chief
Financial Officer of the Hochschild Mining Group in 2002
and General Manager of the Mining Division in 2006.
Mr. Aramburú graduated from the Pontificia Universidad
Católica del Peru in 1987 in Industrial Engineering and
holds an MBA from Stanford University.
Mr Durand has 13 years of legal experience in the mining
industry. He joined the Hochschild Mining Group in 1994
and has been the Legal Manager of the Hochschild
Mining Group since 1998. Mr Durand received a Law
degree from the Universidad de Lima, has participated
in the Management Program for Lawyers at Yale School
of Management, and has an MBA from the Universidad
del Pacífico.
Jorge Benavides (54)
Chief Executive of Exploration and Geology Officer
José Augusto Palma (39)
Senior Adviser, Executive Committee
Mr Benavides has thirty years’ experience in the mining
industry. He joined Hochschild Mining Group in 2001 and
has been head of Exploration and Geology since 2005.
Previously, he spent eight years working for the Phelps
Dodge Mining Company in South America and Mexico,
including as Exploration Manager for the Andean Region.
Mr Benavides holds an MSc in Ore Deposits and
Exploration from Stanford University and a BSc in
Geological Engineering from the Colorado School
of Mines.
Ignacio Bustamante (35)
General Manager, Operations Peru
Mr Bustamante joined the Hochschild Mining Group in
1992. Prior to his current position, he worked for Zemex
Corporation, a subsidiary of Cementos Pacasmayo,
based in Atlanta, Georgia, serving first as Chief Financial
Officer and Vice President of Business Development and
later as its President. Mr Bustamante holds a BSc in
Business and a BSc in Accounting from Universidad del
Pacífico in Peru and an MBA from Stanford University.
Mr Palma joined the Company in July 2006 after a 13
year legal career in the United States, where he was a
partner at the law firm of Swidler Berlin, and later
worked for the World Bank. He also served two years in
the Government of Peru. Mr Palma has Law degrees
from Georgetown University and the Universidad
Iberoamericana in Mexico, and is admitted to practice as a
lawyer in Mexico, New York and the District of Columbia.
Ignacio Rosado (37)
Chief Financial Officer
Mr Rosado has been the Chief Financial Officer of the
Hochschild Mining Group since 2005. Previously, he
was Senior Engagement Manager for Latin America for
McKinsey & Company from 2000-05. Mr Rosado began
his career in banking having worked for Banco Wiese
Sudameris in Peru (1992-1994) and in Banco de Crédito
del Peru. Mr. Rosado holds a MBA from the University of
Michigan Business School and a BSc in Economics from
the Universidad del Pacífico in Peru.
38
Hochschild Mining plc
Annual Report & Accounts 2006
Corporate Governance Report
Introduction
The Hochschild Mining plc Board believes that its participation in an established investment market carries significant responsibility to
manage the Company transparently and in a manner appropriate to a successful business. Accordingly, the Board fully supports good
corporate governance and is determined to comply, wherever possible, in the interests of shareholders and other stakeholders, with the
Combined Code on Corporate Governance. This is demonstrated by the fact that the Company has taken the following substantial steps
to comply with the Combined Code since listing on the London Stock Exchange on 8 November 2006:
•
•
•
•
•
•
•
•
•
•
The Board has approved a written statement setting out the role and responsibilities of the Executive Chairman, Deputy Chairman
and Senior Independent Director.
The Board has appointed four Non-Executive Directors who it considers to be independent thus ensuring that independent
Non-Executive Directors form a majority of the Board.
The Board has adopted a Schedule of Matters reserved for its approval. It has also adopted formal procedures that ensure that all
Directors have access to the Company Secretary and may take independent professional advice, if necessary, in the course of their duties.
A Senior Independent Director has been appointed and is available to shareholders.
Board procedures provide for the Chairman to ensure shareholder views are communicated to the Board, and for Non-Executive
Directors to meet with shareholders.
An Audit Committee has been established consisting of three independent Non-Executive Directors and its terms of reference have
been adopted. The Audit Committee has reviewed the Group’s financial reporting procedures, the financial statements for the year
ended 31 December 2006 and the Group’s system of internal control.
The Corporate Social Responsibility (CSR) Committee has been established consisting of the Chairman, Deputy Chairman and the
Senior Independent Director and its terms of reference have been adopted. The CSR Committee has commissioned an audit of the
Group’s compliance with health, safety, environmental and community policies and procedures.
A Remuneration Committee has been established consisting of three independent Non-Executive Directors and its terms of reference
have been adopted.
The Remuneration Committee has determined that performance-related elements will comprise a significant percentage of the
Executive Directors’ remuneration.
A Nominations Committee has been established consisting of a majority of independent Non-Executive Directors and its terms of
reference have been adopted.
Statement of Compliance
The Directors intend to ensure that they continue to comply with the recommendations of the Combined Code and firmly believe that
they do so, as demonstrated by the above described actions, save that:
•
•
•
the Chairman is not independent within the terms of the Combined Code;
the responsibilities of the Chairman and Chief Executive are not separated as required by the Code; and
neither Board evaluation nor an evaluation of the Chairman have yet been undertaken.
Notwithstanding, the Board is firmly of the opinion that, consistent with Main Provision A.2 of the Combined Code, the current
governance structure of the Company does not allow any one person to have unfettered powers of decision, as discussed below.
The basis for this opinion centres on the fact that there are checks and balances created by the role of the Executive Committee,
the corporate governance responsibilities of the Deputy Chairman and the Senior Independent Non-Executive Director, and the
undertakings given within the Relationship Agreement.
The Board
The Board consists of the Executive Chairman, Mr Eduardo Hochschild, two Executive Directors, Mr Roberto Dañino, the Deputy
Chairman and Mr Alberto Beeck and four Non-Executive Directors. Sir Malcolm Field has been nominated as the Senior Independent
Non-Executive Director. The other Non-Executive Directors are Mr Jorge Born Jr., Mr Nigel Moore and Mr Dionisio Romero.
The major shareholder of the Company is Pelham Investment Corporation (the ‘Major Shareholder’). The shares of the Major
Shareholder are controlled by Mr Hochschild and Mr Beeck (the ‘Beneficial Owners’). Both Directors have considerable knowledge and
experience in the Latin American gold and silver mining industry. Accordingly, the other Directors believe that their membership of the
Board and participation in the management of the Company is vital to the continued success and vibrant growth of the Company. The
Major Shareholder, Mr Hochschild, Mr Beeck and the Company have entered into an agreement that regulates the ongoing relationship
between the Company and the Major Shareholder, Mr Hochschild and Mr Beeck. Further details concerning this agreement are set out
on pages 40 and 41.
There is an agreed schedule of matters reserved for the Board which was originally agreed at the time of the IPO and subsequently
revised by the Board on 11 January 2007. In addition, the terms of reference of the Board committees and the Executive Committee have
been adopted, as well as Board operating procedures. Directors receive a full pack of papers for consideration in advance of each Board
meeting including regular reports on the Company’s operations, to ensure that they remain briefed on the latest developments and are
able to make fully informed decisions.
Hochschild Mining plc
Annual Report & Accounts 2006
39
Corporate Governance Report continued
The Board is responsible for approving Company strategy and monitoring its implementation, for managing the operations of the
Company and for providing leadership and support to the executive management team in achieving sustainable added value for
shareholders. It is also responsible for enabling the efficient operation of the various businesses by providing adequate financial and
human resources and an appropriate system of financial control to ensure these resources are fully monitored and utilised. The Board
has also delegated authority to:
•
•
•
•
the Audit Committee, to ensure the development of an appropriate system of financial control and to monitor the integrity of the
financial reporting by the Company, to oversee the establishment and development of the Company’s internal audit function,
including internal control and risk management, and to oversee relations with the external auditors;
the Remuneration Committee, to set the remuneration policy for Executive Directors and senior management;
the Nominations Committee, for recommending Board appointments and individual performance assessments; and
the Corporate Social Responsibility Committee, for formulating and recommending to the Board the Company’s policy on health and
safety, environmental and community relations as they affect the Group’s operations. Further details concerning the activities of the
CSR Committee may be found in the Directors’ Report on pages 48 to 52.
The terms of reference for all the Board committees are available for inspection on the Company’s website at www.hochschildmining.com.
The membership of each of the Board committees is as follows:
Audit
Nigel Moore (Ch)
Jorge Born Jr.
Sir Malcolm Field
Remuneration
Jorge Born Jr. (Ch)
Sir Malcolm Field
Nigel Moore
Nominations
CSR
Eduardo Hochschild (Ch)
Sir Malcolm Field
Dionisio Romero
Roberto Dañino (Ch)
Sir Malcolm Field
Eduardo Hochschild
Prior to the IPO, the Board met three times. All the Directors attended all these meetings with the exception of Dionisio Romero who
attended two meetings. Two full meetings of the Board have taken place between 31 December 2006 and 31 March 2007. The Audit, CSR
and Remuneration Committees all met for the first time since the IPO in January 2007.
The day-to-day operations of the Company are managed by the Executive Chairman and an Executive Committee. In addition to
Eduardo Hochschild, two other executive directors, Roberto Dañino and Alberto Beeck along with other senior management form the
Executive Committee. Roberto Dañino serves as Executive Director and Deputy Chairman with primary responsibility over corporate
governance and institutional and investor affairs, as well as corporate social responsibility matters (which includes safety, environment,
and community relations). Alberto Beeck is responsible for strategy and corporate development. The other members of the Executive
Committee are Miguel Aramburú, Jorge Benavides, Ignacio Rosado and Ignacio Bustamante, who has recently joined upon assuming
the role of General Manager for Peru. The terms of reference of the Executive Committee were approved by the Board on 16 October
2006 and further amended by the Board on 11 January 2007.
Directors have the right to request that any concerns they may have are recorded in the appropriate Board or committee minutes and
there is an agreed procedure by which members of the Board may take independent professional advice at the Company’s expense, if
they require to do so, in the furtherance of their duties.
The Company Secretary is appointed and removed by the Board and is responsible for the provision of administrative and other services
to the Board. All the Directors have access to the Company Secretary.
Board balance and independence
The Board believes that its current membership of three Executive Directors and four independent and experienced Non-Executive
Directors is a well balanced composition capable of managing the Company in an effective and successful manner and, although the
Chairman is not considered to be independent, decisions can be made without any one Director exercising undue influence. The other
Directors are firmly of the opinion that Mr Hochschild’s long-term relationship with the Company, and his importance to it, mean that
his presence on the Board is in the best interests of the Company and its shareholders generally.
The Board also considers that Mr Hochschild’s continued involvement as Executive Chairman, and effectively as chief executive officer,
is vitally important to the Company at its present stage of development, notwithstanding that the Company is not compliant with the
Combined Code in this respect. However, the Board believes that the role of the Executive Directors, which together with the Executive
Committee take collective responsibility for the running of the Company, and its current membership of three Executive Directors and
four independent and experienced Non-Executive Directors, creates a well balanced structure capable of managing the Company in
an effective and successful manner. Moreover, the undertakings given by the Major Shareholder, Mr Hochschild and Mr Beeck ensure
that the Company will be managed in accordance with the Combined Code. The Board, therefore, believes that it is structured so as to
ensure that no individual has unfettered powers of decision making.
40
Hochschild Mining plc
Annual Report & Accounts 2006
The Board considers that all the Non-Executive Directors are independent of the Company as defined by Code provision A.3.1.
The independent Non-Executive Directors are:
•
•
•
•
Sir Malcolm Field is currently the senior non-executive director of Aricom plc and a non-executive director of both Odgers Ray &
Berndtson and Linden Homes. He has also served as chairman of Tube Lines Limited, was an adviser to the UK Department of
Transport, and managing director and chief executive of WH Smith plc, chairman of the Civil Aviation Authority and a non-executive
director of various companies including Scottish & Newcastle plc and MEPC.
Jorge Born Jr. is currently president and chief executive officer of Bomagra S.A. and deputy chairman of Caldenes S.A., a subsidiary
of Bomagra. He is also deputy chairman of Bunge Limited and of Mutual Investment Limited. Mr Born is also a director of Dufry S.A,
a Brazilian quoted duty free company.
Nigel Moore is a Chartered Accountant and is currently chairman of TEG Environmental plc, a non-executive director of The TEG Group
plc, IntelligentComms Limited, Ascent Resources plc and Production Services Network Limited. He served as a senior partner with
Ernst & Young LLP, holding various positions of responsibility, latterly as client services partner for the oil and gas sector until 2003.
Dionisio Romero is chairman and chief executive officer of the financial services holding company, Credicorp Ltd. He is chairman
of Banco de Crédito del Peru, Banco de Crédito de Bolivia and Atlantic Security Bank and vice chairman of Pacífico Peruano Suiza.
As required by the Combined Code, the Board has considered the independence of these four directors. Mr Romero is chairman of
Banco de Crédito del Peru, a provider of finance to the Company and is a director of TECSUP, a non-profit organisation substantially
supported by the Company. Prior to the IPO, Mr Born received payments of approximately US$72,000 from the Company for his
participation in the Company’s Advisory Board. The Advisory Board has since been dissolved. Having taken this into account, the Board
regards both Mr Romero and Mr Born as independent for the purposes of the Combined Code and has consequently concluded that all
four are independent in character and judgement.
The Board has endeavoured to recruit Non-Executive Directors who are both experienced in the mining industry and highly respected
by the market. The Board is of the opinion that all four independent Directors will significantly enhance the Board’s capacity to oversee
and grow the Company’s operations. Despite this, the membership of each Committee will be reviewed annually by the Board.
The Non-Executive Directors have held informal discussions with the Chairman without the presence of the other Executive Directors.
Sir Malcolm Field has been appointed Senior Independent Director and as such, his main duty is to be available to talk to major
shareholders if their concerns have not been resolved by the Chairman or the other Executive Directors. Towards this end, Sir Malcolm
has met with the Company’s major shareholders to introduce himself to them.
Consistent with the Combined Code, the Board approves the remuneration of the Non-Executive Directors pursuant to the Schedule of
Matters reserved for the Board.
Relationship agreement
The Major Shareholder, Mr Hochschild, Mr Beeck and the Company have entered into an agreement that regulates the ongoing
relationship between the Company and the Major Shareholder, Mr Hochschild and Mr Beeck. The principal purpose of the Relationship
Agreement is to ensure that the Company and its subsidiaries are capable of carrying on their business independently of the Major
Shareholder, the Beneficial Owners and any of their respective associates, and that transactions and relationships with the Major
Shareholder, the Beneficial Owners and any of their respective associates are at arm’s length and on normal commercial terms.
The Company and the Major Shareholder agree in the Relationship Agreement that they will comply with the applicable obligations
under the Listing Rules and to exercise their powers so far as they are able to ensure the Company is managed in accordance with the
Combined Code. Under the agreement, the Major Shareholder has the right to appoint up to two Non-Executive Directors to the Board
for so long as the Major Shareholder holds an interest of 30% or more in the Company and the right to appoint one Non-Executive
Director for so long as it has an interest of 15% or more in the Company, and in each case to remove any such Director(s) previously
appointed. The Relationship Agreement will continue for so long as the Company’s shares are traded on the London Stock Exchange or
until such times as the Beneficial Owners cease to own or control in aggregate a minimum of 15% or more of the issued share capital or
voting rights of the Company.
Board development
All the Directors have been briefed by Linklaters, the Company’s legal advisers, on their responsibilities as directors of a UK listed
company and on other relevant UK legal developments. In addition, since Listing, the Chairman has made arrangements to ensure that
the Directors have free access to the Company’s officers and advisers and to visit the Company’s operations. The Board also intends to
establish other formal induction training for new Directors which includes meetings with the Company’s principal advisers and visits to
the Group’s operations. It is the responsibility of the Chairman to ensure that the Directors update their skills and are provided with the
necessary resources to continue to do so.
Hochschild Mining plc
Annual Report & Accounts 2006
41
Corporate Governance Report continued
Board development continued
The Board has only recently been established with its current membership and it would be premature to conduct any evaluation of the
Board until it has been in place for one year. It is therefore intended that the Board will undergo a formal evaluation of performance
and effectiveness of the Board as a whole and of its committees and individual Directors towards the end of 2007. The Non-Executive
Directors together will agree on the approach to evaluating the Chairman’s performance towards the end of 2007.
Re-election of Directors
In accordance with article 85 of the Company’s articles of association, Directors may be appointed by the Company by ordinary
resolution or by the Board. If appointed by the Board, a Director holds office only until the next annual general meeting. Since all
the Directors were appointed during the year, they will all retire at the forthcoming AGM and, being eligible, offer themselves for
election. There will not, therefore, be any Directors retiring by rotation. In future years, Directors will be required to retire by rotation
in accordance with the Company’s articles of association.
Notice of the 2007 Annual General Meeting will be circulated to shareholders on 25 May 2007 with the Chairman’s Letter and Annual
Report and Accounts. Resolutions to elect all the Directors are set out in full in the AGM notice along with biographical details for each
Director. The Board fully supports all the elections being proposed.
Audit Committee
The Audit Committee was established on 16 October 2006. The role of the Audit Committee is to monitor the integrity of the
Company’s financial statements and review its summary financial statements, to monitor the effectiveness of the Company’s
internal controls and risk management systems and to oversee the relationship with the Company’s external auditors and review
the effectiveness of the external audit process. The ultimate responsibility for the appointment, re-appointment and removal of the
external auditors and for reviewing and approving the interim and annual financial statements remains with the Board.
The Audit Committee terms of reference were approved on 16 October 2006 and reviewed at the Board meeting on 11 January 2007.
A copy is available on the Company’s website at www.hochschildmining.com.
The Combined Code recommends that all members of the Audit Committee should be independent Non-Executive Directors and that
at least one member should have recent and relevant financial experience. The Audit Committee is chaired by Mr Nigel Moore who, as
indicated above, has extensive and substantial financial experience gained whilst holding a number of senior appointments with Ernst
& Young. The other members of the Audit Committee are Sir Malcolm Field and Mr Jorge Born Jr., both of whom are considered to be
independent Directors.
The lead partner of the external auditors and Executive Directors attend each Audit Committee meeting by invitation. At least twice a year
the Audit Committee will meet with the external auditors without the presence of executive management and also will meet privately
with the Head of Internal Audit. Once appointed, the Head of Internal Audit will also be invited to attend meetings of the Audit Committee.
Under its terms of reference, the Audit Committee is required to meet at least three times a year at the most appropriate times in the
reporting and audit process.
Since its formation, the Audit Committee has met twice and has carried out, or is in the process of carrying out, the activities described
below in accordance with the responsibilities set out in its terms of reference:
•
•
•
•
Financial reporting The Audit Committee reviewed the 2006 Annual Report and Accounts before recommending to the Board its
approval and publication. As part of its review, the Audit Committee reviewed accounting policies, estimates and judgements that
had been applied in preparing the report and accounts and the transparency and clarity of disclosures contained within them.
Risk management A high level review of major risks faced by the Company was conducted in January 2007 in order to identify the
areas on which risk management should be focused. The resulting risk matrix was reviewed by the Executive Committee and further
processes for more detailed identification, evaluation and management of risks are under consideration. The Audit Committee has
considered and approved the need for a risk manager within the Group, who is currently being recruited by the Company. Once
appointed, the risk manager will report to the Chief Financial Officer and be responsible for identifying potential risks and proposing
procedures and controls to mitigate such risks.
Internal audit The Audit Committee has considered the role of the Group’s internal audit function within the Group and decided that
it continues to play an important role in the Group’s internal control environment. The Board has reviewed the reporting line for the
internal audit function and has changed it from one of accountability to the Chief Financial Officer to one of direct accountability to
the Audit Committee itself. The Head of Internal Audit will report directly to the Audit Committee.
Internal control The Audit Committee has reviewed the development of the monthly management accounts process and resourcing
within the financial control function. It has also reviewed plans for further development of the internal reporting process, the
adequacy of the information technology (‘IT’) systems within the financial control function and performed an initial review of the
Group’s treasury procedures and controls.
42
Hochschild Mining plc
Annual Report & Accounts 2006
•
•
External audit The Audit Committee considered the re-appointment of the Company’s external auditors before making a
recommendation to the Board in respect of the same to be put to shareholders. The Audit Committee oversees the relationship with
the external auditors. As part of this responsibility, the Audit Committee has reviewed the findings of the external auditors, reviewed
management representation letters, approved audit plans, reviewed and agreed audit fees in respect of the 2006 year-end audit and
reviewed policies on the independence of the external auditors and the provision of non-audit services.
Whistleblowing The Audit Committee has considered the arrangements by which staff may, in confidence, raise concerns about
possible improprieties in matters of financial reporting or other matters and a policy has been put in place. The Audit Committee is
committed to putting appropriate arrangements in place in the UK, Peru, Argentina, Mexico and Chile which enable proportionate
and independent investigation of any improprieties with suitable follow-up action.
Internal control
The Board has overall responsibility for the system of internal control which includes risk management and reviewing its effectiveness.
It has delegated its responsibility for reviewing the effectiveness of these controls to the Audit Committee. The purpose of internal
control is to identify and mitigate business risk with a view to maximising shareholder value and protecting Company assets. These
controls are managed by the use of formal procedures designed to highlight financial, operational, environmental and social risks and
provide the appropriate information to the Board enabling it to react to protect the Company and its shareholders. The process the
Audit Committee has used to assess the effectiveness of internal control includes:
•
•
•
•
review of budgets and reporting against budgets;
consideration of risks to the achievement of strategic plans and objectives;
review of IT issues and preparation of an IT Plan; and
review of accounting and financial reporting together with the internal control environment existing at Group level.
Based on its review of the process since Listing, the Audit Committee is reasonably satisfied that the internal controls are in place at
the operational level within the Group. The Board via the Audit Committee continues to monitor the internal control environment
of the Group alongside the development of risk management processes.
Overall, the Board acknowledges the measures that have already been implemented both before and after the IPO to initiate a risk
management framework, are appropriate to the Group’s circumstances. The Board is committed to making further progress in these
areas with a view to achieving best practice levels of risk management and internal control for international mining companies listed
on the London Stock Exchange.
Going concern
A statement on the Directors’ position regarding the Company as a going concern is contained in the Directors Report on pages 48 to 52.
Nominations Committee
The role of the Nominations Committee is to identify and nominate candidates for the approval of the Board to fill Board vacancies and
make recommendations to the Board on Board composition and balance. The Nominations Committee also prepares the Chairman’s
job description including any other significant commitments which he should be responsible for.
The Combined Code recommends that a majority of the members of the Nominations Committee should be Non-Executive Directors,
all of whom are independent in character and judgement and free from relationships or circumstances which are likely to affect, or
could appear to affect, their judgement. The Nominations Committee is chaired by Mr Eduardo Hochschild. Its other members are Sir
Malcolm Field and Mr Dionisio Romero, who are deemed by the Board to be independent in character and judgement, thus ensuring
that the Nominations Committee complies with the recommendation of the Combined Code as to membership.
The make-up of the Board was considered at length in the period prior to the IPO. At this stage, with a Board whose composition complies
with the requirements of the Combined Code, the Nominations Committee has not considered it necessary to meet since the IPO.
The Nominations Committee terms of reference were approved on 16 October 2006 and a copy is available on the Company’s website
at www.hochschildmining.com.
Remuneration Committee
The Remuneration Committee was established on 16 October 2006. Its terms of reference were approved on 16 October 2006 and
revised at the Board meeting on 11 January 2007. A copy is available on the Company’s website at www.hochschildmining.com.
The role of the Remuneration Committee is to determine and agree with the Board the broad policy for the remuneration of executives
and senior management as designated, as well as specific remuneration packages, including pension rights and any compensation
payments. The Combined Code recommends that all members of the Remuneration Committee should be independent Non-Executive
Directors. The Remuneration Committee is chaired by Mr Jorge Born Jr. and its other members are Sir Malcolm Field and Mr Nigel Moore.
Further details concerning the activities of the Remuneration Committee are set out in the Directors’ Remuneration Report on page 45.
Hochschild Mining plc
Annual Report & Accounts 2006
43
Corporate Governance Report continued
Corporate Social Responsibility Committee
The Corporate Social Responsibility (CSR) Committee was established on 16 October 2006. Its terms of reference were approved
on 16 October 2006 and revised at the Board meeting on 11 January 2007. A copy is available on the Company’s website at
www.hochschildmining.com.
The role of the CSR Committee is to formulate and recommend to the Board the Company’s policy on all corporate social responsibility
issues as they affect the Company’s operations. In particular, it will focus on compliance with national and international standards
to ensure that effective systems of standards, procedures and practices are in place at each of the Company’s operations. The CSR
Committee will also be responsible for reviewing management’s investigation of incidents or accidents that occur in order to assess
whether policy improvements are required. The CSR Committee is chaired by Mr Roberto Dañino and its other members are Sir Malcolm
Field and Mr Eduardo Hochschild.
Further details concerning the activities of the CSR Committee are set out in the Directors’ Report on pages 48 to 52.
Investor relations
The Company is fully committed to achieving an excellent relationship with investors and contact with investors is the responsibility of
the Executive Directors, the Chief Financial Officer and the Head of Investor Relations. The Company announces its production results
on a quarterly basis and analysts are invited to briefings following the Final and Interim results as well as being invited to discuss
quarterly results on the telephone. The Executive Directors and Chief Financial Officer are available to discuss the concerns of major
shareholders at any time during the year. The Chairman and Deputy Chairman, in particular, will be responsible for discussing strategy
with the Company’s shareholders and will communicate the views of shareholders to the other members of the Board.
The main means of communication with shareholders are the Annual and Interim Reports. However, shareholders are welcome to meet
and question the Directors at the Annual General Meeting which will be held on 4 July 2007. Notice of the Annual General Meeting will
be circulated to all shareholders at least 20 working days prior to the meeting and the Chairmen of the Audit, CSR, Remuneration and
Nominations Committees will be available at the meeting to answer questions. Each substantive resolution will be proposed separately
and all proxy votes lodged will be notified to shareholders at the meeting and published on the Company’s website immediately after
the meeting.
Information on matters of particular interest to investors is set out in additional shareholder information on page 118 and on the
Company’s website at www.hochschildmining.com.
44
Hochschild Mining plc
Annual Report & Accounts 2006
Directors’ Remuneration Report
Introduction
This Directors’ Remuneration Report sets out information about the remuneration of the Directors of Hochschild Mining plc for the
year ended 31 December 2006. This report has been prepared in accordance with Schedule 7A of the Companies Act 1985. As required by
legislation, the information in Part II of this report has been audited by Ernst & Young LLP as it contains the information upon which the
auditors are required to report to the Company’s shareholders.
PART I (Information not subject to audit)
Remuneration Committee
The Board established the Remuneration Committee on 16 October 2006 which has met twice since that date. Jorge Born Jr. is the
Chairman of the Remuneration Committee and its other members are Sir Malcolm Field and Mr Nigel Moore. All the members of the
Remuneration Committee are independent Non-Executive Directors.
Under its terms of reference, the duties of the Remuneration Committee are to determine and agree with the Board the broad policy
for the remuneration of the Executive Directors, the Company Secretary and the other members of the Executive Committee, as well
as their specific remuneration packages, including pension rights and, where applicable, any compensation payments. In determining
such policy, the Committee shall take into account all factors which it deems necessary to ensure that members of the senior executive
management of the Group are provided with appropriate incentives to encourage strong performance and are, in a fair and responsible
manner, rewarded for their individual contributions to the success of the Company.
The composition of the Remuneration Committee and its terms of reference comply with the provisions of the Combined Code and are
available for inspection on the Company’s website at www.hochschildmining.com.
The Remuneration Committee has appointed KPMG People Services in London to provide advice on remuneration matters including
advice in respect of the remuneration policy and the structure of possible long-term incentives for senior management.
Remuneration Policy
The Company’s Remuneration Policy has been developed to ensure that the Company is able to attract, retain, and motivate its
executives and senior management. The alignment of management incentives with the creation of shareholder value over both
the short and long-term is key to this strategy. The achievement of annual performance targets is, therefore, rewarded through an
annual performance related bonus, which includes a balanced mix of financial and operational performance measures. Additionally,
the Remuneration Committee is considering the introduction of an Executive Long Term Incentive Plan (‘ELTIP’) to ensure that
management’s interests are further aligned with the long-term success of the Company.
In setting the basic levels of pay for the Executive Directors, the Committee seeks to ensure that salaries are market competitive and
total remuneration is at or below the upper quartile. In making this determination, the Committee makes reference to pay levels of
other FTSE 250 companies as well as those of other international mining companies. Furthermore, the Committee seeks to ensure that
the majority of pay is delivered in the form of performance-related incentives.
The following chart sets out the split between fixed and variable pay assuming that the maximum bonus is achieved. The maximum
bonus percentage of 150% is set out in the Executive Directors’ service contracts and is set to ensure that the majority of the
remuneration is performance based.
Fixed and variable pay
Split between fixed and variable pay for the Executive Directors (based on maximum bonus payments).
(cid:42)(cid:38)(cid:27)
(cid:44)(cid:38)(cid:27)
(cid:56)(cid:87)(cid:105)(cid:95)(cid:89)(cid:1)(cid:73)(cid:87)(cid:98)(cid:87)(cid:104)(cid:111)
(cid:55)(cid:100)(cid:100)(cid:107)(cid:87)(cid:98)(cid:1)(cid:56)(cid:101)(cid:100)(cid:107)(cid:105)
Hochschild Mining plc
Annual Report & Accounts 2006
45
Directors’ Remuneration Report continued
Components of fixed pay for the Executive Directors
Director
Current salary
Pension supplement
Total
Eduardo Hochschild
Roberto Dañino
Alberto Beeck
US$800,000 per annum
US$800,000 per annum
US$800,000 per annum
US$200,000 per annum
US$200,000 per annum
US$200,000 per annum
US$1,000,000 per annum
US$1,000,000 per annum
US$1,000,000 per annum
Notes
1
2
3
Each Executive Director has service contracts with both Hochschild Mining plc and Compañía Minera Ares S.A.C., a Group subsidiary.
In each case, US$640,000 per annum salary is payable from Compañía Minera Ares S.A.C. and US$160,000 per annum is payable from the Company. In addition, US$160,000
per annum of pension supplement is payable from Compañía Minera Ares S.A.C. and US$40,000 of pension supplement is payable from the Company.
Salary paid by Compañía Minera Ares S.A.C includes all legal labour benefits and compensation such as, but not restricted to, July and December bonuses, family allowance,
vacation salaries and compensation for time services (ruled by Peruvian Legislative Decree 6500) but excluding legal profit sharing.
Basic salaries
The base salary for each Executive Director is US$800,000 per annum. In each case, US$640,000 per annum is payable from Compañía
Minera Ares S.A.C. and US$160,000 per annum is payable from the Company. Having assessed the total remuneration packages paid to
the Executive Directors with those paid to executive directors of comparable companies, the Remuneration Committee has reviewed
the base salaries for the Executive Directors and consider them to be appropriate.
Short-term incentives
In respect of 2006, the Remuneration Committee has not made any awards to the Executive Directors.
The maximum bonus for each of the Executive Directors under the terms of their service contracts is 150% of aggregate base salary
of US$800,000.
Pensions and benefits-in-kind
The Company does not currently provide pension benefits to the Directors but does award the Executive Directors with a pension
supplement of US$200,000 each year in lieu of pension. This pension is paid US$160,000 by Compañía Minera Ares, S.A.C. and
US$40,000 by the Company.
In addition, under Peruvian law, companies must pay an annual share of profits, in an amount up to a maximum of 8% of the taxable
income for the year to employees.
The Group also provides medical expenses insurance and motor cars to the Executive Directors.
Performance graph
As required by the Directors’ Remuneration Report Regulations, the following graph sets out the performance of the Company’s
share price since its Listing compared to the FTSE 350 Index and the FTSE All Share Mining Index. These are deemed to be the most
appropriate indices for comparative purposes.
(cid:63)(cid:100)(cid:90)(cid:91)(cid:110)
(cid:39)(cid:39)(cid:43)
(cid:39)(cid:39)(cid:38)
(cid:39)(cid:38)(cid:43)
(cid:39)(cid:38)(cid:38)
(cid:47)(cid:43)
(cid:47)(cid:38)
(cid:62)(cid:101)(cid:89)(cid:94)(cid:105)(cid:89)(cid:94)(cid:95)(cid:98)(cid:90)(cid:1)(cid:67)(cid:95)(cid:100)(cid:95)(cid:100)(cid:93)(cid:1)(cid:102)(cid:98)(cid:89)
(cid:74)(cid:73)(cid:72)
(cid:60)(cid:74)(cid:73)(cid:59)(cid:1)(cid:41)(cid:43)(cid:38)(cid:1)(cid:63)(cid:100)(cid:90)(cid:91)(cid:110)
(cid:60)(cid:74)(cid:73)(cid:59)(cid:1)(cid:55)(cid:98)(cid:98)(cid:1)(cid:73)(cid:94)(cid:87)(cid:104)(cid:91)(cid:1)(cid:67)(cid:95)(cid:100)(cid:95)(cid:100)(cid:93)(cid:1)(cid:63)(cid:100)(cid:90)(cid:91)(cid:110)
(cid:41)(cid:1)(cid:68)(cid:101)(cid:108)(cid:91)(cid:99)(cid:88)(cid:91)(cid:104)(cid:1)(cid:40)(cid:38)(cid:38)(cid:44)
(cid:41)(cid:39)(cid:1)(cid:58)(cid:91)(cid:89)(cid:91)(cid:99)(cid:88)(cid:91)(cid:104)(cid:1)(cid:40)(cid:38)(cid:38)(cid:44)
The performance graph shows the TSR for a holding of shares of the
Group for the year ended 31 December 2006 compared with the TSR for
a hypothetical holding of shares of the same kinds and number as those
by reference to which the FTSE 350 Index and the FTSE All Share Mining
Index are calculated.
The Board considers that the FTSE 350 and the FTSE All Share Mining
Indices currently represent the most appropriate of the published indices
for these purposes as they provide a view of performance against both
the broad equity market index that the Company is a constituent of, and
additionally the UK listed mining sector.
TSR has been calculated on a spot basis with effect from 3 November
2006, the date conditional dealings in the shares commenced on the
London Stock Exchange, assuming that an equivalent sum was invested
on that day in shares of the Group and in the FTSE 100 and FTSE All Share
Mining Indices. Dividends are invested in additional shares and benefits
receivable in the form of shares are also added to the relevant holding.
ELTIP
Whilst many of the Group’s senior executives immediately below Board level acquired shares in the Company at the time of the IPO,
their holdings are not significant. Consequently, the Remuneration Committee believes that it is important to put arrangements
in place to incentivise the performance of the senior management group in line with the long-term interests of shareholders. The
Remuneration Committee is considering the structure of a cash-based long-term incentive plan for executives, and the Executive
Directors have agreed to present a formal ELTIP proposal for the consideration of the Remuneration Committee.
46
Hochschild Mining plc
Annual Report & Accounts 2006
Directors’ service contracts
The Executive Directors are employed under contracts of employment with the Company and Compañía Minera Ares S.A.C., a Group
company, dated 16 October 2006. The contracts may be terminated on 12 months’ notice in writing. In setting the notice period for
termination at 12 months, the Remuneration Committee has reduced the likelihood of having to pay excessive compensation in the
event of poor performance and to this end, has also included a provision in each Director’s contract for immediate dismissal with no
compensation in the event of unsatisfactory performance.
Non-Executive Directors’ fee arrangements
The Non-Executive Directors signed Letters of Appointment with the Company on 16 October 2006. The appointments of the Non-
Executive Directors continue for a period of three years and are automatically renewed on a three yearly basis, subject to re-election,
when appropriate, by the Company in general meeting, and unless otherwise determined by the Board or the Director giving not less
than three months’ notice.
The Non-Executive Directors’ fees have been set at a level to reflect the time commitment and level of involvement that they are required
to make in the activities of the Board and its committees, including the transatlantic travel commitments indispensable to the carrying out
of their duties. The current salaries/fees for the Non-Executive Directors of Hochschild Mining plc are as set out in the table below:
Director
Sir Malcolm Field
Jorge Born Jr.
Nigel Moore
Dionisio Romero
Current salary/fee
£100,000 per annum
£100,000 per annum
£120,000 per annum
£100,000 per annum
PART II (Information subject to audit)
Directors’ remuneration
The following table sets out an analysis of the remuneration of the Directors from the date of commencement of their service
arrangements with the Company to 31 December 2006 for individual directors who held office in the Company during that period.
Director
Eduardo Hochschild
Roberto Dañino
Alberto Beeck
Sir Malcolm Field
Jorge Born Jr.
Nigel Moore
Dionisio Romero
Total
Base
salary/fees
US$000
Pension
supplement
US$000
Profit
share
US$000
Benefits-
in-kind
US$000
Performance
related
bonus
US$000
Total
2006
US$000
116
116
116
42
42
50
42
524
30
30
30
–
–
–
–
90
26
26
26
–
–
–
–
78
41
2
4
–
–
–
–
47
–
–
–
–
–
–
–
–
213
174
176
42
42
50
42
739
Notes
1
2
3
Each Executive Director has a service contract with both Hochschild Mining plc and Compañía Minera Ares S.A.C., a Group subsidiary.
In each case, US$640,000 per annum is payable from Compañía Minera Ares S.A.C. and US$160,000 per annum is payable from the Company. In addition, US$160,000 per
annum of pension supplement is payable from Compañía Minera Ares S.A.C. and US$40,000 of pension supplement is payable from the Company.
Salary paid by Compañia Minera Ares S.A.C. includes all legal labour benefits and compensation such as, but not restricted to, July and December bonuses, family
allowance, vacation salaries and compensation for time services (ruled by Peruvian Legislative Decree 6500) but excluding legal profit sharing.
4 Mr Born Jr. received fees of US$12,640 during the year in respect of services provided to the Group’s Advisory Board. The Advisory Board has now been dissolved.
5 Mr Moore’s fees are higher than those of the other Non-Executive Directors as they include fees paid to him for services as the chairman of the Audit Committee
of the Company.
Directors’ interests in shares
The interests of the Directors are set out in the Directors’ Report on pages 48 to 52.
Approval
This report has been approved by the Board of Directors of Hochschild Mining plc.
On behalf of the Board
Jorge Born Jr.
Chairman, Remuneration Committee
19 March 2007
Hochschild Mining plc
Annual Report & Accounts 2006
47
Directors’ Report
The Directors have pleasure in presenting the report of Hochschild Mining plc and its subsidiaries for the year ended 31 December 2006.
Results and dividend
The Group adjusted EBITDA (calculated as profit before exceptional items, net finance costs and income tax plus depreciation and
exploration costs other than personnel and other exploration costs from continuing operations) amounted to US$107.6 million. Turnover
and attributable profit to equity shareholders after tax increased by 31% and 64% respectively.
The Directors recommend the payment of a final dividend of US$0.0074 per share (2005: US$nil). Subject to shareholders approving this
recommendation at the Annual General Meeting, the dividend will be paid in UK pounds sterling on 6 July 2007 to shareholders on the
register at the close of business on 15 June 2007. Shareholders may elect to receive dividends in US dollars. The US dollar dividend will be
converted into UK pounds sterling at the exchange rate prevailing at the time of payment.
Principal activities and business review
Hochschild Mining plc was incorporated on 11 April 2006 in England and Wales and re-registered as a public company on 17 October
2006. The Company’s ordinary shares were admitted to trading on the London Stock Exchange on 3 November 2006 and trading in the
Company’s shares commenced on 8 November 2006.
Hochschild is a leading precious metals company with a primary focus on the exploration, mining, processing and sale of silver and
gold. The Group is the fourth largest primary silver producer globally and produces a significant quantity of gold.
Currently, the Group has three underground mines in production located in southern Peru which are supported by fully developed
infrastructure. The Group has three advanced stage development projects in Argentina, Mexico and Peru, as well as one early stage
development project in Mexico. In addition to its development projects, the Group has over 20 long-term prospects throughout Latin
America which are at various stages of development. A number of these projects and prospects are structured as joint ventures or
option arrangements with local or overseas mining partners, whilst others are owned and operated exclusively by the Company.
The review of the Group’s business (including details of the Group’s results, operations and principal activities), key performance
indicators and the description of principal risks and uncertainties, prepared in accordance with the Companies Act 1985, is set out on
pages 2 to 13 and 16 to 35 (About Us and Business Review) of this Annual Report.
These pages, taken together with the Chairman’s Statement on pages 14 and 15, the Corporate Governance Report on pages 39 to 44,
the Directors’ Remuneration Report on pages 45 to 47, details of the Board of Directors and Corporate Structure on pages 36 to 38 and
the analysis of revenues, profits and financial performance set out in Notes to the Financial Statements on pages 60 to 99 all form part
of this Directors’ Report.
Future developments
The Directors intend to use the Company’s Listing as a platform upon which to grow the Group’s operations and they believe that the
Group’s mines, projects and prospects provide substantial potential for growth. Strategic acquisitions may also be considered where
suitable opportunities arise within the sector. Information relating to the Group’s research and development and further information
about the Group’s future developments may be found in the Business Review on pages 16 to 35.
Corporate social responsibility
The Directors believe that the health and safety of the Group’s employees, respect for the environment and active engagement with
local communities are fundamental to the sustainability of the Group’s businesses. The Group has sought to back this commitment up
with appropriate resources and programmes over many years.
Corporate Social Responsibility Committee (‘CSR Committee’)
Immediately prior to the IPO, the Board established a committee to oversee these activities. The CSR Committee was originally called the
Health, Safety, Environment and Community Relations Committee; however its name was subsequently changed to better reflect its role.
The CSR Committee will meet at least twice a year and will be responsible for formulating and recommending to the Board the
Company’s policy on all corporate social responsibility (‘CSR’) issues, particularly on safety and occupational health, community relations,
and the environment, as they affect the Company’s operations. In particular, it will focus on compliance with national and international
standards to ensure that effective systems of standards, procedures and practices are in place at each of the Company’s operations. The
CSR Committee will also be responsible for reviewing management’s investigation of incidents or accidents that occur in order to assess
whether policy improvements are required. The ultimate responsibility for establishing policies will remain with the Board.
Monitoring
The CSR Committee has commissioned a full CSR audit of all of the Group’s activities to establish a baseline for its future activities and
from which to measure its progress. This process will be completed during the course of 2007 and the CSR Committee plans to review
the results of that audit in the second half of the year.
48
Hochschild Mining plc
Annual Report & Accounts 2006
The majority of the Group’s employees work in Peru. Peruvian law requires companies to use an independent audit company
designated by the Peruvian Ministry of Energy and Mines to audit, twice a year, the Company’s compliance with all applicable mining
health, safety and environmental regulations. In addition, the Company uses the international certification firm, Deutsche Gesellschaft
zur Zertifiziering von Managementsystemen in Germany (‘DQS’), to carry out regular audits of the Group’s environmental management
system and has found the Group to be in full compliance with international standards.
Local safety and mining hygiene committees have been established at each of the Group’s operating units. These meet once a month
to review, promote and monitor health and safety policies and environmental protection programmes, check that recommendations
from previous external audits are implemented, review the general process of the mining inspections and implement any necessary
steps to mitigate health and safety risks at each of the operating units. Each local committee is made up of representatives of local
management. Compliance with relevant legislation is checked regularly by the Group and statistics on permit compliance are reviewed
on a monthly basis.
Environmental Management System
The Group has implemented an Environmental Management System in respect of its three operating sites which is certified to ISO
14001:2004 standards. The Environmental Management System is a management tool used to monitor all environmental aspects of
the work undertaken by the Group and specifies the environmental standards to which the Group should operate. The San José project
also has a full environmental management system in place, is managed in line with ISO and Group requirements and is planned to be
certified to ISO 14001 in 2007. The Group’s current environmental standards not only comply with local regulations in Peru, Mexico and
Argentina but also exceed the requirements laid down by the World Bank in its Environmental, Health and Safety Guidelines for the
mining industry. These standards are audited by DQS twice a year.
Environmental metrics
As part of its management of its environmental systems, the Company undertakes a programme of measuring its consumption of
natural resources including water. It also undertakes the measurement of the quality of incoming and outgoing water, as well as the
air surrounding its operations and its success in reducing the levels of effluents and pollutants contained in those environments.
The Company monitors closely the cost of closing every mine and its contribution in mitigating the effect of each closure on the
surrounding community and its environment.
Health and safety management systems
Group companies are required to comply with a range of health and safety laws and regulations, and the Board recognises that the
health and safety of Group employees is a major priority. The Group is implementing a Health, Safety and Risk Management System
for its underground and surface mining operations based on the OSHAS 18001 international standards, with the aim of qualifying for
OSHAS 18001 certification in 2007.
In the financial years ended 31 December 2003, 2004 and 2005 Hochschild Mining experienced, in aggregate, one fatal employee
accident. During the year ended 31 December 2006, there have been three employee fatalities: one of the fatalities was due to an
accident caused by a landslide and the other two by the premature explosion of obsolete detonators which were being disposed of.
These fatalities have been fully investigated by management. The Company has taken appropriate disciplinary action in respect of the
breaches of safety procedure that occurred and, as a result, the Company has reviewed and modified its safety procedures.
Health and safety metrics
The Group’s overall safety target is zero accidents at all of its assets and its programmes are focused on achieving this target. As a
secondary measure, the Company started monitoring long-term injury frequency rates (‘LTIFR’) during 2006. The average LTIFR for
the Company in 2006 was 4.80 which is better than the industry average of 6.25. The CSR Committee has commissioned an audit
of the health and safety policies and procedures to determine how they can be improved to ensure that the Group meets its overall
safety targets.
The frequency of accidents is monitored on a monthly and annual basis, both at mine and Group level. Regular statistics showing the
type and causes of accidents are produced and circulated to management so that efforts can be made to reduce and, where possible,
eliminate accidents entirely.
All employees and contractors are given occupational health examinations prior to joining the Group and are then examined annually.
As a measure of its concern for the overall wellbeing of its employees, the Company monitors the total monthly attendances at
Company medical facilities including the number of visits per employee per month. It also measures the pharmacy cost per patient as
an indication of the severity of conditions being treated and the time taken to produce medical examination results as an indication of
the level of medical service being provided.
Hochschild Mining plc
Annual Report & Accounts 2006
49
Directors’ Report continued
Rehabilitation of Land
The Company has a policy of closing mine facilities as the lives of the mines progress in order to reduce liabilities at the end of the
mine life. Total current estimates of end-of-life closure costs for the Group’s operations are about US$37 million, which include amounts
estimated for ongoing maintenance of sites. The Group held a provision of US$32.4 million at 31 December 2006 which was calculated
following a review of the mine’s estimated closure costs undertaken during the year by external consultants.
Social and community programmes
The Directors believe that active long-term engagement with local communities and other stakeholders is fundamental to the
Company’s business and the Company has devoted considerable time and resources to such engagement. The Directors believe that
the three fundamental requirements for improving the lives of local communities are: (i) access to healthcare; (ii) a good education;
and (iii) self-sustainability and, as a result, have tailored the Company’s social and community programmes accordingly.
To assist the Group in making adequate provision for the communities in which it operates the Company undertakes measurements
of the levels of poverty at each location at which it mines, including the adequacy of basic needs such as housing, water, sanitation and
schooling. It also measures the community’s dependency on the Group for employment and training.
Further information regarding the Group’s activities and programmes in the community relations area may be found in the Business
Review on pages 16 to 35.
Employees
Except in respect of Argentina, where employees of Minera Santa Cruz, S.A. are voluntarily affiliated to the Asociación Obrera Minera
Argentina (the Argentine Mineworkers Union) the Group’s workforce is not represented by a works council and no unions have yet been
formed, either in respect of the employees or the contracted personnel. The Group maintains good relations with its workforce and, for
almost 20 years, has not experienced any interruptions in production at any of its operating sites as a result of workplace disputes.
Supplier payment policy
It is the Company’s policy that payments to suppliers are made in accordance with those terms and conditions agreed between the
Company and its suppliers, provided that all trading terms and conditions have been complied with by suppliers.
At 31 December 2006, the Company had an average of 11 days’ purchases owed to trade creditors.
Political and charitable donations
The Company does not make any political donations. During the year the Group made charitable donations of US$2.3 million (2005:
US$1.2 million) in respect of community programmes.
Market value of land and buildings
For the purpose of the initial public offering, the Company commissioned Consultores & Asesores 2020 S.A.C. to carry out an
independent appraisal of certain items of property, plant and equipment as of 1 January 2003 to determine their fair value as at that
date. The fair value of property, plant and equipment was determined primarily with reference to depreciated replacement cost.
Management believes that the fair value reflected the economic condition of Hochschild Mining’s property, plant and equipment at
that time. This fair value has been used to determine cost as at the date of transition (depreciated further to the date of transition).
The revaluation process carries a significant element of judgement; however, management believes that the use of an appropriately
qualified independent appraiser has resulted in a fair value of property, plant and equipment that is suitable for inclusion in the
Company’s financial statements on transition to IFRS.
Events since the balance sheet date
Details of events occurring since 31 December 2006 are set out in note 40 to the Groups’ financial statement on page 99.
Share capital
The Company’s authorised share capital as at 31 December 2006 was £125,000,000 comprising 500,000,000 ordinary shares of £0.25
each. The Company’s issued share capital as at that date was 307,350,226, ordinary shares of £0.25 each credited as fully paid. Full details
of the Company’s issued capital and reserves are set out at note 28 to the Group financial statements.
On incorporation the Company’s authorised share capital was £100 divided into 100 ordinary shares of £1 each and one subscriber share
was issued.
On 16 October 2006, 49,999 ordinary shares of £1 each were allotted to Pelham Investment Corporation and its nominee.
50
Hochschild Mining plc
Annual Report & Accounts 2006
At an Extraordinary General Meeting held on 16 October 2006:
•
•
•
the share capital was increased from £100 to £250,000,000 by the creation of 249,999,900 ordinary shares of £1 each;
each share of £1 each was divided into two ordinary shares of £0.50 each; and
the authorised share capital was reduced from £250,000,000 to £125,000,000 by a reduction in the nominal value of each authorised
and issued share from £0.50 to £0.25, resulting in an authorised share capital of 500,000,000 ordinary shares of £0.25 each; however,
the court approval for the aforesaid share capital reduction was received only on 8 November 2006.
On 2 November 2006 the Company entered into a share exchange agreement with Pelham Investment Corporation and Navajo
Overseas Corporation. This agreement was entered into in order to effect part of the reorganisation of Group companies prior to the
Listing of the Company on the London Stock Exchange. Under the terms of this agreement, the Company allotted 226,450,000 ordinary
shares of £0.50 each to Pelham Investment Corporation and 3,450,000 ordinary shares of £0.50 each to Navajo Overseas Corporation,
in exchange for shares in various holding companies within the Hochschild Mining Group. This was fully disclosed in Part XIV of the
prospectus issued in connection with the IPO.
On 8 November 2006, 77,350,226 ordinary shares of £0.25 each were allotted in connection with the IPO. The special resolution reducing
the authorised share capital was confirmed by the Companies Court and registered with the Registrar of Companies and, therefore,
became effective on 8 November 2006, following the IPO.
Directors and their interests
The Directors who served during the period ended 31 December 2006 and to the current date, are as follows:
Name
Eduardo Hochschild
Roberto Dañino
Alberto Beeck
Sir Malcolm Field
Jorge Born Jr.
Nigel Moore
Dionisio Romero
Date of appointment
28 June 2006
4 October 2006
28 June 2006
16 October 2006
16 October 2006
16 October 2006
16 October 2006
The interests of the Directors who were in office at 31 December 2006, in the share capital of the Company at the date of their
appointment, as at 31 December 2006 and as at 19 March 2007 were as follows:
Name
Eduardo Hochschild1,2
Roberto Dañino3
Alberto Beeck1
Sir Malcolm Field
Jorge Born Jr.
Nigel Moore
Dionisio Romero
At date of appointment
At 31 December 2006
At 19 March 2007
1
0
0
0
0
0
0
214,962,500
3,450,000
0
14,285
0
14,285
0
214,962,500
3,450,000
0
14,285
0
14,285
0
Notes
1 Mr Hochschild and Mr Beeck hold an indirect interest in the Company through a jointly held intermediate holding company (the shares in which are controlled 82.13% by Mr
Hochschild and 17.87% by Mr Beeck and the Board of which is controlled bv Mr Hochschild) which owns the entire issued share capital of Pelham Investment Corporation
which in turn owns shares in the Company.
On 28 June 2006, the intermediate holding company through which Messrs Hochschild and Beeck held their interest in the Company subscribed for one ordinary share of £1.
As a result of changes described in the section on Share Capital above, Eduardo Hochschild held an indirect interest of 214,962,500 at £0.25 each, as at 31 December 2006.
2
3 Mr Dañino’s shareholding is held through Navajo Overseas Corporation.
Relationship agreement
Pelham Investment Corporation, Mr Eduardo Hochschild, Mr Alberto Beeck and the Company have entered into a relationship
agreement to regulate the ongoing relationship between them. The principal purpose of the relationship agreement is to ensure that
the Group is capable of carrying on its business for the benefit of the shareholders of the Company as a whole. Further details are set
out in the Corporate Governance Report on pages 39 to 44.
Hochschild Mining plc
Annual Report & Accounts 2006
51
Directors’ Report continued
Substantial shareholdings
As at 19 March 2007, the Company has been notified, in accordance with DTR 5 and Transitional Provision 7 of the Disclosure and
Transparency Rules of the following interests in the ordinary shares of the Company.
Name of holder
Number of ordinary shares held
Percentage held
Eduardo Hochschild
Blackrock Investment Management (UK) Ltd
214,962,500
22,633,411
69.94%
7.36%
Policy on financial risk management
The Company’s objectives and policies on financial risk management can be found in note 39 to the Group financial statements.
Information on the Company’s exposures to foreign currency, commodity price, credit, liquidity and interest rate risks can be found
in this note.
Directors’ and officers liability insurance
Since Directors are increasingly being added as defendants in legal actions against companies, the Board believes that the risk of
Directors being placed at significant personal financial risk is increasing. The Board also believes that the provision of appropriate
indemnities and the funding of Directors’ defence costs as permitted by legislation are reasonable protections for the Directors and
are important to ensure that the Company continues to be able to attract and retain the highest calibre individuals as Directors.
Accordingly, the Company has purchased and maintains liability insurance for its Directors and Officers as permitted by section
309A(5)of the Companies Act 1985.
However, a Director will not be indemnified for any liability incurred by him to the Company or Group companies; any criminal
or regulatory fines; the costs of defending any criminal proceedings in which he is convicted; or the costs of defending any civil
proceedings brought by the Company in which judgement is given against him.
The adequacy of insurance cover for Directors and Officers will be reviewed by the Board in the light of the changes to Directors’ liability
to be implemented under the Companies Act 2006.
Statement on disclosure of information to auditors
Having made enquiries of fellow Directors and of the Company’s auditors, each Director confirms that to the best of each Director’s
knowledge and belief, there is no information relevant to the preparation of their report of which the Company’s auditors are unaware;
and, each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit
information and to establish that the Company’s auditors are aware of the information.
Going concern
The Directors confirm that they are satisfied that the Company has sufficient resources to continue in operation for the foreseeable
future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.
Auditors
A resolution to reappoint Ernst & Young LLP as auditors will be put to the members at the Annual General Meeting.
Annual General Meeting
The first Annual General Meeting of the Company will be held at 11.30 am on 4 July 2007 at One Silk Street, London EC2Y 8HQ. The
notice convening the meeting is included within the accompanying Chairman’s letter with details of the business to be considered.
Biographical details of the Directors standing for election at the Annual General Meeting are set out within the accompanying
Chairman’s Letter containing the notice of meeting.
On behalf of the Board
Roberto Dañino
Executive Director and Deputy Chairman
19 March 2007
52
Hochschild Mining plc
Annual Report & Accounts 2006
Statement of Directors’ Responsibilities in
Relation to the Group and Parent Company
Financial Statements
The Directors are responsible for preparing the Annual Report and the Group and parent company’s financial statements (‘financial
statements’) in accordance with applicable United Kingdom law and those International Financial Reporting Standards (‘IFRS’) as
adopted by the European Union.
The Directors are required to prepare Group and parent company’s financial statements for each financial year which present fairly the
financial position of the Group and parent company, and the financial performance and cash flows of the Group and parent company
for that period. In preparing those financial statements the Directors are required to:
•
•
•
•
select suitable accounting policies in accordance with IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and
then apply them consistently;
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information;
provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the Group and parent company’s financial position and
financial performance; and
state that the Group and parent company has complied with IFRS, subject to any material departures disclosed and explained in the
financial statements.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Group and parent company and enable them to ensure that the financial statements comply with the Companies Act
1985 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and parent company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Hochschild Mining plc
Annual Report & Accounts 2006
53
Independent Auditors’ Report
to the members of Hochschild Mining plc
We have audited the Group financial statements (the ‘financial statements’) of Hochschild Mining plc for the year ended 31 December
2006 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement
of Changes in Equity and the related notes 1 to 40. We have also audited the parent company financial statements (the ‘financial
statements’) of Hochschild Mining plc for the period ended 31 December 2006 which comprise the Company Income Statement, the
Company Balance Sheet, the Company Cash Flow Statement, the Company Statement of Changes in Equity and the related notes 1 to 12.
These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in
the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable United
Kingdom law and International Financial Reporting Standards (‘IFRS’) as adopted by the European Union are set out in the Statement of
Directors’ Responsibilities.
Our responsibility is to audit the financial statements and the part of Directors’ Remuneration Report to be audited in accordance with
relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view, whether the financial statements and
the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985
and whether the Group financial statements have been properly prepared in accordance with Article 4 of the IAS Regulations. We also
report to you whether, in our opinion, the information given in the Directors’ Report is consistent with the financial statements. The
information given in the Directors’ Report includes that specific information presented in the Operating and Financial Review that is
cross referred from the Business Review section of the Directors’ Report.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other
transactions is not disclosed.
We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2003
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are
not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial
statements. The other information comprises only the Chairman’s Statement, the Operating and Financial Review, the Directors’ Report,
the unaudited part of the Directors’ Remuneration Report and the Corporate Governance Statement. We consider the implications
for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements
and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and
judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are
appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’
Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part
of the Directors’ Remuneration Report to be audited.
54
Hochschild Mining plc
Annual Report & Accounts 2006
Opinion
In our opinion:
•
•
•
•
•
The Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of
the Group’s affairs as at 31 December 2006 and of its profit for the year then ended.
The parent company’s financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of
the state of the parent’s affairs as at 31 December 2006 and of its profit for the year then ended.
The Group and parent company’s financial statements have been properly prepared in accordance with the Companies Act 1985 and
Article 4 of the IAS Regulation.
The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 1985.
The information given in the Director’s Report is consistent with the financial statements.
Ernst & Young LLP
Registered Auditors
London
19 March 2007
Hochschild Mining plc
Annual Report & Accounts 2006
55
Group Income Statement
For the year ended 31 December 2006
Year ended 31 December 2006
Year ended 31 December 2005
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Exploration expenses
Gain on sale of Bongara zinc project and
Compañía Minera Corianta S.A.C.
Selling expenses
Other income
Other expenses
Profit from continuing operations before
net finance costs and income tax
Finance income
Finance costs
Foreign exchange gain/(loss)
Profit from continuing operations
before income tax
Income tax expense
Profit for the year from continuing operations
Discontinued operations
Profit for the year from discontinued operations
Profit for the year
Attributable to:
Equity shareholders of the Company
Minority interest
Basic and diluted earnings/(loss) per ordinary
share from continuing operations
(expressed in US dollars per share)
Basic and diluted earnings per ordinary
share from discontinued operations
(expressed in US dollars per share)
Notes
3, 5
6
7
8
9
10
12
12
13
13
14
31
15
15
Before
exceptional
items
US$000
Exceptional
items
US$000
Before
exceptional
items
US$000
Exceptional
items
US$000
211,246
(75,547)
135,699
(38,738)
(19,863)
–
(3,187)
5,022
(3,870)
75,063
6,906
(12,037)
353
70,285
(29,486)
40,799
–
–
–
–
–
–
–
346
(6,495)
(6,149)
–
–
–
(6,149)
791
(5,358)
Total
US$000
211,246
(75,547)
135,699
(38,738)
(19,863)
–
(3,187)
5,368
(10,365)
68,914
6,906
(12,037)
353
64,136
(28,695)
161,235
(72,529)
88,706
(25,434)
(28,057)
–
(3,161)
2,846
(2,619)
32,281
4,144
(10,105)
(552)
25,768
(4,902)
35,441
20,866
–
–
–
40,799
(5,358)
35,441
46,646
(5,847)
40,799
(5,358)
–
(5,358)
41,288
(5,847)
35,441
12,179
33,045
36,898
(3,853)
33,045
Total
US$000
161,235
(72,529)
88,706
(25,434)
(28,057)
14,812
(3,161)
2,846
(2,821)
46,891
4,144
(10,105)
(552)
40,378
(9,673)
30,705
12,179
42,884
46,737
(3,853)
42,884
–
–
–
–
–
14,812
–
–
(202)
14,610
–
–
–
14,610
(4,771)
9,839
–
9,839
9,839
–
9,839
0.19
(0.02)
0.17
0.11
0.04
0.15
–
–
–
0.05
–
0.05
56
Hochschild Mining plc
Annual Report & Accounts 2006
Group Balance Sheet
As at 31 December 2006
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Available-for-sale financial assets
Trade and other receivables
Derivative financial instruments
Deferred income tax assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Other financial assets at fair value through profit or loss
Cash and cash equivalents
Assets classified as held-for-sale
Total assets
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Equity share capital (including additional capital)
Share premium
Other reserves
Retained earnings
Minority interest
Total equity
Non-current liabilities
Trade and other payables
Borrowings
Provisions
Deferred income tax liabilities
Current liabilities
Trade and other payables
Borrowings
Provisions
Income tax payable
Total liabilities
Total equity and liabilities
On behalf of the Board
Roberto Dañino
Executive Director and Deputy Chairman
19 March 2007
As of 31 December
Notes
2006
US$000
2005
US$000
16
17
18
19
21
29
20
19
21
22
23
31
28
24
25
26
29
24
25
26
118,413
2,091
6,285
17,427
–
15,704
59,403
2,091
26,267
6,050
1,902
10,990
159,920
106,703
16,405
49,726
6,022
–
435,543
10,499
81,106
7,047
19,835
2,467
507,696
120,954
345
667,961
3,844
231,501
146,466
396,156
(205,112)
142,810
480,320
9,011
489,331
1,064
27,114
28,690
4,026
60,894
64,140
29,782
11,385
12,429
117,736
178,630
667,961
219,233
–
(198,055)
28,198
49,376
(2,533)
46,843
3,161
31,089
30,982
4,134
69,366
31,664
69,793
8,860
4,975
115,292
184,658
231,501
Hochschild Mining plc
Annual Report & Accounts 2006
57
Group Cash Flow Statement
For the year ended 31 December 2006
Cash flows from operating activities
Cash generated from operations
Interest received
Interest paid
Payments of mine closure costs
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of available-for-sale financial assets
Purchase of shares of Minera Colorada S.A.C.
Purchase of other financial assets at fair value through profit or loss
Purchase of assets and liabilities of Mina Moris
Loan to Exmin, S.A. de C.V.
Loan to Minera Andes Inc.
Proceeds from other financial assets at fair value through profit or loss
Proceeds from sale of Bongara zinc project and Compañía Minera Corianta S.A.C.
Proceeds from sale of available-for-sale financial assets
Proceeds from sale of Mauricio Hochschild & Cía. Ltda. S.A.C. (subsidiary)
Proceeds from sale of Caylloma mining unit
Proceeds from sale of property, plant and equipment and assets classified as held-for-sale
Proceeds from sale of supplies
Dividends received
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Dividends paid
Capital contribution
Proceeds from issue of ordinary shares under global offer
Transaction costs associated with issue of shares
Purchase of shares from minority shareholders
Capital contribution from minority shareholders
Repayment of capital to minority shareholders
Cash flows generated from (used in) financing activities
Net increase/(decrease) in cash and cash equivalents during the year
Exchange difference
Cash and cash equivalents at beginning of year
Notes
34
4
4
4
25
9
12, 18
12
31
28
28
Year ended 31 December
2006
US$000
2005
US$000
126,231
2,576
(9,163)
(5,426)
(26,010)
88,208
(63,864)
(2,770)
(240)
(5,867)
(4,983)
(754)
(9,800)
5,591
–
6,550
3,801
4,500
991
3,975
147
(62,723)
77,014
(95,977)
(58,375)
93
515,245
(33,989)
(2)
4,215
(671)
407,553
433,038
38
2,467
30,464
345
(4,989)
(5,228)
(12,602)
7,990
(18,852)
(3,107)
–
(21,537)
–
–
–
17,566
16,364
–
–
3,050
239
3,417
182
(2,678)
118,103
(127,073)
(50)
–
–
–
(2,667)
3,229
–
(8,458)
(3,146)
(20)
5,633
2,467
Cash and cash equivalents at end of year
23
435,543
58
Hochschild Mining plc
Annual Report & Accounts 2006
Group Statement of Changes in Equity
For the year ended 31 December 2006
11,265
726
(210,046)
(198,055)
28,198
49,376
(2,533)
46,843
Other reserves
Unrealised
gain/(loss) on
suitable-for-
Share sale financial
assets
US$000
premium
US$000
Cumulative
translation
adjustment
US$000
Merger
reserve
US$000
Total
other
reserves
US$000
Capital
and reserves
attributable to
Retained
earnings
US$000
shareholders Minority
interest
of the parent
US$000
US$000
Total
equity
US$000
–
(210,046) (203,273)
(16,095)
(135)
(1,833)
(1,968)
Equity
share capital
(including
additional
capital)
US$000
Notes
28
219,233
18
28
18
29
–
–
–
–
–
–
–
219,233
–
–
–
–
–
–
28
–
93
Balance at 1 January 2005
Fair value gains on available-
for-sale financial assets
Translation adjustment
for the year
Net income recognised
directly in equity
Profit for the year
Total recognised
income for 2005
Purchase of shares from
minority shareholders
Capital contribution from
minority shareholders
Balance at
31 December 2005
Fair value gains on
available-for-sale
financial assets
Deferred income
tax on available-
for-sale financial assets
Fair value changes
transferred to income
statement on disposal
Translation adjustment
for the year
Net income recognised
directly in equity
Profit for the year
Total recognised
income for 2006
Shares issued
Shares issued under
global offer
Transaction costs
associated with
issue of shares
Capital reduction
Dividends
Capital contribution
from minority
shareholders
Purchase of shares from
minority shareholders
Repayment of capital to
minority shareholders
Balance at
31 December 2006
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,773
4,492
–
–
726
4,492
–
726
–
4,492
726
–
–
–
–
13,351
(398)
(22,844)
–
–
–
–
2,834
(9,891)
–
2,834
–
(9,891)
–
2,834
–
28
73,606 441,639
–
(146,466)
–
(45,483)
–
–
30
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,492
726
–
–
4,492
–
4,492
726
147
873
5,218
–
–
46,737
5,218
46,737
147
(3,853)
5,365
42,884
5,218
46,737
51,955
(3,706) 48,249
–
–
(2,444)
(2,444)
(223)
(2,667)
–
–
3,229
3,229
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,351
(398)
(22,844)
2,834
–
–
–
–
13,351
20
13,371
(398)
–
(398)
(22,844)
–
(22,844)
2,834
142
2,976
(7,057)
–
–
41,288
(7,057)
41,288
162
(5,847)
(6,895)
35,441
(7,057)
–
41,288
–
34,231
93
(5,685)
–
28,546
93
–
–
–
–
–
–
–
–
515,245
–
515,245
–
146,466
(73,142)
(45,483)
–
(73,142)
–
–
(298)
(45,483)
–
(73,440)
–
–
–
–
18,200
18,200
–
–
(2)
(2)
(671)
(671)
146,466
396,156
1,374
3,560
(210,046)
(205,112)
142,810
480,320
9,011 489,331
Hochschild Mining plc
Annual Report & Accounts 2006
59
Notes to the Group Financial Statements
For the year ended 31 December 2006
1 Corporate information
Hochschild Mining plc (hereinafter the ‘Company’) is a public limited company incorporated on 11 April 2006 under the Companies Act
1985 as a Limited Company and registered in England and Wales with registered number 05777693. The Company’s registered address
is One Silk Street, London EC2Y 8HQ, United Kingdom. The Company was incorporated to serve as a holding company to be listed on the
London Stock Exchange. The Company acquired its interest in the companies listed below constituting the Hochschild Mining Group
pursuant to a share exchange agreement (‘Share Exchange Agreement’) dated 2 November 2006 (see notes 2(a) and 28(a)).
The ultimate controlling party of the Company is Mr Eduardo Hochschild whose beneficial interest in the Company and its subsidiaries
(together the ‘Group’ or ‘Hochschild Mining Group’) is held through Pelham Investment Corporation (formerly ‘Dona Limited’).
On 8 November 2006, the Company’s shares were admitted to the Official List of the United Kingdom Listing Authority (‘UKLA’) and to
trading on the London Stock Exchange.
The Group’s principal business is the mining, processing and sale of silver and gold. The Group has three fully developed operating
mines (Ares, Arcata and Selene) located in Southern Peru. The Group also has a portfolio of projects located across Peru, Mexico, Chile
and Argentina at various stages of development.
These Group consolidated financial statements, which were the first financial statements presented by the Group, were approved for
issue by the Board of Directors on 19 March 2007.
The principal activities of the Company’s subsidiaries are as follows:
Company
Hochschild Mining (Argentina) Corporation
(formerly Lorenzon Limited)
Larchmont Corporation
Garrison Corporation
Ardsley Corporation
Hochschild Mining (Peru) Corporation
(formerly Ludlow Corporation)
Hochschild Mining (Mexico) Corporation
(formerly Port Chester Ltd.)
Hochschild Mining Holding Limited
San José International Ltd.1
Compañía Minera Sipán S.A.C.2
Compañía Minera Ares S.A.C.
Compañía Minera Arcata S.A.3
Mauricio Hochschild & Cía. Ltda. S.A.C. (MHC)4
Minera Colorada S.A.C.
Empresa de Transmisión Eléctrica Callalli S.A.C.
Asociación Sumac Tarpuy5
Pallancata Holding S.A.C.
(formerly Compañía Minera Coriorco S.A.)
Minera Suyamarca S.A.C.
MH Argentina S.A.
Minera MH Chile Ltda.
Minera Hochschild Mexico, S.A. de C.V.
Minas Santa María de Moris, S.A. de C.V.
Moris Holding, S.A. de C.V.
Hochschild Mining (US) Inc. (formerly MH Nevada, Inc.)
Minera Santa Cruz S.A.
Principal
activity
Country of
incorporation
Equity interest
at 31 December
2006
2005
Holding company
Holding company
Holding company
Holding company
Cayman Islands
Cayman Islands
Cayman Islands
Cayman Islands
Holding company
Cayman Islands
Holding company
Holding company
Dormant
Production of gold and silver
Production of gold and silver
Production of gold and silver
Services
Exploration office
Power transmission
Not-for-profit
Holding company
Development project
Exploration Office
Exploration Office
Exploration Office
Development project
Holding company
Exploration Office
Development project
Cayman Islands
United Kingdom
Cayman Islands
Peru
Peru
Peru
Peru
Peru
Peru
Peru
Peru
Peru
Argentina
Chile
Mexico
Mexico
Mexico
USA
Argentina
100
100
100
100
100
100
100
–
100
100
96.8
–
30
100
–
100
60
100
100
100
70
100
100
51
100
100
100
100
100
100
–
–
100
100
96.8
100
–
100
–
100
–
100
100
100
–
–
100
51
Incorporated and dissolved in 2006.
Notes
1
2 Currently involved in mine closure activities.
3 Mining unit sold to Compañía Minera Ares S.A.C. in 2006.
4 Sold in 2006, refer to note 12(4).
5 Asociación Sumac Tarpuy is an unincorporated entity, which receives donations from Compañía Minera Ares S.A.C. and donates this money to charitable activities at the
direction of Ares. As a result, the Group consolidates this entity.
60
Hochschild Mining plc
Annual Report & Accounts 2006
2 Significant accounting policies
(a) Basis of preparation
On 2 November 2006 and according to the Share Exchange Agreement terms Hochschild Mining plc entered into an agreement to
acquire Hochschild Mining (Argentina) Corporation, Larchmont Corporation, Garrison Corporation, Ardsley Corporation, Hochschild
Mining (Peru) Corporation and Hochschild Mining (Mexico) Corporation (together referred to as the ‘Cayman Holding Companies’).
In relation to this transaction, Hochschild Mining plc issued 229,900,000 shares to the former shareholders of the Cayman Holding
Companies in exchange for the issued share capital of these companies. As this transaction involved the combination of businesses
under common control, the pooling of interests method of accounting has been applied in the presentation of the consolidated
financial statements for the years ended 31 December 2006 and 31 December 2005 which present the results of the Group as if the
Cayman Holding Companies had always been part of the Group. Accordingly, the assets and liabilities transferred to the Company
have been recognised at historical amounts. For periods prior to the legal formation of the Company, the assets, liabilities, revenue
and expenses of the Cayman Holding Companies comprising the Predecessor Operations were consolidated in preparing the financial
statements. The accompanying consolidated financial statements present the results and changes in equity of the Company and
its subsidiaries as if the Group had been in existence throughout the years presented and as if the Predecessor Operations were
transferred to the Company from the Cayman Holding Companies as of 1 January 2005.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as
adopted for use in the European Union (‘EU’). The Group’s financial statements are also consistent with IFRS issued by the IASB.
The basis of preparation and accounting policies used in preparing the consolidated financial statements for the years ended
31 December 2006 and 2005 are set out below. These accounting policies have been consistently applied to all the periods presented
unless otherwise stated.
The financial statements have been prepared on a historical cost basis, except for certain classes of property, plant and equipment which
have been revalued at 1 January 2003 to determine deemed cost (refer to note 2(e)), derivatives, available-for-sale financial instruments and
other financial assets at fair value through profit and loss which have been measured at fair value. The financial statements are presented
in US dollars (US$) and all monetary amounts are rounded to the nearest thousand (US$000) except when otherwise indicated.
The Group’s transition date to IFRS was 1 January 2005. The rules for first-time adoption of IFRS are set out in IFRS 1, first-time adoption
of International Financial Reporting Standards.
IFRS 1 allows certain exemptions in the application of particular Standards to prior periods in order to assist companies with the
transition process. The Group has applied the following exemptions:
(i) Certain classes of tangible assets had been revalued at 1 January 2003. Deemed cost as at the date of transition is considered as
the revalued amounts as of 1 January 2003 at the time of initial public offering of the Group and depreciated for the period until the
date of transition;
(ii) IFRS 3 is applied as from 1 January 2001 and not retrospectively to past business combinations; and
(iii) The Group has deemed cumulative translation differences for foreign operations to be zero at the date of transition; any gains and
losses or subsequent disposals of foreign operations will not therefore include translation differences arising prior to the transition date.
Reconciliation to the previous GAAP for equity as at the date of transition and profit and loss account for previous years are not
presented as these are the first consolidated financial statements of the Group.
Standards, interpretations and amendment to existing standards that are not yet effective and have not been early adopted by the Group
Certain new standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s
accounting periods beginning on or after 1 January 2007 or later periods but which the Group has not early adopted. Those that are
applicable to the Group are as follows:
•
•
•
•
•
•
•
•
•
IFRS 7, ‘Financial Instruments: Disclosures’, applicable for annual periods beginning on or after 1 January 2007.
IFRS 8, ‘Operating Segments’, applicable for annual periods, beginning on or after 1 January 2009.
IFRIC 7, ‘Applying the Restatement Approach’ under IAS 29, ‘Financial Reporting in Hyperinflationary Economies’, applicable for annual
periods beginning on or after 1 March 2006.
IFRIC 8, ‘Scope of IFRS 2’, applicable for annual periods beginning on or after 1 May 2006.
IFRIC 9, ‘Reassessment of Embedded derivatives’, applicable for annual periods beginning on or after 1 June 2006.
IFRIC 10, ‘Interim Financial Reporting and Impairment’, applicable for annual periods beginning on or after 1 November 2006.
IFRIC 11, IFRS 2 ‘Group and Treasury Shares Transactions’, applicable for annual periods beginning on or after 1 March 2007.
IFRIC 12, ‘Service Concession Arrangements’, applicable for annual periods beginning on or after 1 January 2008.
Complementary amendment to IAS 1, ‘Presentation of Financial Statements – Capital Disclosures’, applicable for annual periods
beginning on or after 1 January 2007.
The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the
financial statements of the Group.
Hochschild Mining plc
Annual Report & Accounts 2006
61
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
2 Significant accounting policies continued
(b) Judgements in applying accounting policies and key sources of estimation uncertainty
Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and
estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but
actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is
contained in the accounting policies and/or the notes to the financial statements. The key areas are summarised below.
Significant areas of estimation uncertainty and critical judgements made by management in preparing the consolidated statements include:
•
•
•
•
•
•
•
Determination of functional currencies (note 2 (d)).
Determination of useful lives of assets for depreciation and amortisation purposes (note 2 (e)).
Determination of ore reserves and resources (note 2 (f)).
Review of asset carrying values and impairment charges (note 2 (i)).
Estimation of the amount and timing of mine closure costs (notes 2 (m) and 26).
Income tax (notes 14 and 29).
Contingent liabilities regarding claims from tax authorities (note 36).
(c) Basis of consolidation
The consolidated financial statements set out the Group’s financial position and operations and cash flow as of 31 December 2006 and
31 December 2005 and for the years then ended, respectively.
Subsidiaries are those enterprises controlled by the Group regardless of the amount of shares owned by the Group. Control exists
when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain
benefits from its activities. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of the Group. The purchase method of accounting is used to account
for the acquisition of subsidiaries by the Group. On acquisition of a subsidiary, the purchase consideration is allocated to the assets and
liabilities on the basis of their fair value at the date of acquisition. The excess of the cost of acquisition over the fair value of the Group’s
share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of net assets of
the entity acquired, the difference is recognised directly in the income statement.
The financial statements of subsidiaries are prepared for the same reporting periods as the Company using consistent accounting
policies. All intercompany balances and transactions, including unrealised profits arising from intra-Group transactions, have been
eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated
to the extent that there is no evidence of impairment.
Minority shareholders primarily represent the interests in Minera Santa Cruz, Compañía Minera Arcata, Minera Suyamarca, and Mina
Santa María de Moris S.A. de C.V. not held by the Company. In the event of a purchase of minority shareholders’ interest when the Group
holds the majority of shares of a subsidiary, any excess of the consideration given over the Group’s share of net assets is recorded in
retained earnings in equity.
(d) Currency translation
The functional currency for each entity in the Group is determined by the currency of the primary economic environment in which
it operates. For the holding companies and operating entities it is US dollars and for the other entities it is the local currency of the
country in which it operates. The Group’s financial information is presented in US dollars, which is the Company’s functional currency.
Transactions denominated in currencies other than the functional currency of the entity are initially recorded in the functional currency
using the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are
remeasured at the rate of exchange ruling at the balance sheet date. Exchange gains and losses on settlement of foreign currency
transactions which are translated at the rate prevailing at the date of the transactions, or on the translation of monetary assets and
liabilities which are translated at period-end exchange rates, are taken to the income statement. Non-monetary assets and liabilities
denominated in foreign currencies that are stated at historical cost are translated to the functional currency at the foreign exchange
rate prevailing at the date of the transaction. Exchange differences arising from monetary items that are part of a net investment in a
foreign operation are recognised in equity and transferred to income on disposal of such net investment.
Subsidiary financial statements expressed in their corresponding functional currencies are translated into US dollars by applying
the exchange rate at period-end for assets and liabilities and the average exchange rate for income statement items. The resulting
difference on consolidation is included as cumulative translation adjustment in equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the closing rate.
62
Hochschild Mining plc
Annual Report & Accounts 2006
(e) Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment losses. Cost comprises
its purchase price and any costs directly attributable to bringing it into working condition for its intended use. The cost of self-
constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost or
deemed cost of property, plant and equipment (hereafter referred to as ‘cost’) at 1 January 2005, the date of the Group transition to IFRS,
is the deemed cost as at the date of transition by considering the revalued amounts as of 1 January 2003 at the time of initial public
offering of the Group and depreciated for the period until the date of transition. Economical and physical conditions of assets have not
changed substantially over this period.
The cost less its residual value of each item of property, plant and equipment is depreciated over its useful life. Each item’s estimated
useful life has been assessed with regard to both its own physical life limitations and the present assessment of economically
recoverable reserves and resources of the mine property at which the item is located. Estimates of remaining useful lives are made on a
regular basis for all mine buildings, machinery and equipment, with annual reassessments for major items. Depreciation is charged to
cost of production on a units of production (UOP) basis for mine buildings and installations, plant and equipment used in the mining
production process or charged directly to the income statement over the estimated useful life of the individual asset on a straight-line
basis when not related to the mining production process. Changes in estimates, which mainly affect units of production calculations,
are accounted for prospectively. Depreciation commences when assets are available for use. Land is not depreciated.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its
estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other
income/expenses, in the income statement.
The expected useful lives under the straight-line method are as follows:
Buildings
Plant and equipment
Furniture, fixtures and fittings
Vehicles
Borrowing costs are not capitalised and are expensed.
Years
3 to 33
5
10
5
Mineral properties and mine development costs
Payments for mineral properties are expensed during the exploration phase of a project and capitalised during their development
phase when incurred. Costs associated with developments are capitalised.
Mine development costs are, upon commencement of production, depreciated using the units of production method based on the
estimated economically recoverable reserves and resources to which they relate.
Construction in progress
Assets in the course of construction are capitalised as a separate component of property, plant and equipment. On completion, the cost
of construction is transferred to the appropriate category. Construction in progress is not depreciated.
Subsequent expenditure
Expenditure incurred to replace a component of an item of property, plant and equipment is capitalised separately with the carrying
amount of the component being written off. Other subsequent expenditure is capitalised if future economic benefits will arise from the
expenditure. All other expenditure including repairs and maintenance expenditures are recognised in the income statement as incurred.
(f) Determination of ore reserves and resources
The Group estimates its ore reserves and mineral resources based on information compiled by internal competent persons. Reports to
support these estimates are prepared each year and are stated in conformity with the Joint Ore Reserves Committee (JORC) code.
Reserves and resources are used in the units of production calculation for depreciation as well as the determination of the timing of
mine closure cost and impairment analysis.
There are numerous uncertainties inherent in estimating ore reserves. Assumptions that are valid at the time of estimation may change
significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs
or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated.
Hochschild Mining plc
Annual Report & Accounts 2006
63
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
2 Significant accounting policies continued
(g) Assets held for sale
Assets are classified as assets held-for-sale and stated at the lower of carrying amount and fair value less cost to sell if their carrying
amount is to be recovered principally through a sale transaction rather than through a continuing use. These assets are not depreciated.
(h) Goodwill
Goodwill is included in intangible assets and represents the excess of the cost of an acquisition over the fair value of the Group’s share
of the net identifiable assets of the acquired entity at the date of acquisition. Separately recognised goodwill is tested annually for
impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating
units that are expected to benefit from business combination in which the goodwill arose.
(i) Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment.
The carrying amounts of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate
that the carrying value may not be recoverable. If there are indicators of impairment, an exercise is undertaken to determine whether
the carrying values are in excess of their recoverable amount. Such review is undertaken on an asset-by-asset basis, except where such
assets do not generate cash flows independent of other assets, and then the review is undertaken at the cash-generating unit level.
If the carrying amount of an asset or its cash-generating unit exceeds the recoverable amount, a provision is recorded to reflect the
asset at the lower amount. Impairment losses are recognised in the income statement.
Calculation of recoverable amount
The recoverable amount of assets is the greater of their value in use and fair value less costs to sell. Fair value is based on an estimate
of the amount that the Group may obtain in a sale transaction on an arm’s length basis. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those
from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. The Group’s cash-
generating units are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Reversal of impairment
An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment
loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortisation, if no impairment loss had been recognised.
(j) Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is determined using the weighted average cost method.
The cost of work in progress and finished goods (ore inventories) is based on cost of production and excludes borrowing costs.
For this purpose, the costs of production include:
•
•
•
costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore;
the depreciation of property, plant and equipment used in the extraction and processing of ore; and
related production overheads (based on normal operating capacity).
Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
(k) Trade and other receivables
Current trade receivables are carried at the original invoice amount less provision made for impairment of these receivables. Non-
current receivables are stated at amortised cost. A provision for impairment of trade receivables is established when there is objective
evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable which on average
do not exceed 30 days. The amount of the provision is the difference between the carrying amount and the recoverable amount, and
this difference is recognised in the income statement.
(l) Share capital
Ordinary shares are classified as equity. Excess to par value of shares received upon issuance of shares is classified as share premium.
64
Hochschild Mining plc
Annual Report & Accounts 2006
(m) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that
an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If
the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax
rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
Mine closure cost
Provisions for mine closure costs are made in respect of the estimated future costs of closure and restoration and for environmental
rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation
of disturbed areas) in the accounting period when the related environmental disturbance occurs. The provision is discounted and the
unwinding of the discount is included in finance costs. At the time of establishing the provision, a corresponding asset is capitalised
and is depreciated over future production from the mine to which it relates. The provision is reviewed on an annual basis for changes
in cost estimates, discount rates and operating lives.
Workers’ profit sharing and other employee benefits
In accordance with Peruvian legislation, Group companies in Peru must provide for workers’ profit sharing equivalent to 8% of taxable
income of each year. This amount is charged to the income statement within personnel expenses (refer to note 11) and is considered
deductible for income tax purposes. The Group has no pension or retirement benefit schemes.
Other
Other provisions are accounted for when the Group has a legal or constructive obligation for which it is probable there will be an
outflow of resources for which the amount can be reliably estimated.
(n) Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
(o) Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost;
any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over
the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
(p) Contingencies
Contingent liabilities are not recognised in the financial statements and are disclosed in notes to the financial information unless their
occurrence is remote.
Contingent assets are not recognised in the financial statements, but they are disclosed in notes if they are deemed probable.
(q) Revenue recognition
The Group is involved in production and sale of doré bars and concentrate containing both gold and silver. Concentrate is sold directly
to customers. Doré bars are sent to a third party for further refining into gold and silver which is then sold.
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be
reliably measured.
Revenue associated with the sale of concentrate and doré bars is recognised in the income statement when all significant risks and rewards
of ownership are transferred to the customer, usually when title has passed to the customer. Revenue excludes any applicable sales taxes.
The revenue is subject to adjustment based on inspection of the product by the customer. Revenue is initially recognised on a
provisional basis using the Group’s best estimate of contained gold and silver. Any subsequent adjustments to the initial estimate
of metal content are recorded in revenue once they have been determined.
Hochschild Mining plc
Annual Report & Accounts 2006
65
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
2 Significant accounting policies continued
In addition, sales of concentrate are ‘provisionally priced’ where the selling price is subject to final adjustment at the end of a period
normally ranging from 30 to 90 days after the start of the delivery process to the customer, based on the market price at the relevant
quotation point stipulated in the contract. Revenue is initially recognised when the conditions set out above have been met, using
market prices at that date. The price exposure is considered to be an embedded derivative and hence separated from the sales contract
at each reporting date the provisionally priced metal is revalued based on the forward selling price for the quotational period stipulated
in the contract until the quotational period ends. The selling price of gold and silver can be measured reliably as these metals are
actively traded on the international exchanges. The revaluing of provisionally priced contracts is recorded as an adjustment to ‘Revenue’.
Income from services provided to related parties (note 32) is recognised in income when services are provided.
(r) Exploration and evaluation expenditure
Exploration and evaluation expenditure for each area of interest is charged to the income statement as incurred. Administrative and
general expenses relating to exploration and evaluation activities are also expensed as incurred.
(s) Finance income and costs
Finance income and expenses comprise interest expense on borrowings, the accumulation of interest on provisions, interest income on
funds invested, foreign exchange gains and losses, gains and losses from the change in fair value of derivative instruments and gains
and losses on the disposal of available-for-sale investments.
Interest income is recognised as it accrues, taking into account the effective yield on the asset.
(t) Income tax
Income tax for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that
it relates to items charged or credited directly to equity, in which case it is recognised in equity.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date,
and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or
the liability is settled based on the tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which
the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit
will be realised.
Tax on dividend remittance, where applicable, is provided in the year in which distributable income is generated.
(u) Financial instruments
Recognition
The Group recognises financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual
provisions of the instrument.
Financial assets and liabilities are offset and the net amount is reported in the balance sheet only when there is a legally enforceable
right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability
simultaneously.
Measurement
Financial assets and liabilities are initially recognised at cost, which is the fair value of consideration given or received, respectively,
including in the case of a financial asset or financial liability not at fair value through profit or loss, any transaction costs incurred.
In determining estimated fair value, investments in shares or portfolios of listed securities are valued at quoted bid prices. When quoted
prices on an active market are not available (and for listed non-actively traded securities), fair value is determined using a valuation
technique. Valuation techniques include using recent arm’s length transactions, if available, reference to the current fair value of
another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If the range of reasonable
fair value is significant and the probabilities of the various estimates cannot be reliably assessed, the investment is not remeasured at
fair value. Investments in warrants are recorded based on an assessment performed by a third party expert using a Black-Scholes option
pricing model.
The Group has classified its investments as available-for-sale assets or other financial assets at fair value through profit or loss in
accordance with the intent of management at the time of the purchase.
66
Hochschild Mining plc
Annual Report & Accounts 2006
Changes in fair value of investments classified as available-for-sale are recognised in equity, except for impairment loss and foreign
exchange gain and losses for monetary items which are recognised directly in the income statement, and are included in income
when realised. Changes in the fair value of financial assets at fair value through profit and loss are recognised directly in the
income statement.
Loans and receivables are loans and receivables created by the Group companies providing money or goods to a debtor. Loans and
receivables are initially recognised in accordance with the policy stated above and subsequently remeasured at amortised cost using
the effective interest method. Financial liabilities are initially recognised in accordance with the policy stated above and subsequently
remeasured at amortised cost using the effective interest method.
Derivatives futures are initially recognised at fair value. Any gains and losses arising from changes in fair value are recognised
immediately in the income statement in the period in which they occur.
Derivatives are classified as a current asset or liability. Changes in fair value of trading derivatives are included in the income statement.
Embedded derivatives
Embedded derivatives which are not clearly and closely related to the underlying assets, liability or transaction are separated and
accounted for as stand-alone derivatives.
Derecognition
Financial instruments are derecognised when the Group transfers all risks and rewards of ownership.
(v) Dividend distribution
Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in
which the dividends are approved by the Company’s shareholders.
(w) Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the balance sheet, cash and cash equivalents
comprise cash on hand and deposits held with banks that are readily convertible into known amounts of cash within three months
or less and which are subject to insignificant risk of changes in value. For the purposes of the cash flow statement, cash and cash
equivalents as defined above are shown net of outstanding bank overdrafts.
(x) Exceptional items
Exceptional items are those significant items which due to their nature or the expected infrequency of the events giving rise to them
need to be disclosed separately on the face of the income statement to enable a better understanding of the financial performance
of the Group and facilitate comparison with prior years. Exceptional items mainly include goodwill impairments, assets held for sale
impairments, gain/(loss) from sale of property, plant and equipment, gain/(loss) from sale of investments, gain/(loss) from sale of
subsidiaries and the related tax impact of these items.
3 Segment reporting
The Group’s activities are principally related to mining operations which involve exploration, production and sale of gold and silver.
Products are subject to the same risks and returns and are sold through the same distribution channels. The Group has a number of
activities that exist solely to support mining operations including power generation and services. As such, the Group has only one
business segment as its primary reporting segment. The Group operates in various countries including Peru, Argentina, Mexico, Chile
and the United States of America. Therefore, the geographical segment is the Group’s secondary reporting format.
(a) Revenue
Revenue for the year is allocated based on the country in which the customer is located. There are no inter-segment revenues.
United Kingdom
Mexico
USA
Canada
Peru
Japan
Total
Year ended 31 December
2006
US$000
35,708
116,034
58,719
717
68
–
211,246
2005
US$000
60,857
52,708
30,476
17,235
50
(91)
161,235
The negative figure results from adjustments to revenue as a consequence of differences between the price and quantity of gold and
silver included in a final invoice and in the provisional invoice issued in the previous year.
Hochschild Mining plc
Annual Report & Accounts 2006
67
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
3 Segment reporting continued
(b) Profit for the year
The Group has no inter-segment transactions. Profit for the year is based on country of operation as follows:
Peru
Cayman Islands
Argentina
Mexico
Chile
USA
United Kingdom
Total
Year ended 31 December 2006
Year ended 31 December 2005
Before
exceptional
items
US$000
Exceptional
items
US$000
58,844
(2,756)
(10,745)
(3,920)
(1,613)
(778)
1,767
40,799
(4,325)
(1,033)
–
–
–
–
–
(5,358)
Before
exceptional
items
US$000
Exceptional
items
US$000
48,013
321
(9,135)
(3,647)
(1,492)
(1,015)
–
33,045
9,839
–
–
–
–
–
–
9,839
Total
US$000
54,519
(3,789)
(10,745)
(3,920)
(1,613)
(778)
1,767
35,441
Total
US$000
57,852
321
(9,135)
(3,647)
(1,492)
(1,015)
–
42,884
(c) Total segment assets
Total segment assets, which exclude income tax assets, are allocated based on where the assets are located:
Peru
Cayman Islands
Argentina
Mexico
Chile
USA
United Kingdom
Total segment assets
Deferred income tax assets
Other income tax assets due
Total
(d) Capital expenditure
Capital expenditure is allocated based on where the assets are located:
Peru
Argentina
Mexico
Chile
USA
United Kingdom
Total
Year ended 31 December
2006
US$000
133,092
11,134
58,597
12,340
580
162
434,218
650,123
15,704
2,134
667,961
2005
US$000
164,120
38,341
15,794
590
59
98
–
219,002
10,990
1,509
231,501
Year ended 31 December
2006
US$000
2005
US$000
32,573
36,155
8,191
67
40
4
77,030
16,960
5,474
52
–
46
–
22,532
68
Hochschild Mining plc
Annual Report & Accounts 2006
(e) Total segment liabilities
Total segment liabilities, which exclude income tax liabilities, are allocated based on where the liabilities are located:
Peru
Cayman Islands
Argentina
Mexico
Chile
USA
United Kingdom
Total segment liabilities
Deferred income tax liabilities
Income tax payable
Total
(f) Depreciation
Depreciation is allocated based on where the assets are located:
Peru
Argentina1
Mexico
Chile
USA
Total
Year ended 31 December
2006
US$000
2005
US$000
95,190
22,576
35,911
1,923
99
48
6,428
162,175
4,026
12,429
135,254
21,919
18,239
49
84
4
–
175,549
4,134
4,975
178,630
184,658
Year ended 31 December
2006
US$000
2005
US$000
17,185
1,032
44
3
14
15,957
629
20
–
–
18,278
16,606
Note
1
Includes US$850,000 of depreciation capitalised in property, plant and equipment of Minera Santa Cruz S.A.
(g) Non-cash expenses
Non-cash expenses for the year based on country of operation were as follows:
Peru
USA
Total
Year ended 31 December 2006
Year ended 31 December 2005
Before
exceptional
items
US$000
Exceptional
items
US$000
113
–
113
5,462
1,033
6,495
Before
exceptional
items
US$000
Exceptional
items
US$000
–
–
–
197
–
197
Total
US$000
5,575
1,033
6,608
Total
US$000
197
–
197
Hochschild Mining plc
Annual Report & Accounts 2006
69
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
4 Acquisitions
(a) Business combination
Minera Colorada S.A.C.
On 15 June 2006, the Group acquired a 30% controlling interest, based on its power to govern its financial and operating policies so as
to obtain benefits from its activities, in Minera Colorada S.A.C. (‘Colorada’), an exploration company, from Cementos Pacasmayo S.A.A.
(‘Pacasmayo’) (a related party) for US$240,000 in cash. After the Group’s acquisition, the shareholding in Colorada was split 30%, 20%,
50% between the Group, Pacasmayo and Compañía Minera Killacolqui, respectively.
As of 31 December 2006, Management forecasts that the project will not produce future benefits and accordingly the Group has
impaired in full the goodwill on acquisition of US$230,000 and related assets of US$113,000.
No further disclosures have been provided since amounts involved are not considered significant in relation to the Group
financial statements.
(b) Acquisition of assets
Mina Moris
On 30 June 2006 Minera Hochschild Mexico, S.A. de C.V. (‘MHM’) and Exmin, S.A. de C.V. (‘Exmin’) entered into an agreement to purchase
the assets and related liabilities of Santa Maria de Moris Mine (‘Mina Moris’) for US$6 million. MHM agreed to pay US$4.2 million (70%
share) and Exmin agreed to pay US$1.8 million (30% share). MHM and Exmin also incurred pre-acquisition costs of US$0.8 million,
which has been treated as a part of consideration for acquisition of these assets. Exmin’s contribution to the project has been funded
by a loan from the Group and the proceeds from purchase of shares in Exmin Resources Inc. by the Group (refer to note 18). These shares
were issued at a discount of 20% to the market price, resulting in an unrealised gain on issue of these shares of US$0.3 million, which
has reduced the cost of acquisition of net assets for the Group.
Assets and liabilities of Mina Moris at the date of acquisition were as follows:
Plant and equipment
Mining properties
Land and buildings
Supplies
Provision for mine closure costs
Total
US$000
3,255
3,355
1,432
248
(1,830)
6,460
Pallancata
On 3 July 2006, the Group entered into an agreement with Minera Oro Vega S.A.C. (‘Minorva’) to form an entity in order to purchase the
mining rights for the Pallancata properties located in the Coronel Castañeda District, Parinacochas province, Ayacucho (department in
Peru) from Minorva. On 16 August 2006, Pallancata Holdings S.A.C. (formerly known as Compañia Minera Coriorco S.A.C.) with Minorva
incorporated Minera Suyamarca S.A.C (‘Suyamarca’), with the Group being the operator of the project through a 60% controlling
interest in this company.
The Group’s initial contribution was US$6.0 million for the development of the project and Minorva’s contribution was in the form of
mining rights and an associated US$1.4 million liability representing payables to third parties, at an agreed net value of US$4.0 million.
Further, the Group has agreed to fund the cost of construction of the mine in full, up to an operating capacity of 750 tonnes per day.
As a result, the total cost of acquisition has been determined by the Group to be US$9.7 million (US$4.0 million of the aforementioned
contribution from Minorva and US$5.7 million towards Minorva’s share in the net assets on construction of the mine to be paid by
the Group), out of which US$11.1 million has been allocated to the mining rights and US$1.4 million towards the liability acquired. The
US$5.7 million has been treated as a deferred consideration (refer to note 24(2)).
On 12 October 2006, Suyamarca purchased the mining rights of four additional properties in the Pallancata project area from Minorva
for US$89,000 and assumed a liability of US$140,000.
70
Hochschild Mining plc
Annual Report & Accounts 2006
5 Revenue
Gold (from doré bars)
Silver (from doré bars)
Concentrate
Services
Total
Concentrate is made up of:
Gold
Silver
Other minerals
Total concentrate
Year ended 31 December
2006
US$000
70,498
23,929
116,751
68
211,246
21,953
94,208
590
116,751
2005
US$000
74,923
16,368
69,894
50
161,235
15,385
54,090
419
69,894
Included within the valuation of concentrate are the provisional pricing adjustments which represent changes in the fair value
of embedded derivatives of US$9,872,000 and US$9,916,000 for 2006 and 2005, respectively (refer to notes 2(q) and 21(4)).
The total volumes of gold and silver sold are as follows:
Gold
Silver
6 Cost of sales
Mining costs
Contractors
Depreciation
Materials
Personnel expenses
Energy
Transportation services
Mining royalty (note 38)
Security and maintenance
Lease rentals
Meals and food at mine site
Freight
Minerals’ treatment
Insurance
Assays
Provision for slow moving and obsolescence of supplies
Communications
Reallocation to administrative expenses.
Reallocation to property, plant and equipment
Change in products in process and finished goods
Other
Total
Hochschild Mining plc
Annual Report & Accounts 2006
Year ended 31 December
2006
US$000
190
10,403
2005
US$000
231
10,366
Year ended 31 December
2006
US$000
2005
US$000
19,847
16,435
12,694
12,028
4,692
3,633
3,258
1,298
1,155
1,065
1,044
642
618
380
303
125
(137)
(2,403)
(3,949)
2,819
75,547
18,984
14,605
12,795
9,484
4,491
2,560
1,184
955
765
776
943
744
495
302
63
100
(79)
(2,015)
1,512
3,865
72,529
71
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
7 Administrative expenses
Personnel expenses
Consulting fees
Donations 1
Lease rentals
Sundry administrative services
Indirect taxes
Depreciation
Tax penalties 2
Contribution to Peruvian Government (note 27)
Technology and systems
Termination benefits
Security
Supplies
Other
Total
Notes
1 Corresponds to donations by Compañía Minera Ares S.A.C. to charitable activities of communities surrounding its mining units (refer to note 1 (5)).
2 Corresponds to tax not withheld on payments to foreign companies, including interest and fines.
8 Exploration expenses
Mine site exploration1
Arcata
Ares
Selene
Pallancata
Prospects2
Peru
Argentina
Generative3
Peru
Argentina
Mexico
Chile
USA
Personnel4
Other
Exploration and mining rights5
Total
Year ended 31 December
2006
US$000
2005
US$000
18,958
5,385
2,307
1,325
1,193
1,037
993
940
800
776
639
322
315
3,748
38,738
14,385
1,464
1,164
1,114
1,577
986
2,001
198
–
54
406
180
163
1,742
25,434
Year ended 31 December
2006
US$000
2005
US$000
1,839
1,527
413
1,577
5,356
411
–
411
1,676
2,826
2,796
1,018
150
8,466
4,401
336
893
1,335
1,587
1,066
–
3,988
1,391
9,964
11,355
268
633
3,078
1,164
344
5,487
5,145
1,149
933
19,863
28,057
Notes
1 Mine site exploration is performed with the purpose of proving mineral reserves, establishing inferred and indicated resources and identifying potential minerals within an
existing mine site, with the goal of maintaining or extending the mine’s life.
2 Prospects expenses are related to detailed geological evaluations to characterise and interpret the three-dimensional continuity of the geometry, quality and quantity of the
ore within a prospect, with the goal of justifying further evaluation. Geological evidence and interpretations can move the project into a more advanced phase of evaluation
with reserve estimation and economic pre-feasibility by the Project.
3 Generative expenditure is very early stage exploration expenditure, incurred in connection with identifying and developing exploration targets with an inferred resource or
potential to develop into a mining operation.
4 Expenses relating to personnel involved with exploration.
5 Expenditure relating principally to payments for mining rights in accordance with relevant regulation.
72
Hochschild Mining plc
Annual Report & Accounts 2006
8 Exploration expenses continued
The following table lists the liabilities (generally payables) incurred in exploration activities of Group companies engaged only in
exploration. Liabilities related to exploration activities incurred by Group operating companies are not included since it is not possible
to separate the liabilities related to exploration activities of these companies from their operating liabilities.
Liabilities related to exploration activities
Cash flows of exploration activities are as follows:
Payments
Year ended 31 December
2006
US$000
320
2005
US$000
92
Year ended 31 December
2006
US$000
2005
US$000
8,649
17,420
9 Gain on sale of Bongara zinc project and Compañía Minera Corianta S.A.C.
In April 2005, the Group sold its Bongara zinc project to Cementos Pacasmayo for US$15,558,000. This post-feasibility project was
carried at US$1,000,000. Prior to the feasibility study, the Group incurred US$1,900,000 of mine property costs and other expenditures
during the exploration period that were charged to the income statement as incurred.
In connection with this transaction, the Group also disposed of its subsidiary, Compañía Minera Corianta S.A.C. (‘Corianta’) to Cementos
Pacasmayo for US$806,000, realising a gain of US$254,000.
10 Selling expenses
Transportation of doré and concentrates and maritime freight
Sales commissions
Personnel expenses
Warehouse services
Other
Total
Year ended 31 December
2006
US$000
2005
US$000
2,110
548
77
152
300
3,187
2,233
276
78
98
476
3,161
Hochschild Mining plc
Annual Report & Accounts 2006
73
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
11 Personnel expenses1
Salaries and wages
Workers’ profit sharing2
Semi-annual salary compensation
Other legal contributions
Termination benefits
Vacations
Other
Total
Personnel expenses were distributed as follows:
Cost of sales
Administrative expenses
Exploration expenses
Selling expenses
Discontinued operations
Other
Total
Year ended 31 December
2006
US$000
2005
US$000
18,175
8,293
2,950
2,484
1,313
1,244
1,005
35,464
16,203
4,626
3,401
2,429
1,043
1,054
581
29,337
Year ended 31 December
2006
US$000
12,028
18,958
4,401
77
–
–
35,464
2005
US$000
9,484
14,385
5,145
78
33
212
29,337
Notes
1 Personnel expenses include Directors’ remuneration (refer to note 32(b)).
2
In accordance with Peruvian Labour Regulations, the Peruvian companies of the Group are required to pay 8% of the taxable profit for the year to their employees.
Average number of employees for 2006 and 2005 were as follows:
Peru
Argentina
Mexico
Chile
USA
United Kingdom
Total
Year ended 31 December
2006
2005
887
274
18
6
3
.1
845
235
18
7
3
–
1,189
1,108
74
Hochschild Mining plc
Annual Report & Accounts 2006
12 Other income and other expenses
Other income:
Decrease in provision for mine closure1
Recovery of expenses
Gain on sale of supplies
Income from mine concession
Gain on sale of property, plant and equipment
Lease rentals
Other
Total
Other expenses:
Impairment of Sipán assets held for sale2
Loss on sale of investments3
Loss on sale of MHC (subsidiary)4
Penalty on cancellation of contract
Loss on maintenance of equipment
Provision for obsolescence of supplies
Impairment of Colorada assets (note 4(a))
Provision for contingencies
Allowance SEAL/Electroperú (note 36(a))
Loss on sale of Inmobiliaria CNP
Loss on sale of property, plant and equipment and
assets classified as held for sale
Other
Year ended 31 December 2006
Year ended 31 December 2005
Before
exceptional
items
US$000
Exceptional
items
US$000
Before
exceptional
items
US$000
Exceptional
items
US$000
Total
US$000
Total
US$000
2,812
791
–
151
–
90
1,178
5,022
–
–
–
(971)
(369)
(377)
(113)
(292)
(113)
–
–
(1,635)
–
–
252
–
94
–
–
346
(2,983)
(2,249)
(991)
–
–
–
(230)
–
–
(42)
–
–
2,812
791
252
151
94
90
1,178
725
379
–
–
–
77
1,665
5,368
2,846
(2,983)
(2,249)
(991)
(971)
(369)
(377)
(343)
(292)
(113)
(42)
–
(1,635)
–
–
–
–
(356)
(99)
–
–
(920)
–
–
(1,244)
(2,619)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(197)
(5)
(202)
725
379
–
–
–
77
1,665
2,846
–
–
–
–
(356)
(99)
–
–
(920)
–
(197)
(1,249)
(2,821)
Total
(3,870)
(6,495)
(10,365)
Notes
1 Decreases in provision for mine closure costs are recorded in ‘Other income’ where the disturbance is not expected to create a future economic benefit (normally this will occur
when the mine to which the provision relates has fully depleted its resources, but the closure and rehabilitation costs are yet to be incurred, and there is a reduction in the
estimate of the total mine closure cost).
In December 2006 an appraisal on the assets of Compañía Minera Sipán S.A.C. was performed resulting in an impairment of a portion of these assets (refer to note 31).
2
3 During the 12 months ended 31 December 2006 the Group disposed of 16,585,047 shares in Inversiones Pacasmayo (refer to note 18) for US$6,350,000 to Greystone Corporation
(a related party). These shares were carried at US$21,133,000, including an unrealised fair value gain of US$12,534,000 which had been recorded in equity. The disposal of these
shares, after recycling the unrealised gain through the income statement, resulted in a loss of US$2,249,000.
4 On 15 June 2006, the Group’s wholly owned subsidiary, Mauricio Hochschild & Cía. Ltda. S.A.C. (‘MHC’), was sold to Greystone Corporation (a related party) for US$1,000,000,
plus the benefit of a US$2,801,000 loan payable by MHC to Ardsley Corporation (a subsidiary of the Group) which had previously been eliminated on consolidation, resulting in
total consideration received of US$3,801,000. This disposal resulted in a loss to the Group of US$991,000.
The book value of the individual assets and liabilities disposed of are as follows:
Available-for-sale financial assets carried at fair valuea
Less: Unrealised fair value gain on assets recorded in equity
Other assets
Other liabilitiesb
Net book value of assets and liabilities disposed
Notes
US$000
15,077
(10,310)
344
(319)
4,792
(a) The available-for-sale financial assets disposed of represent 11,829,971 shares in Inversiones Pacasmayo (refer to note 18).
(b)
Does not include the US$2,801,000 loan payable by MHC to Ardsley Corporation as this loan eliminated on consolidation and therefore the disposal of this loan does not
impact upon the liabilities of the consolidated balance sheet of the Group.
Hochschild Mining plc
Annual Report & Accounts 2006
75
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
13 Finance income and finance costs
Finance income:
Interest on time deposits
Interest on loans to related parties (note 32)
Gain from changes in the fair value of financial instruments
Interest received from investment bank
Dividends received
Other
Total
Finance costs:
Interest on bank loans and long-term debt
Unwind of discount rate
Bank commissions
Loss from changes in the fair value of financial instruments
Interest on loans from related parties (note 32)
Other
Total
14 Income tax expense
Current tax:
Current tax charge from continuing operations
Current tax charge from discontinued operations
Deferred taxation:
Origination and reversal of temporary differences
from continuing operations (note 29)
Charge in respect of discontinued
operations (see note 31)
Year ended 31 December
2006
US$000
2005
US$000
4,053
1,226
918
217
147
345
6,906
(8,832)
(1,441)
(854)
(345)
(5)
(560)
62
2,418
959
237
182
286
4,144
(8,167)
(984)
(46)
(165)
(235)
(508)
(12,037)
(10,105)
Year ended 31 December 2006
Year ended 31 December 2005
Before
exceptional
items
US$000
Exceptional
items
US$000
Before
exceptional
items
US$000
Exceptional
items
US$000
Total
US$000
31,836
–
31,836
104
–
104
31,940
–
31,940
14,490
546
15,036
4,383
–
4,383
Total
US$000
18,873
546
19,419
(4,325)
(895)
(5,220)
(10,392)
388
(10,004)
–
–
–
2,788
(4,325)
(895)
(5,220)
(7,604)
–
388
2,788
(7,216)
Withholding taxes
Total taxation charge in the income statement
1,975
29,486
–
1,975
(791)
28,695
804
8,236
–
804
4,771
13,007
The weighted average statutory income tax rate was 30.2% for 2006 and 25.0% for 2005. This is calculated as the average of the
statutory tax rates applicable in the countries in which the Group operates, weighted by the profit/(loss) before tax of the subsidiaries
in the respective countries as included in the consolidated financial statements.
The changes in the weighted average statutory income tax rate is due to a change in the weighting of profit/(loss) before tax in the
various jurisdictions in which the Group operates.
76
Hochschild Mining plc
Annual Report & Accounts 2006
14 Income tax expense continued
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate
applicable to profits of the consolidated companies as follows:
Profit before taxation from continuing operations
Profit before taxation from discontinued operations
Profit before tax
At average statutory income tax rate of 30.2% (2005: 25.0%)
Expenses not deductible for tax purposes
Non-taxable income
Recognition of previously unrecognised deferred tax assets1
Deferred tax assets generated in the year not recognised2
Deferred tax on unremitted earnings
Withholding taxes
Other
At average effective income tax rate of 44.7% (2005: 23.2%)
Taxation charge attributable to continuing operations
Taxation charge attributable to discontinued operations
Total taxation charge in the income statement
Year ended 31 December
2006
US$000
2005
US$000
64,148
–
64,148
19,359
4,124
(170)
–
2,552
397
1,975
458
28,695
28,695
–
28,695
40,378
15,739
56,117
14,003
4,447
(1,477)
(5,101)
449
621
804
(739)
13,007
9,673
3,334
13,007
Notes
1 Mainly corresponds to the initial recognition of the deferred income tax asset related to the mine development costs and the tax loss carry forward in Minera Santa Cruz S.A.
2 Mainly corresponds to the tax losses of Minera Hochschild Mexico, S.A. de C.V. and MH Argentina S.A., which deferred income tax asset is not recognised due to the uncertainty
of generating taxable income in the future.
Santa Cruz is under a special investment regime that allows for a double deduction in calculating its corporate income tax liability,
in respect of all costs relating to prospecting, exploration and metallurgical analysis, pilot plants and other expenses incurred for
feasibility studies of projects. In this regard, total investment for this regime amounts to approximately 81,884,000 Argentinean pesos
(US$23,866,000 and US$25,613,000 as of 31 December 2005 and 2006, respectively).
Only the tax benefit of a single deduction has been recognised in deferred taxation in the financial statements. The benefit of the
additional deduction will be realised as and when claimed in future periods once production has commenced.
15 Basic and diluted earnings per share
The earnings per share (‘EPS’) calculation has assumed that the number of ordinary shares issued resulting from the Share Exchange
Agreement for the acquisition of the Cayman Holding Companies have been in issue throughout the two year period ended 31
December 2006. Basic EPS is calculated by dividing profit for the year attributable to equity shareholders of the Company by the
weighted average number of ordinary shares issued during the year.
The Company has no dilutive potential ordinary shares.
As of 31 December 2006 and 2005, earnings per share have been calculated as follows:
Profit from continuing operations attributable to equity holders of the Company (US$000)
Profit from discontinued operations attributable to equity holders of the Company (US$000)
Weighted average number of ordinary shares in issue (thousands)
Basic earnings per share from continuing operations (US$)
Basic earnings per share from discontinued operations (US$)
Year ended 31 December
2006
2005
41,288
–
242,867
0.17
–
34,558
12,179
229,900
0.15
0.05
Hochschild Mining plc
Annual Report & Accounts 2006
77
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
Mining
properties
and
development
costs
US$000
Land and
buildings
US$000
Plant and
equipment
US$000
Vehicles
US$000
Mine closure
asset
US$000
Construction
in progress
and capital
advances
US$000
16 Property, plant and equipment
Year ended 31 December 2005
Cost
At 1 January 2005
Additions
Change in discount rate
Disposals
Transfers and other movements
Foreign exchange
30,501
11,148
–
(1,000)
–
(11)
16,171
1
–
(6)
1,632
–
37,344
220
–
(568 )
5,332
(34)
747
31
–
–
237
–
At 31 December 2005
40,638
17,798
42,294
1,015
Accumulated depreciation
At 1 January 2005
Depreciation for the year
Disposals
Foreign exchange
At 31 December 2005
Net book amount at 31 December 2005
Year ended 31 December 2006
Cost
At 1 January 2006
Additions
Change in discount rate
Disposals
Impairment of Colorada assets
Change in mine closure estimate
Transfers and other movements
Foreign exchange
18,718
7,705
–
–
26,423
14,215
40,638
41,163
–
–
–
–
–
(37)
4,866
1,695
(1)
–
6,560
11,238
17,798
748
–
(203)
–
–
5,393
(30)
At 31 December 2006
81,764
23,706
Accumulated depreciation
At 1 January 2006
Depreciation for the year
Disposals
Impairment of Colorada assets
Transfers and other movements
Foreign exchange
At 31 December 2006
Net book amount at 31 December 2006
26,423
8,382
–
–
–
–
34,805
46,959
6,560
2,951
(81)
–
–
(13)
9,417
14,289
13,994
5,641
(357)
(1)
19,277
23,017
42,294
6,369
–
(564)
2
–
5,388
(33)
53,456
19,277
5,650
(360)
2
–
(15)
24,554
28,902
258
132
–
–
390
625
1,015
498
–
(110)
–
–
132
(7)
1,528
390
189
(47)
–
–
(4)
528
1,000
3,704
6,604
6,604
142,051
Total
US$000
121,882
22,532
(688)
(1,630)
–
(45)
66,401
16,606
(358)
(1)
82,648
59,403
142,051
78,840
(636)
(961)
2
(360)
–
(115)
2,729
11,132
–
(56)
(7,201)
–
–
–
–
–
–
6,604
28,252
–
(84)
–
–
(10,913)
(8)
23,851
218,821
–
–
–
–
–
–
–
82,648
18,278
(488)
2
–
(32)
100,408
23,851
118,413
34,390
–
(688)
–
–
–
33,702
28,565
1,433
–
–
29,998
33,702
1,810
(636)
–
–
(360)
–
–
34,516
29,998
1,106
–
–
–
–
31,104
3,412
The Group has given certain equipment as guarantee for a promissory note in Compañía Minera Arcata S.A. (refer to note 25(a)).
78
Hochschild Mining plc
Annual Report & Accounts 2006
17 Goodwill
Intangible assets represent goodwill arising on business combinations.
Balance at 1 January and 31 December 20051
Additions2
Provision for impairment2
Balance at 31 December 2006
US$000
2,091
230
(230)
2,091
Notes
1 The opening balance is attributable to goodwill that arose on the acquisition of Minera Santa Cruz S.A. (‘Santa Cruz’), the holding company for San José project in 2001.
2 This represents the goodwill arising on the acquisition of Colorada, subsequently impaired (refer to note 4(a)).
The carrying amount of goodwill is reviewed annually to determine whether it is in excess of its value-in-use. The value-in-use is
undertaken at the cash generating unit, in this case being the San José project, discounting the expected cash flows estimated by
management on the basis of the best available estimates considering the life of the mine based on the estimates of reserves and
resources available as of date.
The key assumptions used for its calculation are as follows:
•
•
•
•
•
recoverable reserves and resources;
gold and silver prices;
cash costs and inflation including costs to convert resources into reserves and mine closure costs;
discount rates; and
production capacity.
As outlined above, recoverable reserves and resources are based on management’s current estimates, considering the exploration and
evaluation work undertaken.
Gold and silver prices are based on external market consensus.
Cash costs are expected to be similar over the period, however, have been adjusted for inflation between 5–8% over the life of the mine.
Discount rates reflect management’s estimate of the risk specific to the country in which it operates and the risk attached to each
project. Pre-tax discount rates are applied and for San José project, management deems it appropriate to use 14% as the pre-tax rate.
Management expects the risk associated to the project may reduce over a period when the mine starts producing.
Production capacity considered reflects the capacity at which the mine is expected to operate over the life of the mine. No adjustments
have been made to the capacity based on any future plans or further investments.
The calculation of the value-in-use are most sensitive to the following assumptions:
•
•
•
recoverable reserves and resources;
future prices of gold and silver; and
discount rates.
Management believes that no reasonably possible change in any of these assumptions would cause the carrying value of the goodwill to
materially exceed its recoverable amount.
Hochschild Mining plc
Annual Report & Accounts 2006
79
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
18 Available-for-sale financial assets
Beginning balance
Additions
Fair value change
Foreign exchange
Disposals
Ending balance
Available-for-sale financial assets include the following:
Equity securities – listed Canadian companies
Equity securities – listed South American companies
Bonds
Total
As of 31 December
2006
US$000
26,267
3,102
12,973
398
(36,455)
2005
US$000
16,126
5,649
5,657
(1,165)
–
6,285
26,267
As of 31 December
2006
US$000
2005
US$000
6,265
–
20
6,285
3,396
22,871
–
26,267
The breakdown of the investments in equity securities held is as follows (number of shares):
Number of shares held at 1 January 2005
Additions
Number of shares held at 31 December 2005
Additions
Disposals
Share consolidation
Number of shares held at 31 December 2006
Inversiones
Pacasmayo
Inmobiliaria
CNP
Fortuna
River
Exmin
Rio Fortuna
Silver Mine Resources Inc
18,019,117
8,164,451
26,183,568
2,231,450
(28,415,018)
–
700,141
–
1,990,800
–
700,141
–
(700,141)
–
1,990,800
–
–
(1,327,200)
–
2,475,355
2,475,355
–
–
–
–
–
–
3,435,278
–
–
–
–
663,600
2,475,355
3,435,278
Listed South American investments mainly included a 13.9% interest in Inversiones Pacasmayo (‘IPSA’), a non-actively traded investment.
During 2006, this investment was sold for US$6.35 million to Greystone Corporation (a related party), with the balance being sold as
part of the disposal of MHC (refer to notes 12(3) and 12(4)).
In respect of the listed Canadian companies, the Group received in 2005 shares and warrants to purchase shares in Fortuna Silver Mine,
Inc. as part of the payment for the sale of Caylloma mining unit (refer to note 31) to Fortuna.
In August 2006 Minera Hochschild Mexico, S.A. de C.V. purchased 509,090 shares of Exmin Resources Inc. for US$100,000 in connection
with an exploration contract with Exmin, S.A. de C.V. (refer to note 35(g)).
In December 2006 Minera Hochschild Mexico, S.A. de C.V. purchased 2,926,188 shares of Exmin Resources Inc. for US$1.35 million.
The proceeds were used by Exmin for the final payment of Santa María de Moris (refer to note 4(b)).
80
Hochschild Mining plc
Annual Report & Accounts 2006
19 Trade and other receivables
Trade receivables
Advances to suppliers
Prepaid expenses and VAT1
Loan to minority shareholder2
Income tax refund due3
Claim to Peruvian tax authorities4
Receivables from related parties (note 32)
Loans to employees
Assigned funds5
Interest receivable
Other
Provision for impairment6
Total
As of 31 December
2006
2005
Non-current
US$000
Current Non-current
US$000
US$000
Current
US$000
–
–
9,086
8,166
–
–
–
169
6
–
–
17,427
25,216
7,412
8,070
2,436
1,131
1,003
1,091
487
–
2,203
1,128
50,177
–
–
3,547
–
–
–
–
52
1,699
–
752
13,134
6,949
3,267
–
1,509
–
54,383
464
–
17
1,723
6,050
81,446
–
(451)
–
17,427
49,726
6,050
(340)
81,106
The fair values of trade and other receivables approximate its book value.
Notes
1 Value added tax (‘VAT’) – Included in prepaid expenses and VAT above, value added taxes paid in the development of the San José Project that will be recovered through the
future sales of gold and silver by Minera Santa Cruz S.A., once it begins its operations. VAT has been classified as a long-term receivable and is measured at present value using
a discount rate of 11%.
2 The effective interest rate on non-current receivables was 8.18% in 2006 (refer to note 39 (e)).
3 Mainly corresponds to an over-payment of tax by Compañía Minera Sipán in 2000. Due to an ongoing dispute with the authorities, this amount has not yet been refunded
(refer to Note 36(b)). The Directors believe that this amount is recoverable.
4 Corresponds to the withholding tax of 4.1% paid in-excess to the Peruvian tax authorities.
5 Assigned funds are time deposits that guarantee short-term sales commitment to certain customers. The deposits are held for more than 12 months and are not accessible
to the Group. The effective interest rates were between 1% and 2% during 2005 and 2006. During 2006, most of the assigned funds were paid in advance by the Group.
6 Includes provision for impairment of other receivables of US$340,000 as of 31 December 2006 and 2005 and a provision for impairment of VAT of US$111,000 as of
31 December 2006.
20 Inventories
Finished goods
Products in process
Raw materials
Supplies and spare parts
Provision for obsolescence of supplies
Total
As of 31 December
2006
US$000
2005
US$000
7,793
1,841
15
7,607
17,256
(851)
3,136
2,549
969
4,661
11,315
(816)
16,405
10,499
Finished goods include doré and concentrates. Doré is an alloy containing a variable mixture of silver and gold and minor impurities
delivered in a bar form to refiners. The refined products are then sold to customers. Concentrates is a product containing sulphides
with variable content of base and of precious metals and sold to smelters.
As part of the short-term management’s financing policies, the Group acquires pre-shipment loans which are guaranteed by the
finished goods (refer to note 25(a)).
Hochschild Mining plc
Annual Report & Accounts 2006
81
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
21 Derivative financial instruments
Assets
Interest rate swap1
Warrants on Fortuna Silver Mine Inc. shares2
Purchased put option3
Embedded derivatives4
Total
Less non-current portion:
– Purchased put option3
– Warrants on Fortuna Silver Mine Inc. shares2
Non-current portion
Current portion
As of 31 December
2006
US$000
2005
US$000
–
2,660
–
3,362
6,022
–
–
–
6,022
163
1,901
1
6,884
8,949
1
1,901
1,902
7,047
Notes
1 The interest rate swap is classified as a trading derivative with fair value movements recognised in finance costs/income.
The notional principal amount of the outstanding interest rate swap contract at 31 December 2005 was US$12 million and expired on 20 July 2006. It was entered into to
hedge the floating interest rate exposure of long-term loans but did not meet the hedge accounting criteria under IAS 39.
2 At 31 December 2006, this item represented 2,475,355 (2005: 2,475,355) warrants over the same number of shares in Fortuna Silver Mine Inc., which are exercisable on 27 June
3
2007, at a price of CAD$0.345 per share.
In 2005, Compañía Minera Ares purchased a put option contract with Citibank N.A. as from 29 August 2006 for 11 sale transactions of 1,636 ounces of gold each for a price of
US$332.00 per ounce. The Company paid a total premium amounting to US$161,000 for this contract. This contract’s expiration date is 27 June 2007.
4 Sales of concentrates are provisionally priced at the time the sale is recorded. The price is then adjusted after an agreed period of time (usually linked to the length of time it
takes the smelter to refine and sell the concentrate), with the Group either paying or receiving the difference between the provisional price and the final price.
This price exposure is considered to be an embedded derivative in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’. This gain or loss that arises
on the mark-to-market of this embedded derivative is recorded in ‘Revenue’ (refer to note 5).
22 Other financial assets at fair value through profit or loss
Bonds and structured assets
Equity securities
Total
As of 31 December
2006
US$000
2005
US$000
–
–
–
13,170
6,665
19,835
The financial assets held as of 31 December 2005 were fair valued at prevailing market price as at the end of year.
As of 30 September 2006, the Group transferred all its financial assets to its former shareholder Dona Limited as settlement of the
portion of the dividends payable to this entity.
23 Cash and cash equivalents
Cash in hand
Liquidity funds1
Current demand deposit accounts2
Time deposits3
Cash and cash equivalents considered for the cash flow statement
As of 31 December
2006
US$000
997
414,527
16,477
3,542
435,543
2005
US$000
125
–
2,251
91
2,467
Notes
1 The liquidity funds are mainly invested in certificate of deposits, commercial papers and floating rate notes with weighted average annual effective interest rate of 5.16% and
a weighted average maturity of 43 days as of 31 December 2006 (refer to note 39 (e)).
2 Relates to bank accounts which are freely available and do not bear interest.
3 The effective interest rates as of 31 December 2006 and 2005 were 4.45% and 3.70%, respectively. These deposits have an average maturity of three days (refer to note 39 (e)).
82
Hochschild Mining plc
Annual Report & Accounts 2006
24 Trade and other payables
Trade payables
Professional fees1
Deferred consideration2
Board members’ remuneration
Interest payable
Taxes and contributions
Remunerations payable
Mining royalty (note 38)
Dividends payable3
Accrued expenses
Guarantee deposits
Other
Total
As of 31 December
2006
2005
Non-current
US$000
Current Non-current
US$000
US$000
Current
US$000
–
–
–
–
–
1,062
–
–
–
–
–
2
1,064
24,377
7,099
5,720
–
107
2,042
4,256
929
16,843
1,178
742
847
64,140
–
–
–
–
–
1,165
–
–
–
–
–
1,996
3,161
14,501
41
–
2,358
433
1,958
1,563
145
8,716
927
558
464
31,664
Notes
1 Corresponds to legal fees of US$6,081,000 related to the Company’s Listing on the London Stock Exchange (refer to note 1) and audit fees of US$1,018,000.
2 Corresponds to Minorva’s share of payments (40%) towards the expected cost to construct the mine, which the Group has agreed to fund (refer to note 4).
3 Corresponds mainly to dividends payable to Dona Limited, a related party (refer to note 32).
Trade payables are mainly for the acquisition of materials, supplies and contractors’ services. These payables do not accrue interest and
no guarantees have been granted. The fair value of trade and other payables approximate to their book values.
25 Borrowings
Secured bank loansa
Amount due to minority shareholdersc
Amounts due to related parties (note 32)
Total
As of 31 December
2006
2005
Non-current
US$000
Current Non-current
US$000
US$000
Current
US$000
296
26,818
–
27,114
28,017
1,445
320
29,782
17,971
13,108
10
31,089
48,310
–
21,483
69,793
(a) Secured bank loans
As of 31 December 2005, the balance mainly corresponds to a syndicated loan that Compañía Minera Ares acquired in 2004 for
US$70,000,000 with an effective annual interest rate of LIBOR+3.7. Compañía Minera Ares granted mining pledges on the mineral
extracted and mining mortgages on the mining concessions, buildings and facilities, and on the benefits of those assets, for a total
amount of US$87.5 million. In addition, the shareholders of Compañía Minera Ares S.A.C. pledged all the shares of that company. Compañía
Minera Ares S.A.C. has complied with all financial and administrative covenants until the loan was fully paid on 27 December 2006.
As of 31 December 2006, the balance corresponds to:
•
•
Pre-shipment loans for a total amount of US$26,894,000 in Compañía Minera Ares. These obligations accrue an effective annual
interest rate ranging from LIBOR +0.45% to LIBOR +0.65% and are guaranteed by the inventories of the Company (refer to note 20).
US$1,123,000 of a promissory note with an effective annual interest rate of 8.75% and guaranteed by equipment with a total value
of US$3.4 million. Initial amount of US$2.4 million was received by Compañía Minera Arcata S.A. in the first quarter of 2006.
(b) Unsecured bank loans
Hochschild Mining (Argentina) Corporation entered on 4 October 2006 into a US$20 million loan with Banco de Crédito del Peru used
by Minera Santa Cruz (51%) and Minera Andes (49%) as a bridge loan for the San José Project with an effective annual interest rate of
8.08% and was fully paid on 29 December 2006.
The Group does not have unsecured loans as of 31 December 2006 and 2005.
Hochschild Mining plc
Annual Report & Accounts 2006
83
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
25 Borrowings continued
(c) Amounts due to minority shareholders
As of 31 December 2006, the balance corresponds to a loan from Minera Andes Inc. to Minera Santa Cruz S.A. for an amount of
US$25,804,000 (2005: US$1,230,000). There is also a loan of US$934,000 to Minera Santa Cruz S.A. from Minera Andes S.A. (2005:
US$11,878,000). Both loans have an effective annual interest rate of 12% (refer note 39 (e)).
The current portion mainly corresponds to the liabilities assumed in the acquisition of Pallancata’s mining rights (refer to note 4).
(d) Maturity of non-current borrowings
The maturity of non-current borrowings is as follows:
Between 1 and 2 years
Between 2 and 5 years
Over 5 years
Total
As of 31 December
2006
US$000
376
26,738
–
27,114
2005
US$000
30,794
295
–
31,089
(e) Carrying amount of borrowings
The carrying amount of short-term borrowings approximates their fair value. The carrying amount and fair value of the non-current
borrowings are as follows:
Carrying amount
as of 31 December
Fair values
as of 31 December
2006
US$000
2005
US$000
2006
US$000
2005
US$000
Bank loans
Secured (floating rates)
Other loans
Secured (floating rates)
Amounts due to minority interest and related parties (fixed rates)
Total
296
–
26,818
27,114
17,971
–
13,118
296
17,971
–
28,913
–
14,810
32,781
31,089
29,209
84
Hochschild Mining plc
Annual Report & Accounts 2006
26 Provisions
At 1 January 2005
Increase to existing provision
Accretion resulting from unwinding of discount rate
Change in discount rate
Payments
Foreign exchange
Provision provided for the year
At 31 December 2005
Less current portion
Non-current portion
At 1 January 2006
Increase to existing provision2
Accretion resulting from unwinding of discount rate
Change in discount rate
Change in estimate3
Payments
Foreign exchange
Provision provided for the year
At 31 December 2006
Less current portion
Non-current portion
Provision
for
mine
closure1
US$000
41,426
989
984
(1,232)
(5,228)
–
–
36,939
(5,957)
30,982
36,939
3,550
1,019
(1,158)
(2,560)
(5,426)
–
–
32,364
(3,967)
28,397
Workers’
profit
Provision
sharing contingencies
US$000
US$000
Contribution
to Peruvian
for Government
(note 27)
US$000
2,811
–
–
–
(4,403)
54
4,441
2,903
(2,903)
–
2,903
–
–
–
–
(4,874)
93
8,496
6,618
(6,618)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
293
293
–
293
Total
US$000
44,237
989
984
(1,232)
(9,631)
54
4,441
39,842
(8,860)
30,982
39,842
3,550
1,019
(1,158)
(2,560)
(10,300)
93
9,589
40,075
(11,385)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
800
800
(800)
–
28,690
Notes
1 The provision represents the discounted values of the estimated cost to decommission and rehabilitate the mines at the date of depletion of each of the deposits. The present
value of the provision has been calculated using an annual discount rate of 3.43% and 2.76% as of 31 December 2006 and 2005. Uncertainties in estimating these costs include
potential changes in regulatory requirements, decommissioning, dismantling, and reclamation alternatives and the levels of discount and inflation rates.
2 The increase in 2006 corresponds to the provision related to the acquisition of Santa María de Moris Mine of US$1,830,000 (refer to note 4(b)), and to an increase in the
3
provision of San José mining unit of US$1,720,000 due to new constructions performed during 2006.
In 2006, the Group outsourced the reassessment of its estimate for mine closure costs obligations for its mining units Ares, Arcata and Selene. The final estimates were
received in October 2006.
27 Contribution to Peruvian Government
Based on negotiations by the Peruvian Government with a number of large mining companies in Peru, various mining companies
including Compania Minera Ares agreed to enter into contracts with the Peruvian Government to make a voluntary contribution over
five years for social programmes. The draft of the agreement and the authorisation to the Ministry of Energy and Mines to sign these
agreements on behalf of the Peruvian Government was approved by Supreme Decree No 071-2006-EM on 21 December 2006. According
to the agreement, mining companies will pay voluntary contributions based on a fixed percentage of net income after tax after
allowing an additional deduction of a portion of the mining royalties accrued in the period. The agreement also sets reference prices for
different metals. Should the prices fall below these pre-agreed reference prices, companies will not be obliged to make payments. This
contribution is not tax deductible and is to be used for the purpose of eradicating poverty, malnutrition and social exclusion in poor
mining regions in Peru. At 31 December 2006, the Group recognised an obligation of US$800,000 in relation to these contributions,
included in ‘Administrative expenses’ (refer to note 7).
Hochschild Mining plc
Annual Report & Accounts 2006
85
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
28 Equity
(a) Share capital and share premium
As described in note 2, the pooling of interests method of accounting has been applied in the presentation of the consolidated financial
statements. This method presents the results of the Group as if the Company had always been the parent company. Consequently,
despite the Company not being incorporated until 11 April 2006, the ordinary share capital shown in 2005 is the one resulting from the
Share Exchange Agreement described in note 2(a).
Authorised and issued share capital
The authorised and issued share capital of the Company as at 31 December 2006 is as follows:
Class of shares
Ordinary shares
Authorised
Issued
Number
Amount
Number
Amount
500,000,000 £250,000,000
307,350,226
£153,675,113
At 31 December 2006, all issued shares with a par value of £0.25 (weighted average of US$0.953 per share) each are fully paid.
At 31 December 2005, equity share capital represents the sum of the capital accounts of the Cayman Holding Companies adjusted for
the effect of the Share Exchange Agreement described below rather than the share capital of the Company as the Company had not
been incorporated at that date.
Rights attached to ordinary shares
At general meetings of the Company, on a show of hands, every member who is present in person has one vote and on a poll every
member who is present in person or by proxy has one vote for every share of which he is the holder.
The changes in share capital are as follows:
Ordinary shares of £1 each issued and fully paid
Shares issued to the initial shareholder
Shares issued on 16 October 2006
Number of shares issued as of 16 October 2006
Share capital following the capital split:
Ordinary shares of £0.50 each issued
Number of shares in issue at 16 October 2006
Shares issued and paid pursuant to the Share Exchange Agreement
dated 2 November 2006
Shares issued to employees on 11 November 2006
Shares issued and paid by Non-Executive Directors on 11 November 2006
Shares issued and paid pursuant to the global offer dated 11 November 2006
Transaction costs associated with issue of shares
Capital reduction from £0.50 each to £0.25 each
Number of shares issued as of 31 December 2006
Share
capital
US$000
Share
premium
US$000
Number
of shares
1
49,999
50,000
–
93
93
–
–
–
–
100,000
93
229,900,000
71,656
28,570
77,250,000
–
–
219,233
68
27
73,511
–
(146,466)
–
409
163
441,067
(45,483)
–
307,350,226
146,466
396,156
(b) Other reserves
Unrealised gain/(loss) on available-for-sale financial assets
Under IAS 39, the Group classifies its investments in listed companies as available-for-sale financial assets and are carried at fair value.
Consequently, the increase in carrying values, net of the related deferred tax liability, is taken directly to this account and will remain in
this account until disposal or impairment of the investment, when the cumulative unrealised gains and losses will be recycled through
the income statement.
Cumulative translation adjustment
Cumulative translation adjustment account is used to record exchange differences arising from the translation of the financial
statements of subsidiaries with functional currency different from the reporting currency of the Group.
Merger reserve
Merger reserve represents the difference between the value of the net assets of the Cayman Holding Companies acquired under the
Share Exchange Agreement and the nominal value of the shares issued in consideration of such acquisition (refer to note 2(a)).
86
Hochschild Mining plc
Annual Report & Accounts 2006
28 Equity continued
(c) Acquisition of shares from minority shareholders
During the years reported the Group purchased shares of Compañía Minera Arcata from minority shareholders as follows:
Number of shares
Amount paid (US$000)
29 Deferred income tax
The movement in the deferred income tax liabilities and assets are as follows:
Beginning of the year
Income statement credit
Deferred income tax from unrealised gain on available-for-sale financial assets
Use of loss from Caylloma mining unit (see note 31)
End of the year
Year ended 31 December
2006
5,940
2
2005
6,869,033
2,667
As of 31 December
2006
US$000
(6,856)
(5,220)
398
–
(11,678)
2005
US$000
360
(10,004)
–
2,788
(6,856)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current
tax liabilities and when the deferred income tax assets and liabilities relate to the same fiscal authority.
The movement in deferred income tax assets and liabilities before offset during the year considering the nature of the temporary
differences is as follows:
Deferred income tax liabilities
At 1 January 2005
Income statement (credit) charge
At 31 December 2005
Income statement (credit) charge
Deferred income tax from unrealised gain on
available-for-sale financial assets
At 31 December 2006
Deferred income tax assets
At 1 January 2005
Income statement charge
Use of loss carry forward
At 31 December 2005
Income statement credit (charge)
At 31 December 2006
The amounts after offset are as follows:
Deferred income tax assets
Deferred income tax liabilities
Differences
in cost
Mine
of PP&E development
US$000
US$000
Financial
instruments
US$000
3,535
(894)
2,641
(763)
–
1,878
1,715
108
1,823
347
–
2,170
Differences
in cost
of PP&E
US$000
Provision
for mine
Mine
closure development
US$000
US$000
181
460
–
641
1,070
1,711
1,298
609
–
1,907
(427)
1,480
419
7,264
–
7,683
1,422
9,105
446
1,620
2,066
(812)
398
1,652
Tax
losses
US$000
3,181
1,780
(2,788)
2,173
3,291
5,464
Others
US$000
Total
US$000
768
327
1,095
2,501
–
3,596
6,464
1,161
7,625
1,273
398
9,296
Others
US$000
Total
US$000
1,025
1,052
–
2,077
1,137
3,214
6,104
11,165
(2,788)
14,481
6,493
20,974
As of 31 December
2006
US$000
15,704
(4,026)
2005
US$000
10,990
(4,134)
Hochschild Mining plc
Annual Report & Accounts 2006
87
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
29 Deferred income tax continued
Tax losses expire in the following years:
Recognised:
Expire in one year
Expire in two years
Expire in three years
Expire in four years
Expire after four years
Unrecognised:
Expire in one year
Expire in two years
Expire in three years
Expire in four years
Expire after four years
Total tax losses (recognised and unrecognised)
Other unrecognised deferred income tax asset comprise (gross amounts):
Provision for mine closure
As of 31 December
2006
US$000
2005
US$000
6
54
502
8,320
7,109
15,991
–
188
4,813
6,012
19,474
30,487
46,478
–
6
54
502
5,654
6,216
224
–
188
4,813
17,202
22,427
28,643
As of 31 December
2006
US$000
2005
US$000
27,430
30,554
Unrecognised deferred tax on retained earnings
Due to the statutory tax regime in the countries in which the Group’s operating companies are tax residents, there are no temporary
differences in respect of undistributed reserves for which a deferred asset should be recognised.
30 Dividends paid and proposed
Year ended 31 December 2005
Total dividends paid or provided for during the year
Total dividends declared after year-end and not provided for
Year ended 31 December 2006
Total dividends paid or provided for during the year
Total dividends declared after year-end and not provided for
Note
1 Corresponds to dividends paid or provided to former shareholder Dona Limited.
Amount
US$000
–
–
73,4401
2,275
Dividends per share
The dividends declared in 2006 were US$73,142,000 (US$0.32 per share). A dividend in respect of the year ended 31 December 2006 of
US$0.0074 per share, amounting to a total dividend of US$2,274,821, is to be proposed at the Annual General Meeting on 4 July 2007.
These financial statements do not reflect this dividend payable.
88
Hochschild Mining plc
Annual Report & Accounts 2006
31 Discontinued operations and assets classified as held-for-sale
Discontinued operations
The assets and liabilities related to Caylloma mining unit (part of Compañía Minera Arcata) have been presented as held-for-sale
following the approval of the Company’s management and shareholders in 2004 to sell Caylloma. This unit was sold in 2005 to Fortuna
Silver Mine Inc. (‘Fortuna’), realising a gain of US$15,739,000 before taxation. The consideration received in 2005 was as follows:
Cash
Deferred consideration
Interest
Derivative financial asset
Available-for-sale financial asset
Other
Total consideration
Assets and liabilities of Caylloma mining unit at the date of disposal were as follows:
Plant and equipment
Land and buildings
Provision for mine closure costs
Total
Gain on sale of operations
US$000
3,050
4,450
50
1,720
2,541
39
11,850
US$000
1,895
926
(6,710)
(3,889)
15,739
The derivative financial assets and available-for-sale financial assets acquired represent 2,475,355 warrants over Fortuna shares, and
2,472,365 shares in Fortuna, respectively.
An analysis of the result of discontinued operations, including the result recognised on the re-measurement of assets or disposal group
in 2005, is as follows:
Revenues
Expenses
Pre-tax loss
Tax credit
Gain on sale of assets and liabilities
Tax on gain on sale of assets and liabilities
Profit after tax from discontinued operations
Operating cash flows
Investing cash flows
Financing cash flows
Total cash flows
2005
US$000
–
(321)
(321)
95
15,739
(3,334)
12,179
2005
US$000
(321)
3,050
–
2,729
Assets classified as held-for-sale
In 2004, management decided to sell the remaining plant of Compañía Minera Sipán. The following represents the changes in the value
of assets held-for-sale in 2006 and 2005:
Balance at 1 January
Additions
Disposals
Provision for impairment (see note 12(2))
Balance at 31 December
According to the management plan and activities over these assets, they expect to sell them during 2007.
2006
US$000
2005
US$000
3,844
–
(516)
(2,983)
345
3,820
24
–
–
3,844
Hochschild Mining plc
Annual Report & Accounts 2006
89
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
32 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 2006 and 2005. The related
parties are companies owned or controlled by the main shareholder of the parent company.
Trade
Cementos Pacasmayo S.A.A.
Cementos Selva S.A.
Mauricio Hochschild & Cía. Ltda. S.A.
Others
Other
Cementos Pacasmayo S.A.A.
Farragut Holding Inc.
Dona Ltd.
Inversiones Pacasmayo S.A.
Other
Dividends payable
Dona Ltd.3
Loans
Dona Ltd.1
Harrison Corporation1
Greystone Corporation
Farragut Holding Inc.2
Cementos Pacasmayo S.A.A.
Transimex Inc
Accounts receivable
as of 31 December
Accounts payable
as of 31 December
2006
US$000
2005
US$000
2006
US$000
2005
US$000
648
–
–
–
648
242
–
1
–
–
243
–
–
–
–
–
–
200
–
200
7
–
–
–
7
–
2,873
–
300
31
3,204
302
–
14
–
316
3
–
–
–
1
4
–
–
16,460
16,460
8,110
9,960
–
33,102
–
–
51,172
–
–
–
–
–
–
–
–
27
–
57
84
–
–
26
6
1
33
8,716
8,716
12,804
–
898
6,586
160
928
21,376
Total
1,091
54,383
16,780
30,209
Comprised of:
Dividends payable to Dona Ltd.3
Current related party balances
Non-current related party balances
Total
Effective interest rates:
Farragut Holding Inc.2
Cementos Pacasmayo S.A.A.
–
1,091
–
1,091
–
54,383
–
54,383
16,460
320
–
16,780
8,716
21,483
10
30,209
–
–
8.5%
–
–
–
–
8.5%
Notes
1 Transaction with Harrison Corporation and Dona Limited: These loans do not bear interest and were paid in 2006.
2 Transaction with Farragut Holding Inc.: Corresponds to a loan provided by Compañía Minera Ares to Farragut Holding Inc. with original maturity in 2009 which is repayable in
five instalments starting in 2005. This loan bore an annual interest of LIBOR +4.0% up to June 2006, when the benefit was transferred from Compañía Minera Ares to Ludlow.
This amount was repaid in 2006.
3 Dividends payable: On 16 October 2006, the Group declared dividends to its former shareholder Dona Limited for US$20 million. At 31 October 2006, the Group settled the net
balances between the Cayman Holdings Companies and its former shareholder Dona Limited, including the dividends payable. The net amount owing was settled primarily
through the transfer of the entire amount, to Dona, of the Group’s ‘Other financial assets at fair value through profit and loss’ (refer to note 22). On 4 January 2007, the Group
repaid the entire amount payable.
As of 31 December 2006 and 2005 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.
90
Hochschild Mining plc
Annual Report & Accounts 2006
32 Related-party balances and transactions continued
Principal transactions between affiliates are as follows:
Income
Interest on loans to Farragut Holding
Rent received
Services provided
Proceeds from sale
Sale of shares of Inversiones Pacasmayo to Greystone Corporation
Sale of shares held in MHC to Greystone Corporation
Sale of Inmobiliaria CNP shares to Cementos Pacasmayo
Sale of Bongara zinc project (see note 9)
Sale of shares of Compañía Minera Corianta S.A.C. to Cementos Pacasmayo (see note 9)
Expenses
Interest expenses
Acquisition cost
Purchase of Arcata shares from Invernor
Purchase of Inversiones Pacasmayo shares from Invernor
Year ended 31 December
2006
US$000
2005
US$000
1,226
–
30
6,350
1,000
200
–
–
5
–
–
2,418
–
272
–
–
–
15,558
806
235
2,566
2,837
(b) Compensation of key management personnel of the Group
Key management personnel include the members of the management board and Directors who receive remuneration.
Salaries and bonuses1
Total compensation paid to key management personnel
Year ended 31 December
2006
US$000
2005
US$000
5,714
5,714
4,172
4,172
Note
1
Included above is the remuneration paid to the directors of the parent company from the Group of US$2,860,000 (2005: US$1,027,000), out of which US$739,000 (2005: nil)
relates to the remuneration in their capacity as the Directors of the parent company, from date of the commencement of their service contract with the Company to
31 December 2006.
(c) Sale of shares of Inversiones Pacasmayo S.A. (‘IPSA’)
On 15 June 2006, the Group sold 16,585,047 shares of IPSA for US$6.4 million to a related party generating a loss of US$14.7 million
against the fair value of such investment. In addition in June 2006, the shares of IPSA held by subsidiary MHC were sold at book value
through the sale of MHC to a related party.
Hochschild Mining plc
Annual Report & Accounts 2006
91
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
33 Auditors’ remuneration
Ernst & Young LLP was appointed as auditor of the Group during the years ended 31 December 2006 and 2005 and acted as reporting
accountant in respect of the Company’s Listing on the London Stock Exchange. Fees payable to the auditors during the years ended
31 December 2006 and 2005 are mainly those payable to member firms of Ernst & Young. The auditors’ remuneration for services
provided to the Group during the years ended 31 December 2006 and 2005 is as follows:
Audit fees1,2
Transaction advisory services2
Taxation services2
Others2
Fees related to the Listing of the Company3
Total
Ernst & Young
Year ended 31 December
Others
Year ended 31 December
2006
US$000
2005
US$000
2006
US$000
2005
US$000
1,150
12
9
21
8,267
9,459
91
30
1
40
–
162
6
–
3
–
–
9
6
–
3
–
–
9
Includes US$873,000 relating to the 2006 audit fees of the parent company.
Notes
1
2 Audit fees, transaction advisory services, taxation services and others are included in administrative expenses, within the ‘consulting fees’ caption (refer to note 7).
3 The fees related to the Listing of the Company are presented as a reduction of the share premium account (refer to note 28).
34 Notes to the cash flow statement
Reconciliation of profit for the year to net cash generated from operating activities
Profit for the year
Adjustments to reconcile Group operating profit to net cash inflows from operating activities:
Depreciation
Gain on sale of Bongara zinc project and Compañía Minera Corianta S.A.C.
Loss/(gain) on sale/disposal of property, plant and equipment and assets classified as held for sale
Impairment of Sipán assets held for sale
Impairment of Colorada assets
Loss on sale of available-for-sale financial assets
Loss/(gain) on sale of supplies
Loss on sale of MHC (subsidiary)
Decrease in provision for mine closure
Gain from sale of Caylloma mining unit
Finance income
Finance costs
Income tax expense
Provision for contingencies
Other
Increase/(decrease) of cash flows from operations due to changes in assets and liabilities:
Trade and other receivables
Derivative financial instruments
Inventories
Trade and other payables
Provisions
Year ended 31 December
2006
US$000
2005
US$000
35,441
42,884
17,428
–
(94)
2,983
343
2,291
(252)
991
(2,812)
–
(6,906)
12,037
28,695
292
2,938
24,615
3,845
(5,547)
5,135
4,808
16,606
(14,812)
197
–
–
–
5
–
(725)
(15,739)
(4,144)
10,105
9,673
–
871
(8,950)
(6,126)
1,015
(489)
93
Cash generated from operations
126,231
30,464
92
Hochschild Mining plc
Annual Report & Accounts 2006
34 Notes to the cash flow statement continued
Transactions that did not affect cash flows
The main transactions that did not affect cash flows were the following:
Realised gain from sale of available-for-sale financial assets
Capital reduction
Transfer of financial assets to Dona Limited (see note 22)
Capitalisation of loans from minority shareholders to equity share capital in Minera Santa Cruz S.A.
Unpaid purchase of property, plant and equipment
Uncollected proceeds from sale of Caylloma mining unit
Acquisition on available-for-sale financial assets
Liabilities directly associated with assets classified as held for sale
Deferred consideration (see notes 4(b), 24)
Deferred income tax on available-for-sale financial assets (see note 29)
Unrealised gain on purchase of Exmin shares
Foreign exchange – property, plant and equipment
Year ended 31 December
2006
US$000
22,844
146,466
19,766
12,185
1,500
–
–
–
5,720
398
331
83
2005
US$000
–
–
–
–
3,636
8,831
2,542
465
–
–
–
44
35 Commitments
(a) Gold and silver futures contracts1
Gold
Quantity
Year ended 31 December
Organisation
N.M. Rothschild
N.M. Rothschild
Standard Bank
N.M. Rothschild
Standard Bank
Standard Bank
Standard Bank
Standard Bank
Standard Bank
Standard Bank
Citibank
Citibank
Total
Silver
Organisation
Standard Bank
Rothschild
International
International
International
Standard Bank2
Total
2006
(ounces)
–
–
–
–
–
–
–
–
–
–
23,450
36,600
60,050
2005
(ounces)
5,950
5,950
6,000
7,500
10,000
5,870
–
–
7,500
35,000
36,850
36,600
157,220
Quantity
Year ended 31 December
2006
(ounces)
–
–
–
–
–
772,000
772,000
2005
(ounces)
240,000
–
750,000
750,000
500,000
–
2,240,000
Quotation period
Type of
contract
Min/Max
Min/Max
Min/Max
Flat Forward
Fixed price
Fixed price
Flat Forward
Flat Forward
Flat Forward
Flat Forward
Flat Forward
Flat Forward
(US$/ounce)
From
To
330/385
335/385
340/385
346.13
311.00
300.00
387.00
393.75
401.55
411.75
415.93
419.20
June 2006
January 2003
June 2006
January 2003
June 2006
January 2003
July 2006
April 2003
April 2006
April 2003
April 2006
September 2003
June 2005
July 2004
June 2005
July 2004
July 2005
June 2006
July 2006 December 2006
June 2007
June 2007
August 2006
January 2007
Type of
contract
Flat Forward
Flat Forward
Min/Max
Min/Max
Min/Max
Min/Max
(US$/ounce)
5.00
5.00
7.20/8.40
7.00/8.20
7.45/8.43
8.40/10.65
Quotation period
From
To
January 2004 December 2005
January 2004 December 2005
June 2006
January 2006
June 2006
January 2006
July 2006 December 2006
March 2007
October 2006
Notes
1 The contracts and commitments mentioned above are not fair-valued in the books as they were entered into, and continue to be held for the purpose of the delivery of a non-
financial item in accordance with the Group’s expected sales requirements.
2 During 2006, the Group rescheduled the delivery of silver ounces from the six-month period comprised between July and December 2006 to the six-month period comprised
between October 2006 and March 2007. Additionally, the maximum price was amended from 10.60 (US$/ounce) to 10.65 (US$/ounce).
Hochschild Mining plc
Annual Report & Accounts 2006
93
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
35 Commitments continued
(b) Mining rights purchase options
During the ordinary course of business, the Group enters into agreements to carry out exploration under concessions held by third
parties. Under the terms of some of the agreements, the Group has the option to acquire the concession or invest in the entity holding
the concession. In order to exercise the option the Group must satisfy certain financial and other obligations over the agreement term.
The options lapse in the event the Group does not meet the financial requirements. At any point in time, the Group may cancel the
agreements without penalty.
The Group continually reviews its requirements under the agreements and determines on an annual basis whether to proceed with the
financial commitment. The commitments at the balance sheet date are as follows:
Commitment for the subsequent 12 months
Later than one year
As of 31 December
2006
US$000
1,210
22,539
2005
US$000
1,717
–
(c) Pallancata project
Under the terms of the joint venture agreements with Minera Oro Vega S.A.C. (‘Minorva’), Pallancata Holding S.A.C. (‘Pallancata’) has
agreed to meet or contribute towards certain costs relating to the development of the reserves and the mine Pallancata. Pallancata
has budgeted US$20.3 million for this purpose.
The key areas of investment included in the US$20.3 million budgeted expenditure are:
•
•
•
•
All the drilling and associated costs incurred in converting all or part of the known resources to reserves during the period of
12 months from receipt of all relevant mining permits (the ‘initial construction period’).
All the capital required to develop, permit and construct a mining operation at the site at an initial production level of 500 tonnes per
day within the initial construction period.
Construction of a new 22 kilometre road to transport ore from the mine to the Selene concentrator.
Expansion of the concentrator at Selene.
In addition to the above-mentioned budgeted expenditure, the parties to the Pallancata joint venture have agreed to invest an amount
of up to US$2 million in further exploration and drilling of additional exploration targets identified by Minorva. Such additional amount
to be apportioned 60% Pallancata and 40% Minorva.
Pallancata will be subject to an advance production payment in case of failure to comply with these commitments. The advance
production payment would be equal to 40% of quarterly net cash flow that would have been generated.
(d) San Felipe project
On 13 May 2006 Minera Hochschild Mexico, S.A. de C.V. (‘MHM’) and Grupo Serrana S.A. de C.V. (‘Serrana’) entered into agreement to
explore the mining rights of the concessions owned by Serrana which include San Felipe. In this regard, MHM has paid US$200,000
and will invest in exploration expenses in the next three years in an aggregate amount of US$6.7 million. MHM is not committed to any
minimum expenditure during the first year. However after the first year, if MHM wish to continue to explore the mining concessions, it
will be committed to the remaining balance of the US$6.7 million. If MHM decides not to continue to explore the mine, it will be subject
to a penalty equivalent to the difference between US$2 million and 30% of any investment already made in the mining concessions.
If MHM meets the investments schedule above, MHM has an option to transfer the exploration reports and works to a new company
and Serrana will transfer the properties and rights. MHM will invest in the new company US$26.6 million before the end of the fifth
year. If MHM decides not to continue to explore the mine, it will be subject to a penalty equivalent to the difference between US$26.6
million and 30% of any investment already made in the mining concessions.
(e) Colorada project
As outlined in note 4, on 30 June 2006, the Group acquired a 30% controlling interest in Minera Colorada S.A.C. (‘Colorada’), an
exploration company, from Cementos Pacasmayo S.A.A. (‘Pacasmayo’). Under the agreement, the Group and Pacasmayo have the option
to increase their combined participation from 50% to 65% if the Group invests US$1 million in exploration expenses in the project by
August 2009.
Additionally, Compañía Minera Killacolqui S.A.C. has the option to increase its participation from its actual 50% to 80% if, in the
exploration stage of the project, the percentage of silver in the resource is above 50% of the total mine, and elects to fund the
feasibility study.
As of 31 December 2006, management estimates that the project will produce no future benefits and accordingly the Group has
impaired its investment in Colorada.
94
Hochschild Mining plc
Annual Report & Accounts 2006
35 Commitments continued
(f) Santa Rita and Claudia Project
On 18 September 2006, the Hochschild Mining Group entered into a letter of intent with Mirasol Resources Ltd. (‘Mirasol’) relating to an
option and joint venture agreement to explore for, and develop and mine, minerals at two sites (Santa Rita and Claudia) in Argentina.
Under the arrangements, the Hochschild Mining Group will have the right to acquire 51% interest in each project by investing at least
US$3.5 million in the Santa Rita project, and US$6 million in the Claudia project as well as making four annual payments of US$200,000
to Mirasol. The Hochschild Mining Group paid US$150,000 on signing the letter of intent.
(g) Project Moris
In July 2006, the Hochschild Mining Group entered into a letter of intent with Exmin Resources Inc. relating to an option and joint
venture agreement to explore for, and develop and mine, minerals at the surrounding areas of the Mina Moris Project in Mexico. Under
the arrangements, the Hochschild Mining Group will have the right to acquire 70% interest in a new company that will own the mining
and exploration rights for the project area by investing at least US$4.8 million in exploration expenses in the Moris project, as well as
buying Exmin shares for a total amount of US$750,000 at the higher of CAD $0.22 or the 10-day weighted average of the closing price.
The Hochschild Mining Group bought US$100,000 worth of Exmin shares on signing of the contract.
(h) San Luis Cordero Project
On 12 May 2006, the Hochschild Mining Group entered into a letter of intent with Exploraciones del Altiplano relating to an option to
explore and purchase the mining rights for, the San Luis Cordero Property in Mexico. Under the arrangements, the Hochschild Mining
Group will have the right to acquire the exploration and mining rights by investing at least US$2.6 million in the San Luis Cordero
project as well as making payments for a total of US$500,000 to Exploraciones del Altiplano.
(i) Pozos Project
On 3 October 2006 the Hochschild Mining Group entered into a letter of intent with Alejandro Espinoza Dueñas relating to an option
to explore and purchase the mining rights for, the Pozos Property in Mexico. Under the arrangements, the Hochschild Mining Group will
have the right to acquire the exploration and mining rights by investing at least in 800 metres of drilling in the Pozos project as well as
making payments for a total of US$500,000 to Alejandro Espinoza Dueñas.
(j) Operating lease contract
The number of vehicles under an operating lease agreement with Mitsui has significantly increased in 2006.
In addition, the Company has some operating lease agreements for the offices. The largest part of the commitment is related to the
Compañía Minera Ares S.A.C. office. The leasing for drilling equipment with Sandvick expired in August 2006.
The lease expenditure charged to the income statement during the years 2006 and 2005 are included in notes 6 and 7.
As of 31 December 2006 and 2005, the future aggregate minimum lease payments under the operating lease agreements
are as follows:
Not later than one year
Later than one year and not later than five years
(k) Capital commitments
Peru
Argentina
Total
Year ended 31 December
2006
US$000
1,990
2,272
2005
US$000
633
266
Year ended 31 December
2006
US$000
21,366
14,153
35,519
2005
US$000
22,087
–
22,087
Hochschild Mining plc
Annual Report & Accounts 2006
95
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
36 Contingencies
As of 31 December 2006, the Group had the following contingencies:
(a) Dispute with Electroperu S.A.
Compañía Minera Ares has a dispute with Electroperu S.A. (‘Electroperu’) regarding the electric power it used during November and
December 2002 which was simultaneously billed by Electroperu and Sociedad Eléctrica del Sur Oeste S.A. (SEAL). Compañía Minera Ares
has filed a claim with Osinerg (the Peruvian power regulator) claiming that the billing should be only for the actual power consumed by
the Company and that Electroperu and SEAL should each have half the billing.
Electroperu has filed an administrative court action against the resolution issued by Osinerg and initiated an arbitration process
seeking to additionally collect 832,135 Nuevo Sol plus interest (US$242,000). The Arbitration Court issued a decision dated 19 August
2005, comprising a resolution dated 23 September 2005, stating that it has the competence to resolve the dispute and declaring in
favour of Electroperu.
Compañía Minera Ares has requested the Civil Courtroom of the Supreme Court of Lima to declare the Arbitration Court decision as
null and void and has filed an appeal against the resolution of the Arbitration Court on the grounds that it affects constitutional rights.
In connection with the appeal, Compañía Minera Ares has obtained a resolution suspending the Arbitration Court decision.
Management, having consulted legal counsel, considers that there is a reasonable possibility that the outcome of these proceedings
will be favourable to Compañía Minera Ares.
(b) Value added tax and income tax refund due
In 2000, Sipán entered into a leasing arrangement in respect of a building with Crédito Leasing S.A. (‘Credileasing’). Through this
arrangement, Sipán claimed a tax deduction for the total costs of the building over the four-month contract term and recognised
the corresponding value added tax credit.
The Peruvian Tax Authority is challenging the deductibility of the monthly contract payments, associated interest costs on the loan
from Credileasing to fund the finance lease payments and various other expenses for Sipán, as well as the related value added tax. They
issued an assessment for 2000 for current income tax and value added tax, including interest, of approximately US$3.1 million and a
fine of approximately US$6.6 million. Sipán appealed against this assessment. Additionally, the Group maintains an income tax refund
due of US$1,131,000 due to a portion of the tax credit generated in this operation that was not refunded and is maintained as of
31 December 2006 (refer to note 19).
Based on the facts, management considers that the finance lease payments, interest and expenses should be deductible for tax
purposes and the value added tax applied. However, the Tax Court ruled that the finance leasing contract was in fact a purchase of
assets as the real intention of the Company was not to enter into a finance leasing contract but to acquire a building. The Tax Court’s
decision was made on the basis that the building was previously owned by a related entity of Sipán, (being Mauricio Hochschild & Cía
S.A.C.) which had transferred it to Credileasing in the same year, the leasing contract was only for a period of four months and Sipán
obtained a loan for the same amount as the finance lease payments from a bank economically related to Credileasing on the date the
finance leasing contract was signed.
Sipán appealed this decision but it was upheld by the Superior Court and so Sipán filed an appeal with the Supreme Court, which
resolved that the Superior Court must issue a sentence over this dispute.
Under the Peruvian tax law, the management of the Group considers that this contingency is remote.
(c) Taxation
Fiscal periods remain open to review by the tax authorities in respect of taxes for four years in Peru, five years in Argentina and five
years in Mexico, preceding the year of review during which time the authorities have the right to raise additional tax assessments
including penalties and interest. Under certain circumstances, reviews may cover longer periods.
Because a number of fiscal periods remain open to review by the tax authorities, coupled with the complexity of the Group and the
transactions they have undertaken, there remains a risk that significant additional tax liabilities may arise. Notwithstanding this risk,
the Directors believe that management’s interpretation of the relevant legislation and assessment of taxation is appropriate and
that it is probable that the Group’s tax and customs positions will be sustained in the event of a challenge by the tax authorities.
Consequently, the Directors consider that they have made adequate provision for any future outflow of resources and no additional
provision is required in respect of these claims or risks.
(d) Other
The Group has conducted its operations in the ordinary course of business in accordance with its understanding and interpretation,
and based on advice of legal counsel, of applicable legislation in the countries where the Group has operations. In certain specific
transactions, however, the relevant authorities could have a different interpretation of those laws and regulations that could lead
to contingencies or additional liabilities for the Group. Having consulted legal counsel, management believes that it has reasonable
grounds to support its position.
96
Hochschild Mining plc
Annual Report & Accounts 2006
37 Guarantees and investment promotion measures contract
Compañía Minera Ares
In 1995, Compañía Minera Ares started a mining investments programme approved by the General Mine Direction of the Energy and
Mines Ministry through Directoral Resolution Nº330-95 EM/DG issued on 29 December 1995, for an amount of US$13,590,000 which
was financed by Compañía Minera Ares and loans from third parties. With the approved programme, Compañía Minera Ares subscribed
a guarantees and investment promotion measures contract with the Peruvian Government for a 10-year term that commenced on
the date in which the final investment was made. Likewise, through Directoral Resolution 080-97-EM/DGM dated 25 February 1997, an
increase of the investments programme to US$24,760,000 was approved due to the greater potential of the mining site.
The main works and labours contained in the investment plan are the following:
•
•
•
•
•
•
•
Access and mine preparation labour.
Plant buildings construction.
Plant equipment assembly.
Tailings dam constructions.
Power supply system construction.
Water supply system construction.
Auxiliary services construction.
The investment programme was completed by Compañía Minera Ares in March 1998. The total amount invested by the Company
and demonstrated to the Ministry of Energy and Mines was approximately US$33,274,000 at 31 December 1999. Through Directoral
Resolution 189-99-EM/DGM dated 28 October 1999, the Ministry of Energy and Mines granted legal stability to Compañía Minera Ares
starting 1 January 1999 for a 10-year term.
By virtue of the above mentioned contract, the Peruvian Government is obliged to guarantee legal stability to the Company based on
the following terms:
(a) Free trade of its products, meaning that the Government cannot apply restrictions such as:
•
•
•
•
limiting the Company’s ability to sell anywhere;
suspending or postponing internal sales and/or exports;
requiring sales to any market, local or foreign; and
requiring payment for such products based on an exchange of goods
or services or in a currency not valid to make international payments.
(b) Banco Central de Reserva del Peru, as representative of the Peruvian Government, also granted the following rights in favour of
Compañía Minera Ares, during the term of the contract:
•
•
•
•
•
Free access inside and outside the country and to currencies generated by exports subject to laws in force at the date of
the contract.
Free exchange to foreign currency of local currency generated by internal mining production.
No discrimination in relation to the exchange rate issued by Banco Central de Reserva del Peru for similar transactions.
Compañía Minera Ares will have the right to totally or partially decide to be governed, when it considers pertinent, under new legal
dispositions on exchange matters or exchange norms issued during the term of the contract, including the dispositions and the
norms that have to do with exchange aspects not contemplated in the contract, as long as they have a general character or are
applicable to the mining activity. The decision to be subject to the new dispositions or norms will not affect the term of the stability
arrangements, or the exercise of rights other than those contemplated in the new dispositions or norms.
If Compañía Minera Ares decides to be governed under new legislations for a specific period, it has the rights to revert to previous
legislation and apply that legislation for the same period. This decision does not generate new rights or obligations.
(c) Compañía Minera Ares will enjoy legal stability related to the Ares mining unit, without being affected by modifications or
new norms. The legal stability guarantee provides, additionally, that the following taxes will remain constant with those at the
approval date:
•
•
•
•
Income tax, including the way it is determined and the rates applied.
The calculation of compensation and/or tax refunds.
The municipal taxes rates.
The custom taxes rates.
(d) In the framework of administrative stability, the following is understood:
•
The vesting rights of the mining concessions with a rate of US$2.00 per hectare per year, and in the case of profit concessions, the
number of Tax Units (UIT), to which it corresponds.
Hochschild Mining plc
Annual Report & Accounts 2006
97
Notes to the Group Financial Statements continued
For the year ended 31 December 2006
38 Mining royalty
In accordance to Peruvian legislation, a mining royalty that owners of mining concessions must pay for the exploitation of metallic
and non-metallic resources has been enacted. Mining royalties are calculated with rates ranging from 1% to 3% of the value of mineral
concentrates or equivalent, according to the quoted market price published by the Ministry of Energy and Mines. As of 31 December
2006, the amount payable as mining royalties for the mining units of Selene and Arcata amounted to approximately US$929,000
(US$145,000 at 31 December 2005), and is recorded in the caption ‘Trade and other payables’ of the balance sheet. Management, having
consulted with legal counsel, is of the opinion that the Ares mining unit has not been affected by this law and therefore need not make
any royalty payments or provisions for such payments due to the fact that it has the legal stability agreement.
39 Financial risk management
The Group is exposed to a variety of risks and uncertainties which may have a financial impact on the Group and which also impact the
achievement of social, economic and environmental objectives. These risks include strategic, commercial, operational and financial risks
and are further categorised into risks areas to facilitate consolidated risk reporting across the Group.
(a) Foreign currency risk
The Group principally produces silver and gold which are typically priced in US dollars. A proportion of the Group’s costs are incurred
in Nuevo Sol. Accordingly, the Group’s financial results may be affected by exchange rate fluctuations between the US dollar and the
Nuevo Sol. The Group does not use derivative instruments to manage its foreign currency risks.
As of 31 December 2006, the Group has acquired liquidity funds in UK pounds sterling which generate foreign exchange movements.
(b) Commodity price risk
Silver and gold prices have a material impact on the Group’s results of operations. Prices are significantly affected by changes in global
economic conditions and related industry cycles. Generally, producers of silver and gold are unable to influence prices directly; however,
the Group profitability is obtained through the control of its cost base and the efficiency of its operations.
The Group manages its commodity price risk mainly with fixed price sales commitments or with caps and floors built into sales
contracts. The Group is going to end its current fixed price sales commitments during the first six-month period of 2007 (refer to note
35(a)). Management has decided that the Group will not enter into additional commitments in order to obtain full benefit from possible
price increases in the future, maintaining its efforts of lowering costs in order to assure profitability in case of an eventual decrease in
the prices.
(c) Credit risk
Credit risk arises from debtors’ inability to make payment of their obligations to the Group as they become due (without taking into
account the fair value of any guarantee or pledged assets); and by non-compliance by the counterparties in transactions in cash, which
is limited to balances deposited in banks and accounts receivable at the balance sheets dates. To manage this risk, the Group deposits
its surplus funds in highly rated financial institutions, establishes conservative credit policies and constantly evaluates the conditions of the
market in which it conducts its activities. Consequently, the Group does not expect to incur significant losses on account of credit risk.
Credit risk concentrations exist when changes in economic, industrial or geographic factors take place, affecting in the same manner
the Group’s counterparties whose added risk exposure is significant to the Group’s total credit exposure. The Group’s portfolio of
customers is concentrated in three customers domiciled in foreign countries that represent 85% of the total net sales during the
year 2006. Derivatives are executed with different counterparts to avoid concentrations of credit risk.
(d) Liquidity risk
Liquidity risk arises from the Group’s inability to obtain the funds it requires to comply with its commitments under financial
instruments including the inability to sell a financial asset quickly at a price close to its fair value. Management believes that it
will have access to adequate credit on reasonable terms from highly rated financial instruments.
(e) Interest rate risk
The Group has financial assets and liabilities which are exposed to interest rate risk. Changes in interest rates impact primarily loans
and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). The Group does not
have a formal policy of determining how much of its exposure should be at fixed or at variable rates. However, at the time of taking
new loans or borrowings management uses its judgement to decide whether it believes that a fixed or variable rate borrowing would
be more favourable to the Group over the expected period until maturity.
98
Hochschild Mining plc
Annual Report & Accounts 2006
39 Financial risk management continued
As at 31 December 2006
Within
one year
US$000
Between
one and
two years
US$000
Between
two and
five years
US$000
Over
five years
US$000
Fixed rate
Amounts due to minority shareholders (refer to note 25)
(1,445)
(80)
(26,738)
Floating rate
Cash (refer to note 23)
Time deposits (refer to note 23)
Liquidity funds (refer to note 23)
Secured bank loans (refer to note 25)
Loans to minority shareholders (refer to note 19)
Assigned funds (refer to note 19)
997
3,542
414,527
(28,017)
2,436
–
–
–
–
(296)
8,166
6
–
–
–
–
–
–
–
–
–
–
–
–
–
Fixed rate
Amounts due to minority shareholders (refer to note 25)
Receivables from related parties (refer to note 19)
Loans from related parties
Floating rate
Cash (refer to note 23)
Time deposits (refer to note 23)
Assigned funds (refer to note 19)
Secured bank loans (refer to note 25)
As at 31 December 2005
Within
one year
US$000
Between
one and
two years
US$000
Between
two and
five years
US$000
Over
five years
US$000
–
33,102
(160)
125
91
–
(48,310)
(13,108)
–
–
–
–
1,699
(17,676)
–
–
–
–
–
–
(295)
–
–
–
–
–
–
Total
US$000
(28,263)
997
3,542
414,527
(28,313)
10,602
6
Total
US$000
(13,108)
33,102
(160)
125
91
1,699
(66,281)
Interest on financial instruments classified as floating rate is re-priced at intervals of less than one year. Interest on financial
instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are
not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.
40 Subsequent events
On 8 January 2007, the Group granted an option to Ventura Gold Corp (‘Ventura’) for the acquisition of an interest in Inmaculada
property, located in Peru. Under the agreement, in order to acquire an initial 51% controlling interest, Ventura shall complete a total of
15,000 metres of drilling on the property and issue a total of one million of its common shares to the Group within a three-year period.
Once Ventura acquires its 51% controlling interest, Ventura shall issue an additional two million of its common shares to the Group
within the next five years. Additionally, the Group has the option to become the operator of the project and buy back 11% controlling
interest in consideration for a payment to Ventura of three times the total investment made in drilling and related exploration work
completed. If the Group does not exercise the aforementioned option, Ventura may elect to increase its controlling interest by 19% upon
the completion of a feasibility study on the project.
On 21 February 2007, the Group signed the option and joint venture agreement with Mirasol under the arrangements set forth in the
letter of intention described in note 35(f). Within 30 days following the execution of the agreement, Mirasol shall constitute under the
laws of Argentina two companies named ‘Cabo Sur’ and ‘Punta Verde’, which will hold the rights of Claudia and Santa Rita properties,
respectively. Until the exercise of Claudia and Santa Rita options, Mirasol and the Group will own 99% and 1% of each of the new
companies, respectively.
Hochschild Mining plc
Annual Report & Accounts 2006
99
Parent Company Income Statement
Period ended 31 December 2006
Administrative expenses
Operating profit
Finance income
Finance costs
Foreign exchange gain
Profit before income taxes
Income taxes
Profit for the period attributable to equity shareholders of the Company
Period from
date of
incorporation
to 31 December
2006
US$000
(1,729)
(1,729)
3,777
(1)
553
2,600
(789)
1,811
Notes
3
4, 12
5
100
Hochschild Mining plc
Annual Report & Accounts 2006
Parent Company Balance Sheet
At 31 December 2006
ASSETS
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Other receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Share capital
Share premium
Merger reserve
Retained earnings
Total equity
Current liabilities
Trade and other payables
Total liabilities
Total equity and liabilities
As at
31 December
2006
US$000
Notes
6
7
8
9
10
10
10
10
11
4
1,608,452
1,608,456
10,344
421,344
431,688
2,040,144
146,466
416,191
1,315,396
148,277
2,026,330
13,814
13,814
2,040,144
The accompanying accounting policies and notes on pages 104 to 109 are an integral part of these financial statements. The financial
statements on pages 100 to 103 were approved by the Board of Directors on 19 March 2007.
On behalf of the Board
Roberto Dañino
Executive Director and Deputy Chairman
19 March 2007
Hochschild Mining plc
Annual Report & Accounts 2006
101
Parent Company Cash Flow Statement
Period ended 31 December 2006
Reconciliation of profit for the period to net cash used in operating activities
Profit for the period
Adjustments to reconcile Company operating profit to net cash inflows from operating activities:
Income tax expense
Finance income
Finance cost
Foreign exchange difference
Increase/(decrease) of cash flows from operations due to changes in assets and liabilities:
Other receivables
Trade and other payables
Cash used in operating activities
Interest received
Net cash from operating activities
Cash flows from investing activities
Acquisitions of property, plant and equipment
Investments in subsidiaries
Loan to Minera Hochschild Mexico, S.A. de C.V.
Loan to Minera MH Chile Ltda.
Net cash used in investing activities
Cash flows from financing activities
Capital contribution
Proceeds from issue of ordinary shares under Global Offer
Transaction costs associated with issue of shares
Cash flows generated from financing activities
Net increase in cash and cash equivalents during the period
Foreign exchange difference
Cash and cash equivalents at end of period
Transactions that did not affect cash flows
Shares issued under Global Offer
Capital reduction
Unpaid consulting fees
Unpaid investments in subsidiaries
Period ended
31 December
2006
US$000
Notes
1,811
789
(3,777)
1
(553)
(694)
1,127
(1,296)
1,620
324
(4)
(67,217)
(7,000)
(500)
(74,721)
93
515,245
(20,150)
495,188
420,791
553
421,344
6
7
12
12
10
10
10
10
10
7
1,534,629
146,466
5,297
6,606
102
Hochschild Mining plc
Annual Report & Accounts 2006
Parent Company
Statement of Changes in Equity
Period ended 31 December 2006
Shares issued
Shares issued pursuant to the Share Exchange Agreement
Shares issued under Global Offer
Capital reduction
Transaction costs associated with issue of shares
Net income recognised directly in equity
Profit for the period
Total recognised income for 2006
Balance at 31 December 2006
Equity share
capital
US$000
Share
premium
US$000
93
219,233
73,606
(146,466)
146,466
–
–
–
441,639
–
(25,448)
416,191
–
Merger
reserve
US$000
–
1,315,396
–
–
Retained
earnings
US$000
–
–
–
146,466
Total equity
US$000
93
1,534,629
514,245
–
(25,448)
1,315,396
–
146,466
1,811
2,024,519
1,811
–
–
–
1,811
1,811
146,466
416,191
1,315,396
148,277
2,026,330
Hochschild Mining plc
Annual Report & Accounts 2006
103
Notes to the Parent Company
Financial Statements
Period ended 31 December 2006
1 Corporate information
Hochschild Mining plc (hereinafter the ‘Company’) is a public limited company incorporated on 11 April 2006 under the Companies
Act 1985 and registered in England and Wales with registration number 05777693. The Company’s registered address is One Silk Street,
London EC2Y 8HQ, United Kingdom. The Company was incorporated to serve as a holding company to be listed on the London Stock
Exchange. The Company acquired its interest in a group of companies to constitute the Hochschild Mining Group pursuant to a share
exchange agreement (‘Share Exchange Agreement’) dated 2 November 2006.
The ultimate controlling party of the Company is Mr Eduardo Hochschild whose beneficial interest in the Company is held through
Pelham Investment Corporation.
On 8 November 2006 the Company’s shares were admitted to the Official List of the UKLA (United Kingdom Listing Authority) and to
trading on the London Stock Exchange.
2 Significant accounting policies
(a) Basis of preparation
The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as
adopted by the European Union as they apply to the financial statements of the Company for the period ended 31 December 2006.
The Group’s financial statements are also consistent with IFRS as issued by the IASB. In addition, the financial statements have been
prepared in accordance with those parts of the Companies Act 1985 applicable to companies reporting under IFRS.
The financial statements of the Company have been prepared on a historical cost basis. The financial statements are presented in
US dollars (US$) and all monetary amounts are rounded to the nearest thousand (US$000) except when otherwise indicated.
(b) Judgements in applying accounting policies and key sources of estimation uncertainty
Certain amounts included in the financial statements such as the recoverability of accounts receivable and the valuation of investments
in subsidiaries involves the use of judgement and/or estimation. These judgements and estimates are based on management’s best
knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts
included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or
the notes to the financial statements.
(c) Currency translation
The functional currency for the Company is the US dollar and is determined by the currency of the primary economic environment in
which it operates.
Transactions denominated in currencies other than the functional currency of the Company are initially recorded in the functional
currency using the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are remeasured at the rate of exchange ruling at the balance sheet date. Exchange gains and losses on settlement of foreign
currency transactions which are translated at the rate prevailing at the date of the transactions, or on the translation of monetary
assets and liabilities which are translated at period-end exchange rates, are taken to the income statement. Non-monetary assets and
liabilities denominated in foreign currencies that are stated at historical cost are translated to the functional currency at the foreign
exchange rate prevailing at the date of the transaction.
(d) Investments in subsidiaries
Subsidiaries are entities over which the Company controls operating and financial policies, generally by owning more than 50% of
voting rights. Investments in subsidiaries are recognised at acquisition cost less any provision for impairment.
The dividends are recognised when the Company’s right to receive payments is established. Dividends received out of pre-acquisition
profits of a subsidiary are recorded as a reduction to the carrying value of the investment. Dividends received out of pre-acquisition
profits are recorded in the income statement.
(e) Other receivables
Current trade receivables are carried at the original amount less provision made for impairment of these receivables. A provision for
impairment of receivables is established when there is objective evidence that the Company will not be able to collect all amounts due
according to the original terms of the receivable. The amount of the provision is the difference between the original carrying amount
and the recoverable amount and this difference is recognised in the income statement.
(f) Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the balance sheet, cash and cash equivalents
comprise cash on hand and deposits held with banks that are readily convertible into known amounts of cash and which are subject to
insignificant risk of changes in value and have an original maturity of three months or less. For the purposes of the cash flow statement,
cash and cash equivalents as defined above are shown net of outstanding bank overdrafts.
104
Hochschild Mining plc
Annual Report & Accounts 2006
2 Significant accounting policies continued
(g) Share capital
Ordinary shares issued by the Company are recorded at the net proceeds received, which is the fair value of the consideration received
less costs that are incurred in connection with the share issue. The nominal par value of the shares issued is taken to the share capital
account and any excess is recorded in the share premium account, including the costs that were incurred with the share issue.
(h) Trade and other payables
Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective
interest method.
(i) Finance income and costs
Finance income and costs mainly comprise interest income on funds invested and interest expense on borrowings.
Interest income and costs are recognised as they accrue, taking into account the effective yield on the asset and liability, respectively.
(j) Income tax
Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to
items charged or credited directly to equity, in which case it is recognised in equity.
Current tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted at the balance sheet
date, and any adjustment to tax payable in respect of previous years.
No deferred taxes on subsidiaries are recognised.
(k) Financial instruments
Recognition
The Company recognises financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual
provisions of the instrument.
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set
off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Measurement
A financial asset or liability is recognised initially at its fair value plus transaction costs that are directly attributable to the acquisition
or issue of the financial asset or financial liability.
In determining estimated fair value, investments in shares or portfolios of listed securities are valued at quoted bid prices. When quoted
prices on an active market are not available (and for all non-actively traded securities), fair value is determined using a valuation technique.
Valuation techniques include using recent arm’s length transactions, if available, reference to the current fair value of another instrument
that is substantially the same, discounted cash flow analysis and option pricing models. If the range of reasonable fair value is significant
and the probabilities of the various estimates cannot be reliably assessed, the investment is not remeasured at fair value.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
They do not qualify as trading assets and have not been designated as either at fair value through the profit and loss account or
available for sale. Such assets are carried at amortised cost using the effective interest method if the time value of money is significant.
Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the
amortisation process.
If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses
that have not been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate computed at
initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognised in the profit or loss account. If,
in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring
after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment
loss is recognised in the profit and loss account, to the extent that the carrying value of the asset does not exceed its amortised cost
(that would have been measured if there had been no impairment) at the reversal date.
Financial liabilities are initially recognised in accordance with the policy stated above and subsequently remeasured at amortised cost
using the effective interest method.
Derecognition
Financial asets and liabilities are generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.
(l) Dividends payable
Dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s financial statements in the period in
which the dividends are approved by the Company’s shareholders.
Hochschild Mining plc
Annual Report & Accounts 2006
105
Notes to the Parent Company
Financial Statements continued
Period ended 31 December 2006
3 Administrative expenses
Audit fees
Directors’ fees
Training expenses
Tax advisory fees
Other
Total
4 Finance income
Interest received on liquidity funds
Interest received on current account
Interest on loans to related parties (note 12)
Total
5 Income tax
Corporation taxes
Foreign taxes
Total
Period ended
31 December
2006
US$000
873
264
194
125
273
1,729
Period ended
31 December
2006
US$000
3,671
64
42
3,777
Period ended
31 December
2006
US$000
783
6
789
The statutory income tax rate in the United Kingdom is 30% for 2006. The tax on the Company’s profit before tax differs from the
theoretical amount that would arise using the statutory tax rate as follows:
Income before tax
Tax calculated at statutory tax rate
Other
Tax charge
Period ended
31 December
2006
US$000
2,600
780
9
789
6 Property, plant and equipment
Property, plant and equipment is comprised of US$4,000 of computer equipment and office furniture, all acquired in the period.
The depreciation charge for the period is less than US$1,000.
106
Hochschild Mining plc
Annual Report & Accounts 2006
7 Investments in subsidiaries
Movement of the period:
Balance at date of incorporation
Additions
Balance at 31 December 2006
As of 31 December 2006 this account comprises:
Name
Hochschild Mining Holdings Limited
Hochschild Mining (Mexico) Corporation
Hochschild Mining (Argentina) Corporation
Hochschild Mining (Peru) Corporation
Ardsley Corporation
Garrison Corporation
Larchmont Corporation
Total
US$000
–
1,608,542
1,608,542
Country of
incorporation
Equity
interest
Carrying
value
United Kingdom
Cayman Islands
Cayman Islands
Cayman Islands
Cayman Islands
Cayman Islands
Cayman Islands
100
100
100
100
100
100
100
45,618
575,752
253,756
447,125
247,337
1
38,863
1,608,452
On 2 November 2006, the Company entered into a Share Exchange Agreement to acquire the above companies (together referred to as
the ‘Cayman Holding Companies’).
In relation to this transaction, the Company issued 229,900,000 ordinary shares with a nominal value of £0.50 and a fair value of £3.50
to the former shareholders of the Cayman Holding Companies in exchange for the share capital on these companies.
In addition, during 2006 the Company made additional cash contributions to its subsidiaries for US$73,823,000, of which US$6,606,000
remain unpaid at the end of the period.
The list of subsidiaries of the Group is presented in note 1 (Corporate information) of the notes to the Group Financial Statements.
8 Other receivables
Amounts receivable from subsidiaries (note 12)
Prepayments
Accrued income
Other debtors
Total
9 Cash and cash equivalents
Bank current account
Liquidity funds1
Cash and cash equivalents considered for the cash flow statement
As at
31 December
2006
US$000
7,536
616
2,121
71
10,344
As at
31 December
2006
US$000
6,817
414,527
421,344
Note
1 The liquidity funds are mainly invested in certificate of deposits, commercial papers and floating rate notes with weighted average annual effective interest rate of 5.16% and a
weighted average maturity of 43 days as of 31 December 2006.
Hochschild Mining plc
Annual Report & Accounts 2006
107
Notes to the Parent Company
Financial Statements continued
Period ended 31 December 2006
10 Equity
(a) Share capital and share premium
Authorised and issued share capital
The authorised and issued share capital of the Company as at 31 December 2006 is as follows:
Class of shares
Ordinary shares
Authorised
Issued
Number
Amount
Number
Amount
500,000,000 £250,000,000
307,350,226
£153,675,113
At 31 December 2006, all issued shares with a par value of £0.25 per share (weighted average of US$0.953 per share) were fully paid.
Rights attached to ordinary shares
At general meetings of the Company, on a show of hands, every member who is present in person has one vote and on a poll every
member who is present in person or by proxy has one vote for every share of which he is the holder.
The changes in share capital are as follows:
Ordinary shares of £1 per share, issued and fully paid
Shares issued to the initial shareholder
Shares issued on 16 October 2006
Shares issued as of 16 October 2006
Share capital following the capital split:
Ordinary shares of £0.50 per share, issued
Shares in issue at 16 October 2006
Shares issued and paid pursuant to the Share Exchange Agreement
Shares issued to employees on 11 November 2006
Shares issued to Non-Executive Directors on 11 November 2006
Shares issued pursuant to the global offer
Transaction costs associated with issue of shares
Capital reduction from £0.50 per share to £0.25 per share
Shares issued as of 31 December 2006
Number
1
49,999
50,000
Share
interest
US$000
Share
premium
US$000
–
93
93
–
–
–
100,000
229,900,000
71,656
28,570
77,250,000
93
219,233
68
27
73,511
–
(146,466)
–
–
409
163
441,067
(25,448)
–
307,350,226
146,466
416,191
(b) Merger reserve
Merger reserve represents the difference between the value of the net assets of Cayman Holding Companies acquired under the Share
Exchange Agreement and the nominal value of the shares issued in consideration of such acquisition.
11 Trade and other payables
Loan from subsidiary (note 12)
Consulting fees
Audit fee
Corporation income tax payable
Other payables
Total
As at
31 December
2006
US$000
6,606
5,297
873
789
249
13,814
108
Hochschild Mining plc
Annual Report & Accounts 2006
12 Related-party balances and transactions
(a) Related-party accounts receivable and payable
The Company had the following related-party balances as at, and transactions during, the period ended 31 December 2006.
Subsidiaries
Minera Hochschild Mexico, S.A. de C.V
Minera MH Chile Ltda.
Hochschild Mining (Peru) Corporation (refer to note 7)
Total
As at 31 December 2006
Accounts
receivable
US$000
Accounts
payable
US$000
7,035
501
–
7,536
–
–
6,606
6,606
Accounts receivable mainly corresponds to loans given to the above subsidiaries to acquire assets and support their exploration
activities. These loans bear interest at an annual rate of 8.85%. An interest of US$42,000 was recognised as a finance income in 2006.
The fair values of the receivables and payables approximate their book value.
(b) Compensation of key management personnel of the Company
Key management personnel include the members of the management board and Directors who receive remuneration. The amount of
this remuneration amounts $264,000 in 2006.
Hochschild Mining plc
Annual Report & Accounts 2006
109
Reserves and Resources
Ore reserves and mineral resources estimates
Hochschild Mining plc reports its mineral resources and reserves
estimates in accordance with the Australasian Code for Reporting
of Exploration Results, Mineral Resources and Ore Reserves 2004
edition (‘the JORC Code’). This establishes minimum standards,
recommendations and guidelines for the public reporting of
exploration results and mineral resources and reserves estimates.
In doing so it emphasises the importance of principles of
transparency, materiality and confidence.
The information on ore reserves and mineral resources on pages
111 to 114 were prepared by or under the supervision of Competent
Persons (as defined in the JORC Code). Competent Persons are
required to have sufficient relevant experience and understanding
of the style of mineralisation, types of deposits and mining
methods in the area of activity for which they are qualified as a
Competent Person under the JORC Code. The Competent Person
must sign off their respective estimates of the original mineral
resource and ore reserve statements for the various operations
and consent to the inclusion of that information in this report, as
well as the form and context in which it appears.
Hochschild Mining plc employs its own Competent Person who
has audited all the estimates set out in this report
Hochschild Mining Group companies are subject to a
comprehensive programme of audits which aim to provide
assurance in respect of ore reserve and mineral resource
estimates. These audits are conducted by Competent Persons
provided by independent consultants. The frequency and depth
of an audit depends on the risks and/or uncertainties associated
with that particular ore reserve and mineral resource, the overall
value thereof and the time that has lapsed since the previous
independent third party audit.
The JORC Code requires the use of reasonable economic
assumptions. These include long-range commodity price
forecasts (which, in the Group’s case, are prepared by ex-house
specialists largely using estimates of future supply and demand
and long-term economic outlooks). Ore reserve estimates are
dynamic and are influenced by changing economic conditions,
technical issues, environmental regulations and any other
relevant new information and therefore these can vary from
year to year. Mineral resource estimates can also change and
tend to be influenced mostly by new information pertaining
to the understanding of the deposit and secondly the
conversion to ore reserves.
The estimates of ore reserves and mineral resources are shown as
at 31 December 2006, unless otherwise stated. Mineral resources
that are reported include those mineral resources that have
been modified to produce ore reserves. All tonnage and grade
information has been rounded to reflect the relative uncertainty
in the estimates; there may therefore be small differences. Metric
units are used throughout the report. The prices used for the
reserves calculation were: Au Price: US$500 per ounce and Ag
Price: US$8.5 per ounce
110
Hochschild Mining plc
Annual Report & Accounts 2006
Table 01 – Metal resources at 31 December 2006
Resource category
Measured
Indicated
Indicated
Inferred
Ag
Au
Ag
Au
(t)
(t)
(t)
(t)
(g/t)
(g/t)
(moz)
(koz)
Zn
(kt)
Pb
(kt)
Cu
(kt)
Arcata
Measured
Indicated
Total
Inferred
Ares
Measured
Indicated
Total
Inferred
Selene
Measured
Indicated
Total
Inferred
Pallancata
Measured
Indicated
Total
Inferred
San José
Measured
Indicated
Total
Inferred
Moris
Measured
Indicated
Total
Inferred
San Felipe
Inferred
TOTAL
Measured
Indicated
Total
Inferred
983,174
198,839
668,847
168,598
789,816
53,742
548,396
705,282
152,221
758,934
1,182,013
1,576,324
837,445
75,161
843,558
914,559
1,253,678
616,640
911,155
162,090
3,015,654
218,661
3,234,315
37,476
503
562
513
648
272
181
254
182
345
213
336
323
327
330
329
542
600
507
522
576
4
5
4
4
1.43
1.51
1.44
1.64
12.06
4.26
10.49
4.40
2.51
1.04
2.41
1.49
1.30
1.40
1.35
1.90
7.74
8.48
8.36
9.29
1.31
1.15
1.30
0.88
15.9
3.6
19.5
32.8
5.9
1.0
6.8
0.4
8.8
0.4
9.1
9.5
5.8
7.5
13.3
10.7
2.9
12.4
15.3
3.0
0.4
0.0
0.4
0.0
45.2
9.7
54.8
82.9
259.3
23.1
282.4
10.6
63.6
1.8
65.4
43.7
22.9
31.7
54.5
37.7
37.9
206.9
244.8
48.4
127.1
8.1
135.2
1.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,886,472
71
10.31
6.2
1.6
181.9
85.8
10.0
6,158,108
2,104,056
8,262,164
5,268,722
200
367
243
359
2.81
4.16
3.15
1.33
39.6
24.8
64.4
62.7
555.9
281.2
837.2
226.1
0.0
0.0
0.0
181.9
0.0
0.0
0.0
85.8
0.0
0.0
0.0
10.0
Note
1 A combined metal content of 6.75% zinc, 3.18% lead and 0.37% copper are not included in totals and these metals represent 13.2 million ounces of equivalent silver.
Resources include undiscounted reserves. Where reserves are attributable to joint venture partner, reserve figures reflect the Company’s ownership only. No ore loss or dilution
has been included, and stockpiled ore excluded.
Hochschild Mining plc
Annual Report & Accounts 2006
111
Reserves and Resources continued
Table 02 – Metal reserves at 31 December 2006
Reserve
category
Arcata
Proved
Probable
Total
Ares
Proved
Probable
Total
Selene
Proved
Probable
Total
Pallancata
Proved
Probable
Total
San José
Proved
Probable
Total
Moris
Proved
Probable
Total
Total
Proved
Probable
Total
Proved
Probable
Proved
and
probable
(t)
(t)
(t)
1,012,036
688,663
809,259
641,002
153,188
1,273,582
4,577,732
216,897
1,228,933
156,786
845,450
56,161
865,420
671,562
1,312,565
845,611
998,800
767,974
2,041,556
2,714,991
7,292,723
Ag
(g/t)
437
469
442
249
175
235
317
194
309
263
283
273
528
435
450
5
4
4
246
258
251
Au
(g/t)
1.21
1.26
1.22
11.05
4.14
9.77
2.30
0.94
2.22
1.06
1.10
1.08
6.79
7.29
7.21
1.72
1.16
1.51
3.19
3.23
3.21
Ag
(moz)
14.2
3.3
17.5
5.5
0.9
6.4
8.3
0.3
8.6
5.4
6.1
11.5
2.6
11.8
14.4
0.2
0.1
0.3
36.2
22.6
58.7
Au
(moz)
39.5
8.8
48.3
244.6
20.9
265.5
60.0
1.7
61.7
21.9
23.8
45.7
33.4
198.2
231.6
70.3
28.7
99.0
469.8
282.1
751.9
Note
Includes discounts for ore loss and dilution. Reserves = Resources – Ore Loss + Dilution. Where reserves are attributable to joint venture partner, reserve figures reflect the
Company’s ownership only.
112
Hochschild Mining plc
Annual Report & Accounts 2006
Table 03 – Change in reserves and resources from June 2006 to December 2006
Region
Peru
Peru totals
Argentina
Argentina totals
Mexico
Mexico totals
Totals
Category
Arcata
Resource
Reserve
Ares
Resource
Reserve
Selene
Resource
Reserve
Pallancata
Resource
Reserve
Resource
Reserve
San José
Resource
Reserve
Resource
Reserve
Moris
Resource
Reserve
San Felipe
Resource
Reserve
Resource
Reserve
Resource
Reserve
Ag content (million ounces)
Depletion1
Addition2
December
Net
2006 Difference
% change
–3.1
–5.6
–3.0
0.0
–11.7
0.0
0.0
0.0
0.0
0.0
–11.7
17.0
7.4
–5.7
–0.5
6.6
1.7
13.0
12.5
31.0
21.0
18.9
19.5
18.9
19.5
–0.4
0.0
–15.3
0.0
–15.7
8.9
34.2
49.4
60.6
20.4
24.9
22.3
25.2
12.3
49.2
23.8
159.8
78.8
70.4
55.6
70.4
55.6
12.3
8.9
25.0
0.0
37.3
8.9
267.5
143.3
17.0
4.3
–5.7
–6.2
6.6
–1.3
13.0
12.5
31.0
9.3
18.9
19.5
18.9
19.5
–0.4
8.9
–15.3
0.0
–15.7
8.9
34.2
37.7
39
27
–19
–22
36
–10
36
111
24
13
37
54
37
54
–3
0
–38
0
–30
0
15
36
June
2006
43.6
16.1
30.5
28.5
18.6
13.6
36.2
11.3
128.9
69.5
51.5
36.1
51.5
36.1
12.7
0.0
40.3
0.0
53.0
0.0
233.4
105.6
Note
1 Reduction in reserves based on ore delivered to the mine plant.
2 Increase in reserves due mainly to mine site exploration but also to price increase.
Hochschild Mining plc
Annual Report & Accounts 2006
113
Reserves and Resources continued
Table 04 – Change in attributable reserves and resources from June 2006 to December 2006
Region
Peru
Peru totals
Argentina
Argentina totals:
Mexico
Mexico totals
Totals
Category
Arcata
Resource
Reserve
Ares
Resource
Reserve
Selene
Resource
Reserve
Pallancata
Resource
Reserve
Resource
Reserve
San José
Resource
Reserve
Resource
Reserve
Moris
Resource
Reserve
San Felipe
Resource
Reserve
Resource
Reserve
Resource
Reserve
Ag Content (million ounces)
% Attributable
June
2006 Att.1
December
2006 Att.1
Net
difference
% change
100
100
100
60
51
70
70
43.6
16.1
30.5
28.5
18.6
13.6
21.7
6.8
114.4
65.0
26.3
18.4
26.3
18.4
8.9
0.0
28.2
0.0
37.1
0.0
177.8
83.4
60.6
20.4
24.9
22.3
25.2
12.3
29.5
14.3
140.2
69.3
35.9
28.3
35.9
28.3
8.6
6.2
17.5
0.0
26.1
6.2
202.2
103.9
17.0
4.3
–5.7
–6.2
6.6
–1.3
7.8
7.5
25.8
4.3
9.6
9.9
9.6
9.9
–0.3
6.2
–10.7
0.0
–11.0
6.2
24
20
39
27
–19
–22
36
–10
36
111
23
7
37
54
37
54
–3
n.m.
–38
n.m.
–30
n.m.
14
25
Note
1 Attributable reserves and resources based on the Group’s percentage ownership at its joint venture projects.
114
Hochschild Mining plc
Annual Report & Accounts 2006
Production
Arcata
Silver Production
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
Ares
Silver Production
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
Selene
Silver Production
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
Total
Silver Production
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:41)
Gold Production
(cid:97)(cid:101)(cid:112)
(cid:42)(cid:34)(cid:45)(cid:43)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:42)(cid:34)(cid:40)(cid:45)(cid:39)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:43)(cid:34)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:41)(cid:34)(cid:42)(cid:43)(cid:41)
(cid:40)(cid:38)(cid:38)(cid:41)
Gold Production
(cid:97)(cid:101)(cid:112)
(cid:40)(cid:34)(cid:44)(cid:46)(cid:46)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:40)(cid:34)(cid:47)(cid:42)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:34)(cid:45)(cid:42)(cid:40)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:40)(cid:34)(cid:44)(cid:38)(cid:38)
(cid:40)(cid:38)(cid:38)(cid:41)
Gold Production
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:97)(cid:101)(cid:112)
(cid:42)(cid:34)(cid:39)(cid:44)(cid:40)
(cid:41)(cid:34)(cid:41)(cid:41)(cid:43)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:40)(cid:34)(cid:47)(cid:39)(cid:39)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:42)(cid:39)(cid:45)
(cid:40)(cid:38)(cid:38)(cid:41)
Gold Production
(cid:97)(cid:101)(cid:112)
(cid:39)(cid:39)(cid:34)(cid:44)(cid:38)(cid:42)
(cid:40)(cid:38)(cid:38)(cid:44)
(cid:39)(cid:38)(cid:34)(cid:43)(cid:43)(cid:38)
(cid:40)(cid:38)(cid:38)(cid:43)
(cid:39)(cid:38)(cid:34)(cid:44)(cid:43)(cid:45)
(cid:40)(cid:38)(cid:38)(cid:42)
(cid:44)(cid:34)(cid:42)(cid:45)(cid:38)
(cid:40)(cid:38)(cid:38)(cid:41)
(cid:97)(cid:101)(cid:112)
(cid:39)(cid:39)(cid:36)(cid:47)
(cid:45)(cid:36)(cid:40)
(cid:43)(cid:36)(cid:40)
(cid:45)(cid:36)(cid:40)
(cid:97)(cid:101)(cid:112)
(cid:39)(cid:43)(cid:43)(cid:36)(cid:43)
(cid:39)(cid:47)(cid:46)(cid:36)(cid:44)
(cid:39)(cid:47)(cid:41)(cid:36)(cid:40)
(cid:39)(cid:46)(cid:42)(cid:36)(cid:45)
(cid:97)(cid:101)(cid:112)
(cid:40)(cid:46)(cid:36)(cid:41)
(cid:40)(cid:45)(cid:36)(cid:43)
(cid:40)(cid:46)(cid:36)(cid:39)
(cid:42)(cid:36)(cid:41)
(cid:97)(cid:101)(cid:112)
(cid:39)(cid:47)(cid:44)
(cid:40)(cid:41)(cid:41)
(cid:40)(cid:40)(cid:45)
(cid:39)(cid:47)(cid:44)
Hochschild Mining plc
Annual Report & Accounts 2006
115
Glossary
Ag
Silver
Adjusted EBITDA
Adjusted EBITDA is calculated as profit from continuing operations
before exceptional items, net finance costs and income tax plus
depreciation, amortisation and exploration costs other than
personnel and other expenses
AGM or Annual General Meeting
The annual general meeting of the Company which is scheduled
to be held on Wednesday 4 July 2007 at 11.30 am in the offices of
Linklaters LLP at One Silk Street, London EC2Y 8HQ
Annual Report
The annual report of Hochschild Mining plc for the year ended
31 December 2006 and comprising a review of the business
for the year, financial statements, compliance reports and
shareholder information
Audit Committee
The audit committee of the Board
Au
Gold
Attributable after tax profit
Profit for the year before dividends attributable to the equity
shareholders of Hochschild Mining plc from continuing operations
before exceptional items and after minority interest
Average head grade
Average ore grade fed into the mill
Board
The board of Directors of the Company
CAD$
Canadian dollars
Capital employed
The aggregate of equity attributable to shareholders, minority
interests and borrowings
Cayman Holding Companies
Hochschild Mining (Argentina) Corporation, Larchmont
Corporation, Garrison Corporation, Ardsley Corporation, Hochschild
Mining (Peru) Corporation and Hochschild Mining (Mexico)
Corporation, all subsidiary undertakings incorporated in the
Cayman Islands
Committee(s)
Any or all of the Audit, CSR, Executive, Nominations and
Remuneration Committees
Company or Hochschild
Hochschild Mining plc
Competent Persons
Persons who, under the JORC Codes, are required to have
sufficient relevant experience and understanding of the style of
mineralisation, types of deposits and mining methods in the area
of activity for which they are qualified as a competent person.
CSR Committee or Corporate Social Responsibility Committee
The corporate social responsibility committee of the Board
CSR
Corporate social responsibility
Cu
Copper
Cymoid veins
Looping veins
Directors
The directors of the Company
Doré
Doré bullion is an impure alloy of gold and silver and is generally
the final product of mining and processing; the doré bullion will
be transported to be refined to high purity metal
Dollar or US$
United States dollars
Effective tax rate
Income tax expense as a percentage of profit from continuing
operations before income tax
ELTIP
Executive Long Term Incentive Plan
EPS (pre-exceptionals)
The per-share (using the weighted average number of shares
outstanding for the period) profit available to equity shareholders
of the Group from continuing operations before exceptional items
and after minority interest
eq
equivalent
ETF
Exchange Traded Fund
Executive Committee
The executive committee of the Board
Exceptional item
Events that are significant and which, due to their nature or the
expected infrequency of the events giving rise to them, need to be
disclosed separately
Executive Directors
Executive directors of the Company
Expansion capital expenditure
Capital expenditure that increases the Group’s operating capacity
Exploration capital expenditure
Capital expenditure spent to convert resources into reserves and
to increase the reserve and resource base
GAAP
Generally Accepted Accounting Principles
Gold by-product cash costs
Defined as total cash costs multiplied by the percentage of
revenue from gold, divided by the number of gold ounces sold.
Cash costs include cost of sales, commercial deductions and
selling expenses less depreciation included in cost of sales. This
metric allows us to benchmark ourselves versus our peer group
in a consistent manner over time; however, we must consider any
revenue contribution shift.
Group or Hochschild Mining Group
Hochschild Mining plc and its subsidiary undertakings
g/t
Grams per metric tonne
116
Hochschild Mining plc
Annual Report & Accounts 2006
IASB
International Accounting Standards Board
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standards
ISO 14001
An international environmental management system standard
published by the International Organisation for Standardisation
JORC
Joint Ore Reserves Committee
JORC Code
Code developed by the Australian Joint Ore Reserves Committee
for reporting mine reserves and resources
koz
Thousand ounces
kt
Thousand metric tonnes
ktpa
Thousand metric tonnes per annum
LIBOR
London Inter Bank Offer Rate
Listing or IPO (Initial Public Offering) or Global Offer
The listing of the Company’s ordinary shares on the London Stock
Exchange on 8 November 2006
LME
London Metals Exchange
LSE
London Stock Exchange
moz
Million ounces
Nominations Committee
The nominations committee of the Board
Non-Executive Directors
Non-executive directors of the Company
Nuevo Sol
The currency of Peru
OHSAS 18001
Occupational Health and Safety Assessment Series (standards for
occupational health and safety management systems)
Ordinary shares
Ordinary shares of £0.25 each in the Company
Pb
Lead
PPE
Property Plant and Equipment
Registrars
The registrars of the Company, being Capita Registrars
Relationship Agreement
An agreement entered between Pelham Investment Corporation
(referred to as the Major Shareholder), Mr Eduardo Hochschild,
Mr Alberto Beeck (together the Beneficial Owners) and the
Company on 20 October 2006. The principal purpose of the
Relationship Agreement is to ensure that the Company and its
subsidiaries are capable of carrying on their business independently
of the Major Shareholder, the Beneficial Owners and of any of their
respective associates
Reserve replacement
Calculated on the base of tonnage. The difference between
end of year and beginning of year plus the total production is
the tonnage identified for the year. That amount is divided by
the tonnage at the beginning of the year and expressed as a
percentage gives the reserve replacement ratio
Selene Mine System
The Selene Mine is a low sulphidation, precious metal epithermal
vein system conformed, based on current knowledge, by two vein
systems. The first, the Explorador System, is where most of our
production, reserve and resources are focused. The second, the
Tumiri System, has been mined by previous owners and still has an
important exploration potential to develop
Share Exchange Agreement
An agreement entered into on 2 November 2006 whereby
the Company acquired the Cayman Holding Companies in
consideration for 229,900,000 ordinary shares
Silver co-product cash costs
Defined as total cash costs multiplied by the percentage of
revenue from silver, divided by the number of silver ounces sold.
Cash costs include cost of sales, commercial deduction and
selling expenses, less depreciation included in cost of sales . This
metric allows us to benchmark ourselves versus our peer group
in a consistent manner over time; however, we must consider any
revenue contribution shift.
Splays
Secondary veins that bifurcate from the main structure
Spot or spot price
The purchase price of a commodity at the current price, normally
this is at a discount to the long term contract price
Sustaining capital expenditure
Capital expenditure to maintain the Group’s operating capacity
t
tonne
TECSUP
The leading non-profit technical institute in Peru, substantially
funded by Hochschild Mining
TSR
Total shareholder return
UKLA
United Kingdom Listing Authority
Zn
Zinc
Hochschild Mining plc
Annual Report & Accounts 2006
117
Shareholder Information
Shareholder interests at 31 December 2006:
Number of shareholders: 238 (2005: nil)
Number of shares in issue: 307,350,226 (2005: nil)
By size of holding:
500 and under
501 to 1,000
1,001 to 10,000
10,001 to 100,000
100,001 to 1,000,000
Over 1,000,000
Total
Shareholders %
Shares %
5.88
6.72
40.34
23.53
16.81
6.72
0.01
0.01
0.12
0.68
4.31
94.87
100.00
100.00
By category of shareholder:
Shareholders
Shares
Description
no. of
holders
% of
holders
holding
36
Private shareholders
187
Nominee companies
Limited companies
7
Bank and bank nominees 4
4
Other institutions
15.13
89,812
78.57 297,767,058
219,531
2.94
7,652,384
1.68
1,621,441
1.68
% of
capital
0.03
96.88
0.07
2.49
0.53
Total
238
100.00 307,350,226
100.00
Annual General Meeting
The AGM will be held at 11.30 am on Wednesday 4 July 2007 at the
offices of Linklaters LLP, One Silk Street, London, United Kingdom,
EC2Y 8HQ. The Notice of Meeting and the Form of Proxy are
enclosed with this Annual Report.
Company website
Hochschild Mining plc Interim and Annual Reports and results
announcements are available via the internet on our website at
www.hochschildmining.com. Shareholders can also access the
latest information about the Company and press announcements
as they are released, together with details of future events and
how to obtain further information.
Registrars
For information about the AGM, shareholdings, dividends and to
report changes in personal details, shareholders should contact:
Capita IRG Plc, Northern House, Woodsome Park, Fenay Bridge,
Huddersfield, HD8 0LA United Kingdom.
Telephone: United Kingdom 0870 162 3131,
Overseas: 0044 208 639 2157 (www.capitaregistrars.com)
Currency option and dividend mandate
Shareholders wishing to receive their dividend in US dollars
should contact the Company’s registrars to request a currency
election form. This form should be completed and returned to the
registrars by 19 June 2007.
The Company’s registrars can also arrange for the dividend to
be paid directly into shareholders’ UK bank accounts. To take
advantage of this facility, a dividend mandate form, also available
from the Company’s registrars, should be completed and
returned to the registrars by 19 June 2007. This arrangement is
only available in respect of dividends paid in UK pounds sterling.
Shareholders who have already completed one or both of these
forms need take no further action.
Investor Relations
For investor enquiries please contact: Wray Barber, Head of
Investor Relations, Hochschild Mining plc, 1 Grosvenor Crescent,
London, SW1X 7EF
Telephone: 020 7152 6014
Email: wray.barber@hocplc.com
Financial calendar
Dividend payments:
Ex-dividend date
Record date
Deadline for return of currency election form
Final dividend payable
Interim dividend payable
13 June 2007
15 June 2007
19 June 2007
6 July 2007
November 2007
Other dates:
Annual General Meeting
Interim results announced
Interim report circulated
4 July 2007
September 2007
September 2007
Solicitors
Linklaters LLP
Auditors
Head Office
1 Grosvenor Crescent Ernst & Young LLP
London
SW1X 7EF
United Kingdom
1 More London Place One Silk Street
London SE1 2AF
United Kingdom
London EC2Y 8HQ
United Kingdom
Registered Office
(from 1 April 2007)
Hochschild Mining plc
18 Hanover Square
London W1S 1HX
United Kingdom
Company Secretary
Prism Cosec Limited
118
Hochschild Mining plc
Annual Report & Accounts 2006
Notes
Hochschild Mining plc
Annual Report & Accounts 2006
119
Notes
120
Hochschild Mining plc
Annual Report & Accounts 2006
Hochschild Mining plc
is a leading precious metals
company operating in Latin
America with a primary focus
on silver and gold.
01 Highlights
02 About Us
14 Chairman’s Statement
16 Business Review
36 Board of Directors
38 Corporate Structure
39 Corporate Governance Report
45 Directors’ Remuneration Report
48 Directors’ Report
53 Statement of Directors’ Responsibilities
54 Independent Auditors’ Report
56 Group Income Statement
57 Group Balance Sheet
58 Group Cash Flow Statement
59 Group Statement of Changes in Equity
60 Notes to the Group Financial Statements
100 Parent Company Income Statement
101 Parent Company Balance Sheet
102 Parent Company Cash Flow Statement
103 Parent Company Statement of Changes in Equity
104 Notes to the Parent Company Financial Statements
110 Reserves and Resources
115 Production
116 Glossary
118 Shareholder Information
Forward looking statements
The documents in this Annual Report, including those that make up the Directors’ Report,
contain certain forward looking statements, particularly those relating to the business,
strategy, investments, production, major projects and their contribution to expected
production and other plans of Hochschild Mining plc and its current goals, assumptions and
expectations relating to its future financial condition, performance and results.
By their nature, forward looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that will or may occur in the future. Actual
results, performance or achievements of Hochschild Mining plc may be materially different
from any future results, performance or achievements expressed or implied by such forward
looking statements. Past performance is no guide to future performance and persons
needing advice should consult an independent financial adviser.
The forward looking statements reflect knowledge and information available at the date of
preparation of this Annual Report. Except as required by the Listing Rules and applicable law,
the Board of Hochschild Mining plc does not undertake any obligation to update or change
any forward looking statements to reflect events occurring after the date of this Annual Report.
Nothing in this Annual Report should be construed as a profit forecast.
www.hochschildmining.com
Hochschild Mining plc
1 Grosvenor Crescent
London
SW1X 7EF
2006
Hochschild Mining plc
Annual Report & Accounts
For the year ended 31 December 2006
H
o
c
h
s
c
h
i
l
i
i
d
M
n
n
g
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
F
o
r
t
h
e
y
e
a
r
e
n
d
e
d
3
1
D
e
c
e
m
b
e
r
2
0
0
6