Hochschild Mining PLC
Annual Report 2008

Plain-text annual report

Hochschild Mining plc Annual Report & Accounts 2008 H o c h s c h i l i i d M n n g p c l A n n u a l R e p o r t & A c c o u n t s 2 0 0 8 Hochschild Mining plc 46 Albemarle Street London W1S 4JL United Kingdom +44 (0) 207 907 2930 +44 (0) 207 907 2931 info@hocplc.com www.hochschildmining.com Hochschild Mining is a leading underground precious metals producer operating in the Americas with a primary focus on silver and gold. Overview 01 How have we performed this year? 02 Why invest in Hochschild? 04 Chairman’s statement Business review 08 Q&A with the CEO 11 Strategy 12 Market and geographic overview 14 Operational review 22 Financial review 30 Corporate social responsibility 36 Risk management Governance 38 Board of directors 39 Senior management 40 Directors’ report 45 Corporate governance report 50 Directors’ remuneration report 55 Statement of directors’ responsibilities 56 Independent auditor’s report Financial statements 57 Consolidated accounts 62 Notes to the consolidated accounts 110 Parent company accounts 113 Notes to the parent company accounts Further information 125 Reserves and resources 129 Production 131 Glossary 132 Shareholder information Investor relations For investor enquiries please contact: Jane Flynn, Investor Relations Associate by writing to the London Office address (see below), by phone on 020 7907 2933 or by email at jane.flynn@hocplc.com. Financial calendar Dividend payments 29 April 2009 Ex-dividend date Record date 1 May 2009 Deadline for return of currency election form 5 May 2009 Final dividend payable 28 May 2009 Other dates Annual General Meeting Half-yearly results announced London Office (and Registered Office address) 46 Albemarle Street London W1S 4JL United Kingdom Company Secretary R D Bhasin 26 May 2009 August 2009 Auditors Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom Solicitors Linklaters LLP One Silk Street London EC2Y 8HQ United Kingdom Forward looking statements The constituent parts of this Annual Report, including those that make up the Directors’ Report, contain certain forward looking statements, including such statements within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, such forward looking statements may relate to matters such as 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. Forward-looking statements include, without limitation, statements typically containing words such as ‘intends’, ‘expects’, ‘anticipates’, ‘targets’, ‘plans’, ‘estimates’ and words of similar import. 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. Factors that could cause or contribute to differences between the actual results, performance or achievements of Hochschild Mining plc and current expectations include, but are not limited to, legislative, fiscal and regulatory developments, competitive conditions, technological developments, exchange rate fluctuations and general economic conditions. These factors, risks and uncertainties are further discussed elsewhere in this Annual Report in the section entitled Risk Management. 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. Certified as a FSC mixed sources product, 9lives 55 is produced with 55% recycled fibre from both pre and post-consumer sources, together with 45% FSC certified virgin fibre from well managed forest. 9lives 55 provides the same visual and mechanical performance as 100% virgin fibre papers and offers excellent environmental attributes. How have we performed this year? $434m $0.04 Revenue up 42% Proposed total dividend 16.9moz 153koz Silver production up 25% Gold production down 24% $116.1m +29% Cash balance Capacity up to 10,190 tonnes per day p.00 Where indicated, follow signposting for further details Production Achieved 2008 target of 26 million attributable silver equivalent ounces. Investments Investments in Lake Shore Gold, San Felipe, Liam, Gold Resource Corporation, Mariana Resources and others. Expansions Successfully completed capacity expansions at Arcata, San José and Selene. Diversification We now have operations or investments in five countries in the Americas: Peru, Argentina, Mexico, Canada and Chile. 01 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Why invest in Hochschild? It’s all about potential. Since our IPO in 2006, we have met all of our production targets, we have doubled throughput capacity, entered new, mineral rich countries and delivered solid returns for investors. We are committed to delivering long- term shareholder value and believe that we have a unique investment proposition: 1 Unrivalled regional knowledge and underground mining expertise > > > Third largest primary silver producer globally A developing producer of gold Experienced and professional management team p.38–39 2 An impressive track record with over 40 years’ experience in underground mining > > Achieved 2007 and 2008 production targets of 26 million attributable silver equivalent ounces On track to meet 2009 production target of 28 million attributable silver equivalent ounces p.4–7 100% of production targets achieved since IPO in 2006 02 Hochschild Mining plc Annual Report & Accounts 2008 Lake Shore CANADA Revenue by country Peru Argentina Mexico 20% 74% 6% Lake Shore Gold San Felipe Moris MEXICO San Luis Potosi El Águila 3 A significant and diversified asset base Peru Ares Arcata Capacity – 940 tpd Silver – 1,538 koz Gold – 64.16 koz Capacity – 1,750 tpd Silver – 9,032 koz Gold – 24.04 koz Selene Pallancata Capacity – 500 tpd Silver – 1,579 koz Gold – 8.50 koz Capacity – 2,500 tpd Silver – 4,188 koz Gold – 16.16 koz Mexico Moris Argentina San José Capacity – 3,000 tpd Silver – 65.07 koz Gold – 26.85 koz Capacity – 1,500 tpd Silver – 4,381 koz Gold – 54.26 koz p.16–18 Revenue by product Silver Gold 61% 39% Liam Azuca Inmaculada PERU Ares Lima Pallancata Arcata Selene Encrucijada ARGENTINA Mendoza Santiago CHILE San José Mining operation Projects Corporate office Exploration office 4 Clear and focused strategy for the future > > Maximise the potential of our operations by focusing on efficiency and rigorous mine planning Bring into production new and profitable precious metals projects in the Americas p.11 03 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Chairman’s statement The measures we swiftly implemented at the end of last year ensure that we are in a sound financial position and well placed to deliver our long-term growth strategy. 2008 was a challenging year. The global economy was heavily impacted by the financial crisis in 2008 and many companies struggled to survive. Whilst the economic turmoil was certainly negative for Hochschild in the short-term, it also gave us the opportunity to focus on what has always been our priority - to produce profitable ounces. Precious metals prices, particularly silver, fell sharply during the second half of the year. While other mining companies were waiting for prices to adjust, we were aggressively making plans to prepare the business for future challenges. In November, we announced a number of measures to ensure that we continued to mine profitable ounces, including: 150 redundancies, a freeze on non-essential capex, cuts in our exploration budget and the delay of San Felipe, our zinc project in northern Mexico. At the end of 2008 and in the first three months of 2009, we sold forward 10.7 million ounces of our 2009 silver equivalent production (comprised of 8.9 million ounces of silver and 30 thousand ounces of gold) to ensure a more stable cash flow which will fund operating capex and future M&A initiatives. In our forty years as underground miners, this is not the first time that we have needed to react to volatile precious metals prices. The speed at which we implemented these changes shows that we are well prepared to address price volatility. In 2009, prices have readjusted and we are now a leaner, fitter company, benefiting from an improving price environment. Revenue for the year increased by 42% to $433.8 million whilst operating profit decreased by 17% to $86.3 million, mostly due to lower realisable silver prices, the anticipated decline in average grades at Ares and Selene, cost inflation and higher treatment charges. As a consequence, pre-exceptional EPS has decreased from $0.27 to $0.08. Our results were also significantly impacted by $45 million of exceptional items, including an impairment of $34.7 million relating to fixed assets (Selene, Moris and San Felipe). We continue to enjoy a healthy balance sheet with a year end cash balance of $116.1 million. This, in conjunction with cash generated from our operations and more stable inflows guaranteed by our short-term forward sales, will allow us to pursue our growth strategy: maximising profit through organic growth, exploration and carefully selected acquisitions. Organic growth I am very proud to say that we have delivered on all our production targets since our IPO in 2006. We produced 26.1 million silver equivalent ounces in 2008 and we are now the world’s third largest primary silver producer. Our 2008 production target was set at a challenging level and meeting it has not been an easy feat in a year when we were also expanding three of our six operations – Arcata (+46%), Selene (+50%) and San José (+100%). All our plant expansions were successfully completed on time and since the IPO, overall production capacity has more than doubled. Including Moris, our only open pit mine, production capacity has increased by 264%. As industry costs increased, we had to be particularly vigilant with regard to unit cost per tonne inflation, which was contained at an increase of 14.3%. Including Moris, unit cost per tonne was flat year-on-year. This has been achieved through a mix of strong operational management, sound planning and efficient procurement. Exploration growth In addition to the exploration success achieved at our existing operations, we are also confident about a number of projects in our pipeline which are delivering positive results. Since January 2008, our exploration efforts have been led by Raymond Jannas, the new Vice President of Exploration & Geology who 26.1m Attributable silver equivalent ounces produced in 2008. 04 Hochschild Mining plc Annual Report & Accounts 2008 In June 2008, the Group acquired 100% of the San Felipe project, our advanced development project in northern Mexico, for $51.5 million. As a result of declining zinc prices in the second half of the year and our commitment to reduce capex, in November we decided to delay the development of this project. However, we remain confident about the long-term potential of San Felipe and will continue to review the timing of the project. In Peru, we purchased 50% of Liam, a joint venture (JV) with Southwestern Resources Corporation (‘Southwestern’). Southwestern is a Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern Peru. The Liam JV comprises a 282,000 hectare land package in very close proximity to our four existing operations. In 2009, we entered into a binding agreement to acquire the remaining 50% of the Liam JV through the purchase of 100% of Southwestern, for a total cash consideration of $17.5 million. The acquisition, which is subject to the approval of Southwestern’s shareholders, consolidates our position in one of our key operational clusters and enables us to leverage our existing infrastructure and knowledge of the regional geology. has over 30 years experience in this field mainly working in the Americas. Raymond is responsible for driving forward the exploration effort for the Group and developing our pipeline for future growth. Azuca Azuca is a 100% owned project located in southern Peru, in close proximity to our existing operations. In 2008 we identified two laterally extensive mineralised vein systems which have resulted in the development of a significant inferred resource totalling 1.8 million metric tonnes at 327 g/t Ag and 1.34 g/t Au, containing 23.3 million silver equivalent ounces. Drilling extensions at the Azuca and Canela veins look very promising and we believe that there is a high probability that an additional resource will be defined in 2009. Encrucijada Encrucijada, which is located in Chile, is a joint venture project with Andina Minerals Inc, in which we can earn a 60% interest. In 2008 we achieved some particularly encouraging results as a result of a first-pass core drilling programme. The most promising vein intercepts include; 1.4mt at 3.87 g/t Au, 344 g/t Ag (538 g/t Ag equivalent); 1.6mt at 2.47 g/t Au, 85 g/t Ag (209 g/t Ag equivalent), 0.2mt at 0.9 g/t gold and 2,378 g/t silver (2,422 g/t silver-equivalent) in separate drill holes. In 2009, we plan to expand our drilling programme to evaluate two new targets. M&A growth In 2008, we continued to execute our cluster consolidation strategy by securing bolt-on acquisitions, joint ventures and strategic investments in a number of key mining districts, investing a total of $254 million during the year. Our 40% investment in Lake Shore Gold is an example of this strategy, providing us with a phased, low-risk exposure to high- grade gold deposits in a mineral rich region of Canada and adding a new cluster to our portfolio. 2008 Commitments Progress Production target Expansions Arcata +46% San José +100% +50% Selene 05 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Chairman’s statement continued M&A highlights: > > > > > Remaining 30% of San Felipe 40% of Lake Shore Gold 50% of Liam JV 15% of GRC* 100% of Southwestern Resources† * 10% of GRC was acquired on 26 February 2009. † Agreement signed on 23 March 2009 and is subject to the approval of Southwestern’s shareholders. In Mexico, we entered into a strategic alliance with Gold Resource Corporation (‘GRC’) and after the year end, we increased our ownership interest in GRC from 5% to 15%. GRC is a precious metals mining company with a number of high grade development and exploration projects in southern Mexico, including El Aguila which is scheduled to begin production in 2009. We also made an offer to acquire Minera Andes or its stake in the San José project, in order to ensure that the project would be fully financed. Although our offer was not accepted, Minera Andes was able to meet its obligations at San José by other means. We look forward to working with Minera Andes to continue to develop the operation and realise its full potential. With a solid balance sheet, we are well positioned to benefit from current market opportunities and looking forward, we expect to continue growing through carefully selected M&A. Responsible mining Efficient operations can only be achieved through good community support and we are dedicated to maintaining the highest standards of corporate and social responsibility. We are committed to the safety of all our employees and have made significant progress over the past year. In 2008, we reduced our accident frequency rate by 24% compared to 2007. Nonetheless, it is with deep regret that I report one mine fatality in 2008. We are addressing the underlying safety deficiencies that led to the occurrence of this tragic event. The impact of market conditions on our full year results means that the 8% profit sharing that our Peruvian employees are entitled to under Peruvian law will be lower and this is creating a challenge for us. As announced on 23 March 2009, mining industry workers in Peru in general are expecting profit sharing to remain at similar levels to previous years and, as a result, there has been industrial action at our four Peruvian operations. The stoppage is not currently impacting our full year production target and we remain confident that a negotiated solution can be reached. Update: I am pleased to say that the industrial action in Peru was swiftly resolved after four days of negotiations and did not impact our full year production target. The end of the industrial action was announced to the market on 27 March 2009. Board changes During the year, we announced the appointments of Miguel Aramburú, CEO and Ignacio Rosado, CFO to the Board of Directors. I would like to thank them and all our employees for the hard work that has enabled Hochschild Mining to progress on its strategic goals. I would also like to take this opportunity to thank Alberto Beeck, who stepped down from the Board of Directors in September 2008, for his significant contribution to the Group. 06 Hochschild Mining plc Annual Report & Accounts 2008 $0.04 Proposed total dividend Dividend Despite the cashflow generated by the Company, the board has agreed that in the current climate, it is sensible to conserve cash and ensure that the business is well funded to further its growth strategy. It has therefore concluded that a reduced dividend of $0.02 per Ordinary Share is proposed for the six months to 31 December 2008, resulting in a total dividend for the year of $0.04 per Ordinary Share. We will keep dividend policy under review to ensure that we manage the business in a way that maximises long-term shareholder return. Outlook Going into 2009, Hochschild is a leaner, fitter company that is well positioned to face the challenges ahead, with a firm focus on producing profitable ounces. Our attributable production target for 2009 is 28 million silver equivalent ounces (at the Company’s current conversion ratio of 60:1), comprising approximately 19.1 million ounces of silver and 148.2 thousand ounces of gold, representing a year-on-year increase of 7%. In addition, Lake Shore Gold is targeting 30,000 ounces of gold in 2009 which would equate to 0.72 million attributable silver equivalent ounces. We remain extremely optimistic about Lake Shore Gold’s growth profile. We expect unit cost per tonne to decrease due to expansions and lower projected input prices. We will continue to responsibly manage our operations and will not hesitate to close or put into care and maintenance mines that are considered uneconomic. The financial crisis continues to have an impact on the sector and we believe that this creates interesting opportunities for a company with Hochschild’s financial strength and established record as a partner of choice in the Americas. We will continue to take a disciplined approach to M&A, focusing on mid-sized, underground precious metals projects in the Americas, preferably located around existing clusters. In order to ensure more stable cashflow to fund operating capex and future M&A, we sold forward 10.7 million ounces of our 2009 silver equivalent production during late 2008 and early 2009. The fundamentals for silver and gold are strong and we therefore remain extremely positive about the long-term prospects for precious metals and have not sold forward any of our 2010 production. At this time we do not plan to undertake any further forward sales contracts for 2009 production. The measures we swiftly implemented at the end of last year ensure that we are in a sound financial position and well placed to deliver our long-term growth strategy. Our focus will continue to be on producing profitable ounces and expanding the business through appropriate investment and acquisition. With our solid assets, excellent project pipeline and professional and dedicated management team, we are well positioned for the coming year. Eduardo Hochschild Executive Chairman 24 March 2009 07 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Q&A with the CEO 28m Attributable silver equivalent ounces to be produced in 2009. Our overall aim is to create long-term, sustainable value for our shareholders and a safe and rewarding workplace for all our employees. Q. Where is our growth potential? We have a clear and focused strategy for delivering growth: to maximise existing operations and to bring into production new and profitable precious metals projects in the Americas. As explained overleaf, we will achieve this through a combination of organic, M&A and pipeline (JV/greenfield exploration) growth. This strategy is underpinned by our overall aim of creating long-term, sustainable value for shareholders and a safe and rewarding workplace for all our employees. Q. What were the operational highlights of 2008? 2008 was another strong operational year for the Group. Once again, we achieved our production target, producing 26.1 million attributable silver equivalent ounces in the year. We increased our capacity by 29% to 10,190 tonnes per day, which means we have more than doubled the Group’s total plant capacity since 2006. In 2008, we also acquired 40% of Lake Shore Gold Corp, a gold company with prime development projects in Timmins, a mining prolific region of Canada. Finally, following our cluster strategy, we further consolidated our position in southern Peru via the acquisition of 50% of the Liam JV, one of the largest single claim blocks in Peru with significant mineral potential. We have achieved all of this, whilst maintaining a strong cash position with over $116.1 million cash on the balance sheet, ensuring that we are well positioned for the future. Q. What are Hochschild’s key goals for 2009? Our aim for 2009 is to produce profitable ounces and all our goals will follow from this. We have set a new production target for 2009 which is to produce 28 million attributable silver equivalent ounces, representing a 7% increase over 2008 production. We will effectively control costs and limit capital expenditure to committed investments and sustaining p.14 08 Hochschild Mining plc Annual Report & Accounts 2008 Q&A with the CEO 157% Increase in the Group’s throughput capacity in 2008*. Throughput capacity (tpd)* 0 9 1 , 7 0 9 8 , 4 0 0 8 , 2 6 0 0 2 7 0 0 2 8 0 0 2 * Excludes Moris, our only open pit mine, as it has a different operational profile to our underground mines. capital expenditures at existing operations. In addition, we will pursue strategic acquisitions and joint ventures which either consolidate one of our existing clusters or provide entry into new, key mining districts. Underpinning our operations is a commitment to the health and safety of all Hochschild’s employees. Q. You have made a number of smaller investments; can you talk through this approach? We frequently take a staged, low risk approach to acquisitions as this enables us to thoroughly evaluate opportunities before committing significant funds and ensures that we use management time most effectively. In the last year we have undertaken a number of smaller investments including a $17.9 million strategic investment in Gold Resource Corporation, a precious metals company with a number of development projects in southern Mexico. We currently hold 15% of the company with the right to increase our stake to 40% by 2010. We also completed a $1.5 million investment in Mariana Resources, an exploration company with projects in Argentina and Chile. Q. You have said that the current climate has created some interesting M&A opportunities for Hochschild. Can you provide some detail on your current pipeline? We are seeing some particularly interesting opportunities in the current market environment, where some juniors are facing difficult financing issues and looking for partners to bring projects into production. We have positioned ourselves as ‘partner of choice’ in the Americas and this is helping to attract some excellent prospects. Our approach is conservative and disciplined. We focus on mid-sized, underground precious metals projects in the Americas around existing clusters and on projects in new, mineral rich areas which will deliver long-term shareholder value. Q. 2008 was a turbulent year for global financial markets. How has this impacted Hochschild? Are you still confident about the long-term prospects for the company? Although the financial crisis has had a significant impact on the whole mining sector, we remain extremely confident about the long-term prospects for Hochschild. We have been in operation for over 40 years and during this time we have been through, and successfully managed, very difficult market conditions. We have taken very swift action to ensure that the business is equipped to deal with challenging precious metals prices. This has included job cuts, a recruitment freeze and a reduction in administrative expenses and capital expenditure. We have delayed our San Felipe project due to the sharp drop in zinc prices and will also consider reducing production, putting into care and maintenance or closing any mines which are considered to be uneconomic. Our focus is to produce profitable ounces and management will ensure that we reach this objective. In addition to these measures, we have taken the prudent decision to sell forward 10.7 million ounces of our 2009 silver equivalent production in order to lock-in some certainty over our cash flow to fund operating capex and future M&A initiatives. Q. Can you talk through your decision to delay San Felipe? Zinc prices fell by over 46% from a high of $2,267/mt to $1,218/mt in the six months to 20 November 2008 (when we announced our decision). In this price environment and given our decision to minimise capital expenditure, we concluded that it would be prudent to delay development of this project. San Felipe remains a key asset for the Group and we will continue to review the viability and timing of the project. 09 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Q&A with the CEO continued I am committed to delivering our operational and financial targets. As mentioned earlier, in 2008 we once again achieved our stated production and also completed three capacity expansions on schedule. We achieved this whilst making significant progress in relation to our safety record. Safety is an ongoing priority for the whole team at Hochschild and I am pleased that we made significant strides in this area in 2008 with a 24% reduction in our accident frequency rate and 81% in the accident severity index. Q. How do you measure your progress? Our objective is to create long-term, sustainable value for our shareholders and a safe and rewarding workplace for all our employees. We are extremely confident about the long-term prospects of the Company and our strategy remains consistent as detailed opposite. Miguel Aramburú Chief Executive Officer 24 March 2009 Q. What is your view on precious metal prices? We continue to believe in the long-term prospects for precious metals. However, given current market volatility, we have taken the prudent measure of selling forward 10.7 million of 2009 silver equivalent production, as mentioned earlier. We have not sold forward any of our 2010 production and do not plan to undertake any further forward sales contracts in 2009. Q. Are you still focused on achieving the 50 million target stated at the time of the IPO? Our long-term goals remain the same. We continue to work towards achieving the 50 million target and have some interesting prospects that could support this. Unfortunately, the global economic climate changed in 2008 and, as a result, our primary focus for the near term is on guaranteeing profitable ounces. Long-term, we believe that the sector and the wider economy will recover and that Hochschild will come through this period in a strong position and with a solid platform from which to deliver growth. Q. This is your first year as CEO, what has been your greatest achievement? Taking on the role of CEO has been an exciting and challenging task for me, particularly following on from Eduardo Hochschild who is such a strong and inspiring leader. I’ve had the fortune to work for the Group for over 13 years and this has put me in a good position to take the Company forward. Our swift response to the financial crisis was one of the greatest achievements of 2008 and I am extremely proud of the Company’s ability to adapt to such difficult conditions. We were one of the first mining companies to announce a proactive plan of action to the market and hopefully this indicates the commitment and pragmatism of the management team. 10 Hochschild Mining plc Annual Report & Accounts 2008 Q&A with the CEO continued Our strategy is straightforward > > Maximise the potential of our operations by focusing on efficiency and effective mine planning Bring into production new and profitable precious metals projects in the Americas Organic growth p.16 Pipeline growth p.20 M&A growth p.19 Strategy in action Completion of capacity expansions at: > > > Arcata +46% San José +50% Selene/Pallancata +100% We are focused on maximising the potential at our existing operations. We regularly review each site to make sure that we are running at optimum efficiency whilst planning for long-term growth. In 2008 this included investment in plant expansions as well as mine-site exploration. With our commitment to cash preservation in 2009, we will be focusing on operational efficiency and effective mine planning. Strategy in action Progression of JV and exploration projects: > Azuca – 100% owned early development project in southern Peru, diamond drilling underway Inmaculada – joint venture gold/silver project in Peru, diamond drilling underway > We are continually assessing new opportunities at all stages of development. Projects enter our pipeline either by joint venture or internal discovery (greenfield exploration) and are subject to a strict evaluation process. Our pipeline currently comprises numerous long-term prospects in our target countries. Strategy in action Strategic acquisition of: > > > > > > Remaining 30% of San Felipe 40% of Lake Shore Gold Corporation 50% of the Liam Regional JV 15% of Gold Resource Corporation* 16% of Mariana Resources † 100% of Southwestern We have adopted a highly selective approach to acquisitions and undertake a rigorous evaluation before pursuing opportunities to ensure that all transactions are value accretive in the long-term. We are focused on: > Mid-sized, high grade, underground precious metals assets Cluster consolidation: leveraging existing operations and management expertise Specific geological regions: Peru, Mexico, Argentina, Canada, Chile Bolt on acquisitions or joint ventures > > > * 10% of Gold Resource Corp was acquired on 26 February 2009. † Agreement signed on 23 March 2009 and is subject to the approval of Southwestern’s shareholders. 11 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Market and geographic overview We remain extremely confident about the outlook for precious metals prices. We are already seeing stronger performance in 2009 with silver trading up 25% and gold up 7%. 2008 market overview 2008 was an extremely volatile year for commodities, particularly in the second half when concerns about the world’s banking sector and the possibility of a protracted global recession set in. continued macro uncertainty. As silver is extracted as a by-product of other base metals, the recent rise in supply is likely to be impacted by mine closures as base metal operations become uneconomic in light of lower commodity prices. Forecast 2008 silver demand 2% 7% Industrial De-hedging Photography Jewellery & silverware Coins Investment 24% 13% 1% 53% Forecast 2008 silver supply Mine production 20% Government sales Scrap 3% Gold proved its status as a safe haven and generally withstood the fallout, making an intra year gain of 3%, in contrast to the massive decline experienced by almost every other asset class. Silver fell from its highs in March 2008, when it was trading at nearly $21/oz and, in respect of the year ended 31 December 2008, finished the year down 27% at $10/oz. Despite this decrease, silver outperformed the MG Base Metals Index (MGMI) which dropped by 54% over the same period, proving continued correlation, albeit weaker, with gold. 77% Precious metals prices impact our financial results and in a lower price environment we must adapt the business to ensure the production of profitable ounces. As discussed previously, we have undertaken a number of short and medium term measures to achieve this. Silver summary 2008 was an extremely volatile year for silver, which reached highs of nearly $21/oz in March followed by lows below $9/oz in October as the outlook for industrial demand and the general investor sell off impacted all commodities. Despite this turbulence in the second half, silver achieved an annual average price of $14.98/oz, up 12% year-on-year. > > Fabrication demand is projected to have risen by 1% in 2008 due to increased demand from industrial applications and silver coins. On the supply side, mine production is projected to have marginally risen by 1% in 2008. These trends are unlikely to continue into 2009 due to the significant change in the global economic landscape. GFMS are predicting a decline in industrial demand but expect this to be offset by strong investment demand for silver in light of 12 Hochschild Mining plc Annual Report & Accounts 2008 Silver’s unique industrial properties and its role as a store of value mean that it will be impacted by the drivers for both precious and base metals. GFMS are expecting continued volatility for the year ahead and forecast a base case price scenario of $13/oz per ounce. Key drivers for silver in 2009 Demand > Continued macro economic uncertainty should support investment demand Silver’s correlation with gold as a safe haven asset Consumers substituting gold for silver, particularly in the Indian jewellery market which is highly price sensitive and saw demand soar in the second half of 2008 Robust demand for bullion coins > > > Supply > Potential for mine closures as base metal operations where silver is produced as a by-product become uneconomic in a lower price environment Government sales which are expected to have dropped sharply in 2008 Rapid decrease in photography demand will reduce the volume of scrap on the supply side which fell 6% in 2008 Forecast 2008 gold demand 6% 9% Jewellery Other fabrication Bar hoarding 10% Producer de-hedging Identifiable investment 18% 57% Forecast 2008 gold supply Mine production 29% Official sector sales Scrap supply 7% 64% Gold summary 2008 was a strong year for gold which achieved a record annual average price of $871.96/oz and daily nominal highs over $1,000/oz in March, as a result of soaring oil prices and significant dollar weakness. Strong demand from investors seeking a safe haven counteracted the sharp decline in commodity prices, between March and October, driven by institutional investors unwinding index and basket positions. Investment demand remains the key driver of the gold price with annual implied net investment increasing by an estimated 22% in 2008 to 219 tonnes. This counteracted lower jewellery demand which fell 4% in 2008. On the supply side, global mine production fell by an estimated 4% to 2,385 tonnes and scrap volumes increased 13% as a result of higher and often volatile gold prices. Going into 2009, flat mine production, declining net government sales and limited increases in scrap sales support the view that gold may experience a sustained rally in the first half of the year. Gold is typically seen as a hedge against US dollar weakness and inflationary pressures, both of which are expected trends in 2009. GFMS have highlighted the possibility of a return to the highs of March 2008, when gold was trading over $1,000/oz, in the first half of 2009. Silver and gold performance 2008 160 140 120 100 80 60 40 20 0 Gold Bullion LBM US$/troy ounce Silver Fix LBM cash cents/troy ounce MG Base Metal lndex (MGMI) cash – price index 3% (27)% (54)% Jan 08 Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec 08 Key drivers for gold in 2009 Demand > Increased demand for safe haven assets as a result of the global credit crisis Significant fall in the value of other asset classes i.e. equities, property and financial assets supports the investment case for gold Possible inflationary pressure and weaker US dollar may drive the value of gold higher Increased investment led growth for official coins which rose 41% in 2008 > > > Supply > Mine production expected to be flat in 2009. In 2008, production is expected to decrease 4% to 2,385 tonnes, with losses reported in over 30 countries Declining government sales, down 42% year-on-year – now at their lowest level since the Central Bank Agreement was signed in 1999 > Geographic overview Our growth strategy focuses on achieving profitable production in the Americas, a vast region with enormous mineral potential. We now have operations and investments in five of the top 20 precious metal producing countries globally, including Peru and Mexico which are the world’s two largest producers of silver and also Argentina, Canada and Chile. We only pursue opportunities in countries which offer enabling environments for foreign investment in the mining sector and which provide stable economic and regulatory frameworks over the long-term. Global production rankings Country Peru Mexico Chile Canada Argentina Silver 2007 Gold 2007 1 2 4 9 13 5 14 16 8 15 Sources: GFMS, Silver Institute, Bloomberg 13 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Operational review Key performance indicators Attributable silver production (koz) 2005 2006 2007 2008 10,550 11,604 13,588 16,941 Attributable production is measured as the number of ounces produced multiplied by our ownership interest at each mine and summed together for all operations. Attributable gold production (koz) 2005 2006 2007 2008 232 196 201 152.9 Attributable production is measured as the number of ounces produced multiplied by our ownership interest at each mine and summed together for all operations. Life of mine (years) 2006 2007 2008 3.7 4.6 3.2 Life of mine is based on reserves and calculated by dividing the number of reserve tonnes by the amount of ore forecast to be processed during the following 12 month period. Life of mine measures the extent to which we have expanded our reserve base whilst taking into consideration capacity expansions. * Reserve life of mine relates to our underground operations. Moris, our only open pit mine, has a different operational profile and is therefore not included In line with guidance for the year, the Company achieved total attributable silver production of 26.1 million ounces, comprising 16.9 million ounces of silver and 152.9 thousand ounces of gold. Production Attributable silver production increased 25% year-on-year representing strong silver production at Arcata, Pallancata and San José. Attributable gold production decreased by 24% due to anticipated lower grades at Ares and Selene, but this was partially offset by an increase in production at our other operations. As a result of the expansions completed in 2008, the Group’s plant capacity has increased by 29%, with full benefits to accrue in 2009. Capacity at San José doubled to 530 ktpa while Arcata’s capacity has been expanded by over 46% from 424 to 618 ktpa. Throughput at the Selene plant, which also processes ore from Pallancata, has increased by 50% from 706 to 1,059 ktpa. Hochschild has more than doubled plant capacity since its IPO in November 2006 demonstrating once again its ability to deliver projects on schedule. Including Moris, our only open pit mine, production capacity increased by 263%. Hochschild’s attributable production target for 2009 is 28 million attributable silver equivalent ounces (at the Company’s current conversion ratio of 60:1), comprising approximately 19.1 million ounces of silver and 148.2 thousand ounces of gold. This represents a year-on-year increase of 7%. The 2009 production target of 28 million silver equivalent ounces only forecasts Selene’s production through to June In addition to the Group’s production of 28 million attributable silver equivalent ounces, Lake Shore Gold, in which we have a 40% investment, is expected to produce up to 30,000 ounces of gold in 2009 (which would equate to 0.72 million attributable silver equivalent ounces). We remain optimistic about Lake Shore Gold’s growth profile. Full production tables p.129–130 Life of mine To ensure that we are mining profitable ounces, we have increased cut-off grades in our underground mines by an average of 18%. This has impacted our reserve base as marginally economic ore is excluded from reserves. The combined effect of the change in cut-off grades and the increase in capacity implemented last year, resulted in a decrease in average mine life from 4.6 to 3.2 years* based on reserves as at 31 December 2008. However, we remain committed to replenishing and expanding our resource base and we have an extremely successful record of converting resources to reserves. Full reserve and resource tables p.126–128 14 Hochschild Mining plc Annual Report & Accounts 2008 15 Hochschild Mining plc Annual Report & Accounts 2008 Lake Shore CANADA MEXICO San Luis Potosi Overview Business review Governance Financial statements Further information Operational review continued Peru Arcata Arcata enjoyed another successful year with silver production up 38% and gold production up 46% year-on-year. These increases were a result of the plant expansion completed during the year as well as consistent grades and recoveries. In 2008, we sold Arcata’s concentrate production to Peñoles, Traxys, Cormin, Louis Dreyfus and a small fraction to Doe Run. Production and sales p.129–130 During 2008, we incorporated 1,112,254 metric tonnes with 1.4 g/t Au and 525 g/t Ag (21.7 million ounces of silver equivalent) into indicated resources and 1,032,896 metric tonnes with 1.4 g/t Au and 517 g/t Ag (19.8 million ounces of silver equivalent) into reserves. We continue to increase reserves and resources in the Mariana, Julia, Michelle, Soledad, Ramal Marion, Nicole and Soledad Norte veins. We are also exploring two new veins, Rosita and Luz and secondary structures mainly between Marion and Macarena (35,251 metres drilled in 132 holes; 4,478 metres of underground workings). Exploration potential is open at depth and along strike for these veins. The 2009 exploration programme focuses on adding new reserves and resources primarily in the Rosita, Luz, Mariana and Nicole veins, as well as exploring new targets north of the Mariana structure through underground workings and drilling. Exploration p.126–128 Ownership 100% Start of production 1964 Property size 47,000 hectares Pallancata Pallancata, which commenced production in the third quarter of 2007, is a venture with International Minerals Corporation (‘IMC’) in which we control 60% and act as the mine operator. Pallancata exemplifies our cluster consolidation strategy. Its close proximity to Selene enables us to leverage existing infrastructure as ore from the operation is transported 22 kilometres to the plant at Selene for processing. Selene’s plant was expanded in 2008 from 2,000 to 3,000 tpd to accommodate the anticipated growth in production at Pallancata. Pallancata recorded strong production results in its first full year of operation, with silver and gold production increasing 495% and 486% year-on-year to 4,188 koz and 16.16 koz respectively. In 2008 the silver/gold concentrate from Pallancata was sold to Teck Cominco. Production and sales p.129–130 Underground workings at the Pallancata Central, Ramal Central, Cimoide 1, María and Sofía veins resulted in a major conversion of resources into reserves of 3,080,459 metric tonnes at 1.3 g/t Au and 396 g/t Ag (47.5 million ounces of silver equivalent). In addition, we drilled 5,332 metres in 67 drill holes at the Pallancata-Oeste, Pallancata-Central veins and associated secondary structures, developing an inferred resource of 699,102 metric tonnes at 1.4 g/t Au and 368 g/t Ag (10.1 million ounces of silver equivalent). The 2009 exploration programme will focus on 15,220 metres of drilling at the Virgen del Carmen, San Javier and Mariana that have high grade silver potential. Exploration p.126–128 Ownership 60% HOC/40% IMC Start of production Q3 2007 Property size 7,330 hectares PERU Ares Lima Pallancata Arcata Selene Peru production split* 22.3% 9.1% 45.3% 23.3% Arcata Ares Selene Pallancata * Total production. 16 Hochschild Mining plc Annual Report & Accounts 2008 Operational review continued +100% Expansion completed at Selene in 2008, capacity now at 3,000 tpd Ares As anticipated and previously disclosed, the average reserve grade at Ares is declining due to the ageing and geological nature of the deposit. As a consequence, gold and silver production decreased 57% and 43% respectively. Ares produces 100% doré, all of which was sold to Johnson Matthey in 2008. Production and sales p.129–130 During 2008 we drilled 5,690 metres and developed 1,062 metres of underground workings that resulted in 178,954 metric tonnes with 5.1 g/t Au and 96 g/t Ag (2.3 million ounces of silver equivalent). We are continuing to replace the ore in splays and tensional structures in the Victoria vein system. We tested a new geological model with 19 drill holes (6,226 metres) exploring the Apolo, Maria, Teresa and Tania vein targets, sub-parallel to the major success at the main Victoria system. In 2009, our exploration efforts will focus on developing resources and reserves at the Isabel, Tania and Maruja veins, located north of Victoria. Exploration p.126–128 Ownership 100% Start of production 1998 Property size 22,700 hectares Selene As anticipated and previously disclosed, the average reserve grade at Selene is declining due to the ageing and geological nature of the deposit. As a consequence, gold and silver production decreased 61% and 54% respectively. Selene produced an average of 22,000 tonnes of ore per month in 2008; however, this number is expected to decrease to approximately 15,000 tonnes per month in 2009. Although Selene has 1.2 million tonnes of total resources, a high level of capital expenditure would be required to extract these ounces. As announced in our Q408 Production Report in January 2009, the Company’s focus for 2009 is to deliver profitable production and we will therefore reduce production, close, or put into care and maintenance any mines that are considered uneconomic. As a consequence, Selene is under consideration for closure. Selene’s plant, which was upgraded during the year, will continue to process ore from Pallancata. The 2009 production target of 28 million silver equivalent ounces only forecasts Selene’s production through to June with a significant decline in tonnage over this six month period. In 2008, more than 60% of Selene’s production was converted into doré at the Ares plant and sold to Johnson Matthey. The remaining concentrate was sold on a spot basis primarily to Teck Cominco, Norddeutsche Affinerie AG and in blends with Arcata to Cormin. Production and sales p.129–130 During 2008, we executed 11,335 metres of diamond drilling at the Martha-Eva, Tumiri, Timida, Explorador and Pucanta veins. We achieved a minor development of resources, converting 290,716 metric tonnes at 1.5 g/t Au and 189 g/t Ag (2.6 million ounces silver equivalent) into reserves. However, grades are lower than those historically found at Selene due to the ageing nature of the mine. As the exploration results have deteriorated over time, in 2009 we will focus on compiling all geological information and re- interpreting the data to define possible new drill targets. Exploration p.126–128 Ownership 100% Start of production 2003 Property size 19,500 hectares 17 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Operational review continued ARGENTINA Argentina/Mexico Argentina/Mexico Mendoza Santiago San José Lake Shore San José, the Group’s operation in Argentina, commenced production in the second quarter of 2007. San José is a venture with Minera Andes in which we control 51% and act as the mine operator. We remain very positive about the potential at San José, reflected by the plant expansion undertaken in 2008 which doubled capacity from 750 to 1,500 tonnes per day. CANADA Inventories were higher than expected in the fourth quarter primarily due to a temporary furnace malfunction which has now been resolved. In addition, sales were impacted by the early closure of a customer’s refinery for the Christmas holiday period. In 2008, we sold the doré produced at San José to Argor Heraeus S.A., a licensed trader, smelter and assayer based in Switzerland. The concentrate produced at the operation was sold to Norddeutsche Affinerie AG. Moris After the year end, we made an offer to acquire Minera Andes or its stake in the San José project, in order to ensure that the project would be fully financed. Although our offer was not accepted, Minera Andes was able to meet its obligations at San José by other means. Production and sales p.129–130 In 2008 we drilled 14,453 metres in 60 drill holes along the Odin, Ayellen and Ramal Frea veins. Another 4,24 metres in 20 holes were drilled at extensions of the Huevos Verdes, Frea and Kospi veins, increasing the mineralisation potential of these structures. Exploration p.126–128 Ownership 51% HOC/49% MAI Start of production Q2 2007 Property size 40,449 hectares Moris, which commenced production in August 2007, is a venture with EXMIN in which we control 70% and act as the mine operator. Moris is the Group’s only open pit mine but provided a key stepping stone into Mexico, which is of key strategic importance to the Group. Production at the operation more than doubled to 876 thousand tonnes in 2008. Lima Gold recoveries at Moris are expected to increase in 2009 as a result of a more PERU stable plant process. In 2008, we sold all of the gold/silver doré produced at Moris to Johnson Matthey. Production and sales p.129–130 Ownership 70% HOC/30% EXMIN Start of production Q3 2007 Property size 18,631 hectares ARGENTINA Mendoza Santiago ARGENTINA San José Moris MEXICO 18 Hochschild Mining plc Annual Report & Accounts 2008 Operational review continued Acquisitions and investments A selective approach Expansion through investment and acquisition is a key element of our strategy. We have maintained our disciplined approach in 2008, focusing on mid-sized, underground precious metals projects in the Americas, particularly in our existing clusters, which we believe will create long-term shareholder value. During 2008 and in early 2009, we secured a number of strategic investments in key mining districts with a total spend of $284.5 million, of which $254 million was invested during 2008. In the first half of 2008 we acquired 40% of Lake Shore Gold for a total of $164 million, providing us with exposure to reasonably priced, high-grade gold deposits in the Timmins mining district of Northern Ontario, Canada. The company has a strong pipeline of projects, from grass roots through to advanced exploration as well as a proprietary database of exploration targets and is expected to produce up to 30,000 ounces of gold in 2009 (which would equate to 0.72 million attributable silver equivalent ounces). We view this as an important strategic investment and have three positions on the board. In 2009 we participated in Lake Shore Gold’s equity financing and maintained our ownership at 40% by investing a further $18.5 million. Proceeds from the financing will be used for underground rehabilitation and development work at the company’s 100% owned Bell Creek mine and Vogel properties in support of an advanced underground exploration programme, exploration expenditures at the Timmins, Thunder Creek, Casa Berardi and other exploration properties, and for general corporate purposes. In June 2008 we acquired 100% of the San Felipe project, our advanced development project in northern Mexico. As a result of declining zinc prices in the second half of the year and our commitment to reduce capex, in November we decided to delay the development of this project. However, we remain confident about the long-term potential of San Felipe and will continue to review the timing of the project. In line with our cluster strategy, we further consolidated our position in southern Peru via the acquisition of a 50% interest in the Liam JV with Southwestern for a total consideration of $33.3 million. The 282,000 hectare property has significant strategic importance for Hochschild as it is in close proximity to our four existing operations; Arcata, Ares, Selene and Pallancata. The acquisition was completed in August 2008. In 2009, we entered into a binding agreement, subject to the approval of Southwestern’s shareholders, to acquire the remaining 50% of the Liam JV through the purchase of 100% of Southwestern, for a total cash consideration of $17.5 million. Southwestern is a Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern Peru. The acquisition consolidates our position in one of our key operational clusters and enables us to leverage our existing infrastructure and knowledge of the regional geology. In November 2008, we made a $5 million investment in Gold Resource Corporation, an underground precious metals mining company with a number of high grade development and exploration projects in southern Mexico. We have subsequently exercised our option to invest a further $13 million in GRC and as a result we now hold 15% of the company and are extremely confident about the potential of the business. 19 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Operational review continued Exploration Strong project pipeline We remain committed to our long-term goal of achieving a resource and reserve life of four years at each of our operations and in 2008 spent $23.8 million on exploration. We remain extremely positive about our project pipeline which currently has numerous opportunities in Peru, Argentina, Mexico, Chile and Canada at various stages of development. We are constantly evaluating opportunities, with a clear focus on mid-sized, high grade, underground precious metals deposits in key mining districts: Azuca Azuca is a 100% owned project located in southern Peru, in close proximity to our existing operations. Successful exploration at Azuca during 2008 has identified two laterally extensive mineralised vein systems: Azuca and Canela. Additional mineralised vein systems have been identified at the property and their continuity and metal content will be confirmed in 2009. Core drilling of approximately 15,000 metres in 53 holes at this exciting new discovery resulted in the development of a significant resource in the inferred category along two ore shoots in the Azuca vein, totalling 1,776,034 metric tonnes at 327 g/t Ag and 1.34g/t Au (408 g/t Ag-equivalent) containing 23.3 million ounces of silver-equivalent. Drilling to the east of Azuca and along the Canela vein looks very promising, indicating that there is potential for additional resource to be defined in 2009. Metallurgical recoveries are slightly above 90% for both gold and silver. Liam JV To date, 38 prospects have been identified and partially evaluated. The most important is the Crespo project where previous exploration led to the drilling of approximately 6,400 metres in 41 holes. Drilling results have allowed the internal calculation of a mineralised potential at Crespo of 12.5 million metric tonnes at 0.77 g/t Au and 39.4 g/t Ag, containing 0.4 moz Au and 15.8 moz Ag. Initial core drilling focused on defining distinct zones containing structures with higher grade mineralisation (above 300g/t Ag equivalent). A total of 352 metres was completed in six holes. Results include 14.5 metres at 328 g/t Ag equivalent and 11 metres at 327 g/t Ag equivalent. Data review, core re-logging and preliminary exploration work were also carried out at the Huacullo, Astana- Farallón and Ibel prospects. These areas will be a significant part of the 2009 generative programme in Peru. Inmaculada The Inmaculada project is part of a JV agreement with Ventura Gold, in which Hochschild has a 49% ownership interest. Ventura Gold recently reported the first independent inferred mineral resource estimate at the Inmaculada project as per National Instrument 43-101 by Micon of 3.7 million tonnes at an average grade of 4.0 g/t Au and 139 g/t Ag containing 483,000 ounces Au and 16.6 million ounces Ag (as at 5 January 2009). Encrucijada Encrucijada is part of a JV agreement with Andina Minerals Inc, signed in February 2008, in which Hochschild can earn a 60% interest in the property. Detailed surface exploration has defined four areas of interest (Millaray, Central, Curicala and Norte). A first pass core drilling programme was completed in the Millaray area totalling 1,561 million tonnes in 10 holes. The Quillay and Millaray veins have been recognised at above 400 metres along strike and to 130 million tonnes depth. In 2009, detailed exploration will be performed at the Central, Curicala and Norte areas to define drillable targets for follow-up. Vaquillas project A joint venture letter of intent with Iron Creek Capital Corp. to explore the precious metal properties within their Vaquillas project was signed in September 2008. Under the terms of the agreement Hochschild can earn-in a 60% interest in the Vaquillas project by contributing $6.75 million over a five year period. Field work started during the first week in October on the Inti claims followed by a 2,100 metre reverse circulation drill programme (9 holes) that was completed in December. Sample results from the drilling programme show no significant mineralisation, with the exception of drill hole 3 which intersected 1 metre of 326 g/t Ag. The remaining targets will be explored during 2009. 20 Hochschild Mining plc Annual Report & Accounts 2008 Operational review continued Our growth pyramid We are constantly assessing new opportunities at all stages of development. Projects enter our growth pyramid either by way of internal discovery or joint venture and are subject to a strict evaluation process, where we rank and prioritise each opportunity based on specific criteria. Any project that does not meet the Group’s requirements is joint ventured, farmed out or dropped. The projects in the bottom half of the pyramid are either 100% owned or allow us the right to earn into majority ownership over time. Our pipeline currently comprises numerous target definitions/prospects in Peru, Argentina, Chile, Mexico and Canada. Argentina Canada Chile Mexico Peru Ares Arcata Selene San José Pallancata Moris El Aguila Lake Shore Gold Feasibility completed San Felipe* Crespo Encrucijada Victoria Claudia Azuca Quellopata El Soldado La Flora Astana-Farallón Huacullo Los Pinos San Martin Argentina – 297,746 hectares Chile – 13,300 hectares Mexico – 80,415 hectares Peru – 332,045 hectares *Project delayed 21 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Financial review Full year revenue from continuing operations, net of commercial discounts, increased by 42% to $433.8 million (2007: $305.0 million), comprising silver revenue of $264.1 million and gold revenue of $169.2 million. Commercial discounts Commercial discounts mostly refer to refinery charges for processing mineral ore and are discounted from revenue on a per tonne or per ounce basis. In 2008, commercial discounts were $30.2 million representing a 127% increase on 2007. This was partly due to the Group producing a higher amount of concentrate in 2008 resulting from a full year’s production at both Pallancata and San José (which commenced production in Q3 2007). In addition, we incurred higher treatment charges for concentrate in most mines given the less favourable market conditions. The ratio of commercial discounts to gross revenue increased from 4% in 2007 to 7% in 2008. The reporting currency of Hochschild Mining plc is US dollars. In our discussion of financial performance we remove the effect of exceptional items, unless otherwise indicated, and in our income statement we show the results both pre and post such exceptional items. Exceptional items are those 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 to facilitate comparison with prior years. Revenue The increase in revenue was mainly as a result of a higher amount of silver ounces sold and higher gold prices. In 2008, silver accounted for 61% and gold for 39% of consolidated revenue compared to 59% and 41% respectively in 2007. Gross revenue increased 46% to $463.4 million in 2008 (2007: $317.4 million). Silver Gross revenue from silver increased 52% in 2008 to $288.8 million (2007: $190.5 million). This change reflects a 50% increase in total ounces sold, partly offset by lower realised silver prices, which were down 2% year-on-year. The total amount of silver ounces sold in 2008 was 20,593 koz (2007: 13,717 koz). Gold Gross revenue from gold increased 38% in 2008 to $174.6 millio n (2007: $126.8 million). This change was a result of higher realised gold prices, up 35% in 2008. The total amount of gold ounces sold in 2008 was 198.3 koz in 2008 (2007: 202.1 koz). Key performance indicators Revenue 2005 161.2 2006 2007 2008 211.2 305.0 433.8 Silver cash costs ($/oz Ag co-product) 2005 2006 2007 2008 2.77 3.63 4.40 7.05 Gold cash costs ($/oz Au co-product) 2005 159 2006 156 2007 2008 212 469 Defined as total cash costs multiplied by the percentage of revenue from silver/gold, divided by the number of silver/gold ounces sold. Cash costs include cost of sales, commercial deductions and selling expenses less depreciation included in cost of sales. This metric allows us to benchmark ourselves versus our peer group in a consistent manner over time. The calculation used in 2007 has been adjusted to include: (i) the termination benefits of mine workers (this amount was previously included in administrative expenses) and (ii) a change in the allocation of depreciation and amortisation in cost of sales. 22 Hochschild Mining plc Annual Report & Accounts 2008 23 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Financial review continued Key performance indicators Revenue by mine US$(000) unless otherwise indicated Adjusted EBITDA ($m) 72.9 107.6 2005 2006 2007 2008 147.6 142.3 Calculated as profit from continuing operations before exceptional items, net finance income/(cost), foreign exchange (loss)/gain and income tax plus depreciation, amortisation and exploration costs other than personnel and other expenses. This provides an indication of the rate of earning’s growth achieved. Cash flow from operating activities ($m) 2005 25.8 2006 2007 2008 21.4 94.0 78.6 Defined as net cash flow from operating activities. This is cash flow which can be used to fund dividend payments and invest in the future growth and development of the business. Silver revenue Arcata Ares Selene Pallancata San José Moris Commercial discounts Net silver revenue Gold revenue Arcata Ares Selene Pallancata San José Moris Commercial discounts Net gold revenue Other revenue1 Total revenue Year ended 31 December 2008 Year ended 31 December 2007 % change 119,284 38,196 29,168 48,207 52,942 992 94,754 38,078 48,593 8,342 744 26 (24,712) 264,077 (11,697) 178,840 111 48 20,344 67,899 8,714 13,214 40,095 24,380 11,924 97,469 14,807 1,749 532 347 (5,423) (1,578) 169,223 125,250 479 931 433,779 305,021 244 35 (49) 42 Pro forma earnings per share ($) 1 Other revenue includes revenue from base metal components in the concentrate sold from the Arcata mine net of commercial discounts and revenue from the sale of energy. 0.13 0.15 2005 2006 2007 2008 0.08 0.27 Defined as the per share profit (using the number of shares outstanding immediately after the Listing being 307,350,226) 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 number of shares outstanding. 24 Hochschild Mining plc Annual Report & Accounts 2008 Average realisable prices Average realisable precious metals prices, which include commercial discounts, for the 12 months to 31 December 2008 were $853.28/oz for gold and $12.82/oz for silver. The average realisable price for the year was negatively impacted by the significant fall in precious metals prices in the second half of 2008 when silver decreased by an average of 39% and gold by 7%. 12 months 12 months to 31 Dec to 31 Dec 2008 2007 % change $12.82 $13.08 $853.28 $634.30 (2) 35 ($/oz) Silver Gold Forward sales contracts The Group sold forward 778 koz of its silver 2008 production at $10.63/oz and 1.9 koz of its gold 2008 production at $840/oz. Both forward sales matured in January 2009. In addition, the Group has sold forward a total of 10.7 million ounces of its 2009 silver equivalent production comprised of 8.9 million ounces of silver at an average price of $12.09/oz and 30.0 thousand ounces of gold at an average price of $972/oz. Of the total amount sold forward, 3.3 million silver ounces and 1.9 thousand gold ounces were sold in December 2008 and the remaining 6.4 million silver ounces and 30.0 thousand gold ounces were sold forward in Q1 2009. None of 2010’s production has been sold forward. At this time, management does not plan to undertake any further forward sales contracts for 2009 production. The decision to sell forward a portion of 2009 production was driven by the desire for more stable cash flows which will fund operating capex and future M&A. We remain positive about the long-term prospects for silver and gold but in light of current market conditions, we believe that it is prudent to focus on cash preservation in the current financial year. Costs Management remains focused on cost control and during 2008 a series of productivity measures were implemented including plant expansions, changes in mining methods and procurement initiatives. This has enabled us to offset some of the industry cost inflation experienced in 2008, which was particularly prevalent in the first half of the year. Financial review continued In our underground mining operations, unit cost per tonne increased by an average of 14.3% from $69.7 in 2007 to $79.7 in 2008. As previously indicated, the increase was driven by industry cost inflation associated with labour, materials (explosives, reagents and steel inputs), energy and supplies. Including Moris, our only open pit operation which has different cost profile to our underground mines, the Group’s unit cost per tonne was flat year-on-year at $59.9 (2007: $59.7). During the year, the average unit cost per tonne for our three original mines (Ares, Arcata and Selene), was $70.8 representing an annual increase of 16.4%. This cost increase was mainly a result of higher prices of key inputs, such as cyanide, energy, explosives and steel balls as well as higher energy costs. Our fourth operation in Peru, Pallancata, was also affected by industry inflationary pressure, with unit cost per tonne increasing 5.8% mostly due to higher energy and maintenance costs. In San José, unit cost per tonne decreased by 16.6% in 2008 as a result of increased throughput and efficiency gains resulting from the optimisation of production processes at both the mine and plant. This reduction was achieved despite increases in overall inflation in Argentina (7.2% in 2008) and higher energy costs. Cash costs Co-product cash costs include cost of sales, commercial deductions and selling expenses, less depreciation included in cost of sales. Silver/gold cash costs are total cash costs multiplied by the percentage of revenue from silver/ gold, divided by the number of silver/ gold ounces sold in the year. Cash costs for the year increased from $4.40 to $7.05 per ounce for silver and from $212 to $469 per ounce for gold. The increase is mainly explained by: Group’s corporate workforce which occurred in the last quarter of 2008. This initiative, which involved 102 redundancies in administrative positions (150 positions in total), was one of a series of measures undertaken by management to reduce operating costs and preserve cash. Selling expenses Selling expenses increased by $8.5 million to $11.3 million in 2008 (2007: $2.8 million) as a result of: i) the expected decline in extracted grades, especially at Ares and Selene, which accounted for approximately 79% of the total increase of silver cash cost and 53% of the total increase of gold cash cost; and i) higher transportation costs due to the higher volume of concentrate sold at Arcata, San José and Pallancata as a result of capacity expansions and a full year production in the case of San José and Pallancata; ii) the higher commercial discounts due to less favourable market conditions that represent approximately 11% of the increment of silver cash cost and 8% of the increase of gold cash cost. By product cash costs include cost of sales, commercial deductions and selling expenses, less depreciation included in cost of sales. Silver/gold cash costs are total cash costs less revenue from gold/silver, divided by the number of silver/gold ounces sold in the year. By product cash costs for the period were $3.09 per silver ounce and ($255) per gold ounce. (2007: ($1.80) per silver ounce and ($445) per gold ounce). ii) increased sales in Argentina resulting in higher export duties. Export duties in Argentina are levied at 10% of revenue for concentrate and 5% of revenue for doré. Profit from continuing operations Profit from continuing operations before exceptional items, net finance cost, foreign exchange loss and income tax totalled $86.3 million in 2008, representing an annual decrease of 17% (2007: $103.9 million). The decrease is primarily the result of the expected decline in grades at Ares and Selene, higher production costs and commercial discounts, and higher depreciation and amortisation (as detailed above). Profit from continuing operations was also negatively impacted by higher selling expenses, partly offset by increased revenue generated by higher gold prices and a greater amount of silver ounces sold. 25 Hochschild Mining plc Annual Report & Accounts 2008 In Mexico, the average unit cost per tonne at Moris decreased by 2.2% to $18.0. Depreciation and amortisation, which is included in costs of sales, increased from $24.7 million in 2007 to $41.4 million in 2008. This increase was driven by the Group’s higher production in 2008 and also by its greater net asset base, with six mines in operation as opposed to three in 2007. Administrative expenses Administrative expenses before exceptional items totalled $68.8 million in 2008 (2007: $68.8 million). On a post exceptional basis, administrative expenses increased 1.6% to $69.9 million in 2008 (2007: $68.8 million). This was due to the one off termination benefit associated with the reduction in the Overview Business review Governance Financial statements Further information Financial review continued Adjusted EBITDA reconciliation US$(000) unless otherwise indicated Profit from continuing operations before exceptional items, net finance income/ (cost), foreign exchange gain/(loss) and income tax Operating margin 86,268 20% Year ended 31 December 2008 Year ended 31 December 2007 % change $0.04 Proposed total dividend Depreciation and amortisation in cost of sales 41,373 Depreciation and amortisation in administrative expenses Exploration expenses Personnel and other exploration expenses Adjusted EBITDA Adjusted EBITDA margin 1,125 23,841 10,315 142,292 33% 103,930 34% 24,685 525 26,890 8,424 147,606 48% (17) 68 114 (11) 22 (4) Adjusted EBITDA Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance cost, foreign exchange loss and income tax plus depreciation, amortisation and exploration costs other than personnel and other expenses. Adjusted EBITDA decreased by 4% over the year to $142.3 million (2007: $147.6 million) mainly as a result of a decrease in profit from continuing operations as explained above. are valuable components of our growth strategy and will have a positive impact in the medium term. Finance income & costs Finance income decreased 53% to $9.4 million in 2008 (2007: $19.8 million) mainly due to lower interest on time deposits ($11.2 million) as a result of lower average cash balances ($160 million) and lower gains from changes in the fair value of financial instruments. Exploration expenses In 2008, exploration expenses decreased 11% to $23.8 million (2007: $26.9 million) as a result of the Group’s decision, announced in November 2008, to reduce expenditure. This mainly affected greenfield expenditure which decreased to $8.8 million (2007: $13.9 million). However, we remain committed to advancing existing projects and prospects and have therefore maintained our expenditure on brownfield and advanced project exploration, which increased by 7% to $4.3 million (2007: $4.0 million). Impact of the Group’s investments in joint ventures and associates The Group’s share of the loss of equity accounted investments in joint ventures and associates resulted in a loss of $8.2 million, which has had an impact of $7.4 million on attributable net earnings before exceptional items and $0.02 on EPS. This loss comprises the Group’s share of post-tax losses of its associate, Lake Shore Gold ($3.9 million) and its share of post tax losses of joint venture companies formed to develop the Pacapausa ($2.1 million) and Claudia ($2.2 million) projects. Notwithstanding these losses recorded in the Income Statement due to this line item, we believe that these investments Finance costs increased from $7.5 million to $18.8 million during the period primarily due to interest on the $200 million syndicated loan facility which was drawn down during the year. Foreign exchange loss The Group recognised a foreign exchange loss of $7.1 million in 2008 (2007: $4.4 million loss), as a result of transactions in other currencies than functional currency. The devaluation of the Peruvian sol (5%) had an impact of ($4.1) million; the Argentinean peso (10%) had an impact of ($3.9) million; and the Mexican peso (27%) had an impact of ($0.7) million. These losses were partially offset by a foreign exchange gain of $1.6 million in the UK generated primarily as a result of the acquisition of shares in Lake Shore Gold which was effected in Canadian dollars. Income tax The pre-exceptional effective income tax rate in 2008 is 48.4%, compared to 30.8% in 2007. The increase in the effective income tax rate has been driven primarily by the following factors: i) the reduction in profit following the lower grades and increased costs at the mines has resulted in less tax being paid to the authorities compared to the prior 26 Hochschild Mining plc Annual Report & Accounts 2008 Financial review continued $116.1m Cash balance year. However, items for which no tax relief is created (such as the tax losses arising in exploration companies, for which no deferred tax asset can be recognised, and non-deductible expenditure) did not reduce by a similar amount, and as a result they are a larger percentage of prima facie tax expense (profit before tax multiplied by the weighted average statutory tax rate) than they were in the previous year. This has resulted in a 9% increase in the pre-exceptional effective tax rate. ii) the significant decline in the Mexican and Argentinean pesos, and the Peruvian soles (being the currencies in which tax calculated and levied in the Group’s operations) against the US dollar has resulted in the recognition of additional deferred tax liabilities, and tax being paid on taxable exchange gains which arose in the local operations. The effect of the devaluation of the local currencies was to increase the pre-exceptional effective tax rate by 7%. On a post-exceptional basis, the effective tax rate for the Group was 243.8%. The significant increase over the post- exceptional effective tax rate for the previous year was the result of: i) the factors discussed above, and ii) the impairments of the San Felipe project, and the investments in EXMIN and Electrum Capital for which there was no deferred tax relief (refer to the ‘Exceptional items’ discussion below). However, the actual amount of current tax expense in 2008 was $13.1 million compared to $44.9 million in 2007. Exceptional items Exceptional items, after tax, totalled $45 million in 2008. This mainly includes: i) impairment of fixed assets: Selene, Moris and San Felipe were impaired by a total consideration of $29.6 million, after tax ii) impairment of financial investments in: EXMIN $8.2 million and Electrum Capital $2.6 million and iii) other exceptional items include: the loss from changes in the fair value of financial instruments of $4.7 million, after tax, termination benefits of $1.1 million and impairments on accounts receivable of $1.3 million. In addition, the Group recorded a credit of $3.9 million mainly as a result of gains on Gold Resource options ($2.3 million) and on the sale of Fortuna silver shares ($1.3 million). Impairments of fixed assets The Group conducts an impairment review every time indicators of impairment exist, as required by IFRS. Impairment indicators include: declines in metal prices; increases in costs, royalties or taxes; falling grades; lower reserves; production cut backs and significant project development over- runs. The presence of one or more indicators does not necessarily mean that the asset would be impaired but that it must be tested for impairment. Impairment testing should be performed at an individual asset or cash-generating unit level. Given the impact of lower precious metals prices in the second half of 2008 and the production and cost profiles of some of our operations, we have recorded a total impairment charge of $34.7 million in 2008 (before tax) and $29.6 million after tax which has an impact of $0.09 on the EPS. Selene has been written down by $13.7 million due to declining grades at the mine and the high level of capital required to extract economic tonnage. Moris has been written down by $5.7 million as a result of the small reserve and resource base at the operation. In addition, we have recorded an impairment charge of $15.4 million for the San Felipe project, which was delayed as a result of declining zinc prices in the second half of the year and our commitment to conserve cash holdings. We remain confident about the long- term value of San Felipe and will continue to review the timing of the project. Dividends The directors recommend a final dividend of $0.02 per Ordinary Share which, subject to shareholder approval at the 2009 AGM, will be paid on 28 May 2009 to those shareholders appearing on the register on 1 May 2009. Dividends are declared in US dollars. Unless a shareholder elects to receive dividends in US dollars, they will be paid in pounds sterling with the US dollar dividend converted into pound sterling at exchange rates prevailing at the time of payment. Our dividend policy takes into account the profitability of the business and the underlying growth in earnings of the Company, as well as its capital requirements and cash flow. For further details regarding dividend dates, see shareholder information p.132 27 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Financial review continued As at 31 December 2008 As at 31 December 2007 49,220 123,726 82,291 49,660 40,995 47,012 134,180 52,176 23,750 105,266 Lake Shore Gold ($164 million), 50% of the Liam JV ($33.3million), 100% in San Felipe ($51.5 million) and 5% of Gold Resource Corporation ($5 million). In 2008, the Group incurred a higher amount of capital expenditure in operating units due to plant expansions at San José, Arcata and Selene. Capital expenditure We continue to invest in our production platform to ensure we have the infrastructure in place for future growth. In 2008, capital expenditure was $311 million (2007: $145 million) due to new investments in Peru, Argentina and Mexico. Industry inflation has also impacted capital expenditure in 2008. The increase of $166.6 million of capital expenditure in 2008 is primarily a result of the mine developments and expansion projects at San José, Arcata and Selene. This increase was also driven by the acquisition of 100% of San Felipe ($51.5 million) and 50% of the Liam JV ($33.3million). Balance sheet & cash flow review Working capital: US$(000) unless otherwise indicated Current assets Inventories Trade and other receivables Current liabilities Trade and other payables Pre-shipment loans Working capital Working capital The change in the working capital position resulted from a significant increase in trade and other payables from $52.2 million as at 31 December 2007 to $82.3 million as at 31 December 2008 and from an increase in pre-shipment loans from $23.8 million as at 31 December 2007 to $49.7 million as at 31 December 2008. Trade payables and other payables increased mainly as a consequence of increased production and higher salaries payable, as well as an increase in taxes and contributions. Receivables were lower at the end of 2008 because of a decrease in trade receivables and the reclassification of a portion of a loan to Minera Andes from current receivables to non-current receivables. The decrease was partially offset by higher prepaid expenses and VAT in Minera Suyamarca and Minera Santa Cruz. The reduction in trade receivables is mainly explained by the change in our customers’ base and selling contract terms. Trade accounts receivable comprised of amounts receivable from Cormin, Louis Dreyfus, Sudamericana Trading and Norddeutsche Affinerie. Cash flow Total cash decreased $184.4 million in 2008 (2007: $134.2 million decrease). Cash flow from operating activities increased by 267% to $78.6 million mainly as a result of lower working capital. The increase in cash flow from operations was offset by the outflows resulting from investing activities, which totalled $475.8 million in 2008 compared to $162.3 in 2007. 2008 investments included: 40% of $264.1m Silver revenue up 48% 28 Hochschild Mining plc Annual Report & Accounts 2008 Financial review continued $169.2m Gold revenue up 35% Capital expenditure: US$(000) unless otherwise indicated Arcata Ares Selene Pallancata1 San José1 Moris1 San Felipe1 Other Total 1 Represents 100% of capital expenditure Net debt: US$(000) unless otherwise indicated Cash and cash equivalents Long-term borrowings Short-term borrowings less pre-shipment loans Net debt/(net cash) Year ended 31 December 2008 Year ended 31 December 2007 43,977 10,438 47,226 14,619 80,398 2,234 63,318 49,061 22,750 3,705 27,497 12,190 62,752 12,099 667 3,078 311,271 144,738 As at 31 December 2008 As at 31 December 2007 116,147 231,692 48,410 163,955 301,426 55,209 9,419 (236,798) As a result of the syndicated loan facility of $200 million, the Group’s balance sheet changed from a net cash position of $236.8 million to a net debt position of $164.0 million. Part of the facility was used for M&A as described under the cash flow section. The decrease in cash and cash equivalents from $301 million to $116 million was mainly explained by the increase in capital expenditure in 2008 due to plant expansions at Arcata, Selene and San José. 29 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Corporate social responsibility Hochschild Mining has been a long-standing proponent of good working practices and is acknowledged as a champion of values demonstrating its commitment to Corporate Social Responsibility (‘CSR’). Since the Group’s listing in London in 2006, it has endeavoured to maintain its corporate culture of fostering respect for the well being of its employees and contractors, the environment and the communities in which it operates. To achieve this objective, the Group is committed to: > • taking all necessary steps to ensure: • a safe and healthy workplace • the prevention of environmental contamination respect for, and commitment to, the communities in which it operates complying with all relevant legislation promoting continuous improvement in its management systems incorporating best practice adopting a proactive approach in preventing and, where this is not possible, managing, the risks that may hinder achievement of its CSR objectives encouraging its employees to adopt the Group’s values through the use of training and internal communications. > > > > Management and accountability Roberto Dañino, Deputy Chairman and Executive Director has Board-level responsibility for CSR issues. The Board has ultimate responsibility for establishing Group policies relating to CSR and ensuring that national and international standards are met. The Board established a Corporate Social Responsibility Committee in 2006 as a formal committee of the Board with delegated responsibility for various CSR issues, focusing on compliance with national and international standards and ensuring that appropriate systems and practices are in place Group-wide to ensure the effective management of CSR-related risks. 30 Hochschild Mining plc Annual Report & Accounts 2008 During the year, the CSR Committee considered: > > > > the outcome of the investigation into the fatality that occurred during the year at Arcata the implementation of recommendations made by external consultants on completion of health and safety, and environmental audits at the Group’s operations progress on the implementation of the safety-driven management information system designed in conjunction with Det Norske Veritas (‘DNV’) (detailed further in the Safety section of this report on page 32) a briefing on the Safety Leadership workshop held at the Head Office in Lima to raise awareness of safe working practices and reinforcing the culture of ‘safety-first’ throughout the organisation. To support the CSR Committee, a working group of relevant personnel meets on a monthly basis to consider, at an operational level, local health and safety policies and environmental protection programmes. These meetings are attended by the CEO and COO. Monitoring performance In acknowledgment of its reporting responsibilities, the Company has taken a number of steps during the year to enable management to measure the Company’s progress against its CSR objectives. After each section of this Report, performance indicators have been disclosed with their prior year equivalents, where available. In instances where Group-wide figures are not available, performance in respect of the wholly-owned Peruvian operations only has been disclosed (which represent almost 70% of the Group’s attributable production). 31 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Corporate social responsibility continued 83% reduction in accident severity index. 1. Workplace a) Safety The Hochschild approach Our people and their safety remain of paramount importance for the Group and is reflected in everything that we do. The safety of the Group’s employees is considered a vital element in the successful achievement of the corporate strategy to which the Board and management are committed. The Group has continued to invest, during 2008, in operating controls and processes to ensure that the highest standards of safety are met. As a testament to the Group’s commitment to achieving an internationally recognised level of health and safety management, OHSAS18001 accreditation at the wholly-owned Peruvian operations was independently audited and re-certified during the year. However, it is with deep regret that one mine fatality occurred in 2008. The Group has conducted an investigation and taken steps to address the underlying safety deficiencies that led to this tragic event. Developments during the year Notable developments during the year include: > significant improvements in safety indices with frequency rates, severity index and accidentability index reduced by 24%, 83% and 86% respectively the attainment of Level 3 in the implementation of the DNV management information system which provides a framework to improve occupational health and safety performance, including risk and opportunity identification, analysis, target setting, and measurement a Group-wide competition with prizes worth a total of $30,000 on offer, for practical suggestions on how safety can be improved. Over 200 entries were received and finalists invited to present their ideas to a panel including the Chairman and the Chief Executive. The first prize of $15,000 was awarded to an employee from the Ares mine for the design of a tool to aid the safe > > 32 Hochschild Mining plc Annual Report & Accounts 2008 > > handling of heavy wooden supports the launch of a Group-wide initiative to reward safe behaviour with prizes awarded every two months at each mine to those employees who exemplify the Group’s approach to safety implementation of all safety-related recommendations made in the performance of safety audits by independent consultants. b) Health The Hochschild approach In the first instance, the Group strives to avoid occupational illnesses by taking all necessary steps to provide a working environment that does not pose any risk to the health of its workers. Given the risks inherent in mining activities however, the Group has a Health team charged with the provision of medical services and occupational health to assure the well being of those employed by the Group as the need arises, and on an on-going basis. On joining the Group, all employees in Peru and Argentina are subject to occupational health examinations which are subsequently scheduled on an annual basis. Routine examinations at the end of employment with the Group were introduced during the year. These processes will be implemented in Mexico during 2009. Developments during the year Notable developments during the year include: > implementation at the Peruvian operations of Sisalud software developed by the Group’s medical staff to support the provision of medical services. The system is used to manage, amongst other things, patient medical history, appointments and pharmacy management in partnership with local insurance companies, Hochschild developed a process that significantly reduces the time taken to (i) process results of occupational health examinations and (ii) obtain the approval of the relevant insurance company, upon commencement of a worker’s employment with the Group. > Corporate social responsibility continued This system has earned local recognition and is being replicated by other mining and insurance companies in Peru. c) Corporate HR The Hochschild approach The Corporate Human Resource Vice Presidency supports the execution of the Group’s strategy by the recruitment and retention of employees through the use of innovation and best practice. The Group seeks to differentiate itself from its peers by emerging as an employer of choice. By taking this approach, the Group seeks to enhance its ability to attract and retain the necessary skills. Developments during the year Notable developments during the year include: > the development of a Talent Inventory Review, which enables the Group to identify (i) those positions within the organisation that are considered critical in order to achieve its strategic objectives, and (ii) the positions comprising critical and key employees. The results were used as the basis for developing succession and retention plans. Furthermore, the exercise gives management visibility of key post holders and the means by which skills considered essential for the business can be monitored and developed further initiatives to increase its profile locally and internationally through a) the sponsorship of facilities at the Ponitifica Universidad Católica del Perú and b) the offer of a scholarship at the Colorado School of Mines the launch of a formal graduate trainee programme in which 16 of the best performing graduates from five Peruvian universities with relevant degrees (such as mine engineering, geology and chemistry) were trained and recruited by the Group. > > Safety indicators Indicator Fatalities Accidents resulting in absence of one day or more LTIFR1 Accident Severity Index2 Accidentability Index3 1 Calculated as total number of accidents per million labour hours. 2 Calculated as total number of days lost per million labour hours. 3 Calculated as LTIFR x severity divided by 1000. Health indicators Indicator Average number of medical attendances at Peruvian operations and at San José per month Average number of medical emergencies at Peruvian operations and at San José per month Average number of occupational health examinations at the Group’s wholly-owned Peruvian operations per month 2008 2007 1 5 92 5.75 543 3.13 105 7.59 2,883 21.8 2008 2007 2,8511 2,5052 53.422 89.582 2383 224 1 2 3 These figures do not include attendances and emergencies at the Moris mine which have been monitored since August 2008. These figures include attendances and emergencies at the Pallancata mine between May 2007 and December 2007 only. This figure does not include the number of occupational health examinations at Pallancata which have been monitored since June 2008 and which will be monitored in respect of Moris in 2009. The Company intends to report on performance in these areas in respect of its entire operations in future CSR reports. General HR indicators General 2008 2007 Average number of Group employees 5,012 4,132 Training Number of hours of training undertaken by each employee1 Percentage of workforce trained during the year1 19.62 83% 13.59 68% Labour relations Number of production days lost as a result of industrial unrest 0 1 1 In respect of Peruvian operations only. Management will disclose performance in these areas in respect of the entire operations in future CSR reports. 33 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Corporate social responsibility continued 2. Community relations (‘CR’) The Hochschild approach The Group strives to go beyond keeping a conflict-free relationship with surrounding communities by supporting community based organisations and interest groups in their many efforts ranging from improving the lives of people to the local provision of training and education. Sustainability of activities within the communities is continuously improved by promoting the participation of additional development agencies in the implementation of local development plans. The Group’s CR policy ensures the creation of new jobs at the local level, including the establishment of appropriate training programmes with priority to community members. In addition, the Group keeps permanent communication and dialogue with surrounding communities to encourage trust and integration. A sustainable development approach is undertaken by CR personnel so that communities are assisted in their efforts to reach better life-quality standards based on their Community Development Plan. In this sense, the Group provides overall support and technical assistance in the areas of health, child nutrition, education and income generation activities. Developments during the year a) Education and training Local communities Education and training for community members are key parts of the Group’s approach to strengthening local capacity and ensuring continuous development beyond the end of the Group’s operations in the area. Hochschild supports primary and secondary schools established in the areas adjacent to the Group’s operations. Over 20 schools and 1,000 students are supported in different ways. Examples of such support include: > the provision of scholarships, materials and supplies summer school activities access to and special training on the use of IT networking support for teachers and school directors. > > > In addition, a wide variety of training courses are offered to community members to encourage economic independence on a sustainable basis. In this sense, vocational training is provided in carpentry, food production, 34 Hochschild Mining plc Annual Report & Accounts 2008 agriculture, fish farming, alpaca breeding and textile handcrafting. Local government and community authorities are also trained in mining legislation and topics relating to the operations in their territories. TECSUP The Group’s involvement in TECSUP has also continued during the year. This establishment, founded and substantially funded by the Hochschild Group is a leading non-profit technical institute with over 5,000 graduates. TECSUP offers careers in nine areas, including metallurgical and chemical processes, electronics and industrial automation, maintenance of heavy and industrial equipment, and agricultural technology. In 2008, TECSUP received accreditations from the German Agency for Accreditation of Engineering Education and from the European Network for Accreditation of Engineering Education, which will allow its graduates to pursue additional studies abroad. b) Health and nutrition Child malnutrition is of the highest concern for the Group given its prevalence in the communities around our Peruvian operations. The Group has started a five-year programme to deal with this issue in partnership with various organisations. With the technical help of Caritas del Peru (an established NGO) we are providing, amongst other things, training for community health promoters, mother-child health campaigns, training on production of supplementary food and hygiene. c) Income generation activities Alpaca breeding is the most important non-mining activity for communities in the highlands of Peru at altitudes over 4,000 metres. The Group’s alpaca breeding programme focuses on producing quality fibre of higher value for hundreds of breeder families. Activities range from facilitating sanitary campaigns and building animal sheds to the development of alpaca selection groups and training on collection, classification and commercialisation of fibre. Management of natural resources, such as water and pastures, is important to ensure sustainability of this programme that has already reported income gains of over 10% in breeder families. Fish farming activities are also being promoted given its nutritional benefits and the ability to generate income for the participating families. In one such programme, part of the production is allocated to feed school children in Arequipa communities. New crops have been introduced in community areas of low altitude, along with new irrigation technologies leading to increases in yields and income per hectare. Community groups are organising themselves to sell their products at the local market and to the mines’ food services. Families have also started to manage vegetable gardens to reduce child malnourishment. 3. The environment The Hochschild approach The Group endeavours to minimise the impact of its business on the environment and to facilitate the on-going sustainability of the land where it develops operations and activities. Environmental management is facilitated through a reporting structure at mine level with accountability to the Corporate Environmental Manager forming part of the Operational Excellence group. In addition to its primary responsibilities, the Environmental Department works together with the operational teams, community relations and the Legal Department on the application for, and on-going compliance with, mining permits, thereby assuring the continuity of operations. The Group is committed to complying with the highest standards of environmental management systems at its three original operations in Peru (Ares, Arcata and Selene), which have been recertified ISO14001 compliant during the year. The same standards are applied to the Group’s operations elsewhere with the intention that official certification will be achieved at San José, Pallancata and Moris during 2010. The focus of the Group’s environmental teams is on the following areas: > > > tailings management waste rock management safe disposal of domestic and industrial waste water treatment (mine, industrial, domestic water) storage and handling of hazardous materials, principally cyanide hydrocarbons management management of new projects closure and rehabilitation works consumption of resources, principally water > > > > > > Corporate social responsibility continued Developments during the year Developments during the year include: > implementation of 95% of recommendations arising from environmental audits conducted by third-party consultants group-wide implementation of various key environmental procedures relating to, amongst others, waste management, management of drilling fluids, sediment control, Hydrocarbon management, Hydrocarbon spills management, and containment systems for chemicals environmental impact studies performed in connection with proposed expansion programmes and in the planning of new infrastructure projects, such as plant capacity increases and a new tailings dam processes adopted to measure more broadly, environmental performance at each mining unit group-wide initiatives to raise the general awareness of environmental issues amongst employees. > > > > Future reporting Since June 2008, the Group has been monitoring the additional indicators specified below and intends to report on them in future CSR Reports: > Proportion of materials used in the operations that has been recycled Total water withdrawal by source Proportion of recycled water used Total water discharge by quality and destination. > > > Community relations indicators Indicator Community investment Production days lost as a result of community conflicts Environmental indicators 2008 $4.6m 2007 $4.3m 2006 $2.3m 2005 $1.2m 0 0 0 0 Indicator 20081 20071 20061 Average monthly fresh water consumption per metric tonne of treated ore (cubic metres) Average monthly electricity consumption per metric tonne of treated ore (kWh) Average monthly diesel consumption per metric tonne of treated ore (gallons) Average monthly wood consumption per metric tonne of treated ore (kg) Number of material environmental incidents across entire operations 0.55 2.72 1.58 90.30 102.01 134.28 3.14 18.33 0 1.62 17.13 0 1.36 14.36 0 1 Figures relate to the Group’s mines in Ares, Arcata and Selene only, unless otherwise stated. Case study – Perito Moreno The Group’s Argentinian operating company, Minera Santa Cruz (‘MSC’), has undertaken a number of projects during the year which illustrate how Hochschild’s local operations implement the Group’s CSR strategy. Such initiatives have included: > the establishment of a development agency managed by representatives of local government, business and the agricultural sector. The agency is tasked with overseeing the development and sustainability of Perito Moreno, a town located nearest to the Group’s jointly-owned mine at San José. MSC contributed $120,000 during the year and is committed to contributing the same amount in each of the coming two years > a programme of talks and organised visits to the Group’s operations aimed at fostering a culture of openness with the inhabitants of Perito Moreno > the provision of funding for student housing at the university most closely located to Perito Moreno. 35 Hochschild Mining plc Annual Report & Accounts 2008 Risk management Type of risk Description of risk Mitigating steps Financial risks Commodity price risk Adverse movements in the prices of silver and gold could have a material impact on the Group’s results of operations. Silver and gold prices continuously monitored with steps taken in late 2008 to mitigate the impact of changes in commodity prices within Board-approved parameters. Credit risk Loss of Group revenue resulting from a customer’s inability to pay. The Group has identified the following actions which it has implemented/is in the process of implementing: > Amendments to the contractual terms of sale which, amongst other things, provide for advance payments and delay the transfer of title obtaining parent company guarantees Risk profiling of key and new customers. > > Liquidity The Group may be unable to raise funds to meet its financial commitments as they fall due. Foreign currency risk With the Group’s products generally priced in US dollars, and its cost base spread across several different countries and currencies, fluctuations in exchange rates of local currencies against the US dollar may impact the Group’s results. The Group constantly monitors the Group’s level of short and medium term liquidity and access to credit lines to ensure appropriate level of financing. Impact of fluctuations on revenues kept under constant review by management and periodically reviewed by the Board. Further information on financial risks can be found in note 36 to the Consolidated Financial Statements Overview Business review Governance Financial statements Further information Overview As with all businesses, management of the Group’s operations and execution of the Group’s growth strategies are subject to a number of risks, the occurrence of any one of which may adversely affect the execution of growth strategies and hence the performance of the Group. The Group has significantly improved its risk framework over the past few years, with good progress being made in better understanding and managing the Group’s significant risks. The Group has a risk management system in place to support the identification and management of the Group’s significant risks. This is supported by a Risk Committee which was established during the year and comprises the CEO, the Vice Presidents, and the head of the internal audit function. The Risk Committee is responsible for implementing the Group’s policy on risk management and internal control in support of the Company’s business objectives, and monitoring the effectiveness of risk management within the organisation. The key business risks affecting the Group are set out in the table opposite. The steps the Group has taken to mitigate these risks, when they are within its control, are also described. 36 Hochschild Mining plc Annual Report & Accounts 2008 Risk management Type of risk Description of risk Mitigating steps Increase in production costs will impact on the Group’s profitability. The Group seeks to enter into, whenever possible, long-term supply contracts at favourable prices. Operational risks Costs Business interruption Assets used in operations may break down and insurance policies may not cover against all forms of risks due to certain exclusions and limitations. Reserve and resource replacement The Group’s future profitability and operating margins depend upon its ability to replenish reserves with geological characteristics to enable mining at competitive costs. Reserves stated in this Annual Report are estimates. Personnel Loss of key senior management and personnel, in particular, highly skilled engineers and geologists. Lack of availability of individuals with relevant mining experience situated in the locality of the Group’s operations, or the inability of the Group to obtain all necessary services or expertise locally or to conduct operations on projects at reasonable rates. Political, legal and regulatory risks The Group currently has combined property damage and business interruption insurance policies for all operations, and adequacy of coverage is regularly reviewed in conjunction with consultants to ensure appropriate level of cover for the industry and for operations in Latin America. For many years the Group has accomplished an excellent track record of reserve and resource replacement. The Group considers its ability to attract and retain highly qualified personnel as critical to success. To this end, the Group seeks to provide competitive compensation arrangements and well-defined career plans. Costs associated with ensuring compliance with all relevant laws and regulations are substantial and future changes may require additional expense, restrictions on or suspensions of, the Group’s operations and may result in delays in the development of its properties. Regional risk assessments are performed on consideration of investment in new countries incorporating reviews of political environments and likelihood of changes in relevant royalties and taxes. Local teams in each country of operation monitor and react as necessary to policy changes impacting on the business. Further mitigation is achieved through broadening of the geographic spread of the Group’s assets, ensuring risks are diversified across a number of countries. Corporate social responsibility related risks Health and safety Group employees working in the mines may be exposed to health and safety risks. Failure to manage these risks may result in a work slowdown, stoppage or strike and/or may damage the reputation of the Group and hence its ability to operate. In 2008, the organisation began implementation of a safety management information system in partnership with DNV. Environmental Social The Group may be liable for losses arising from environmental hazards associated with the Group’s activities and production methods, or may be required to undertake extensive remedial clean-up action or pay for governmental remedial clean-up actions. As part of the Group’s approach to environmental risk management, the Environmental Department engages the services of external consultants to perform periodic audits of the Group’s operations with findings reported to senior management and corresponding recommendations implemented under agreed action plans. Communities living in the localities of the Group’s operations may oppose the activities carried out by the Group at existing mines or development projects and prospects which may also impact on the Group’s ability to obtain concessions for current or future projects. The Group’s Community Relations Department maintains permanent dialogue and cooperation with communities surrounding the Group’s operations. A number of sustainability programmes have been developed by the Group to promote self-dependence. 37 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Board of Directors Executive Directors Eduardo Hochschild (45) Executive Chairman Eduardo Hochschild joined Hochschild Mining 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 BSc in Physics and Mechanical Engineering. He holds numerous directorships, with Cementos Pacasmayo S.A.A., COMEX Peru, the Banco de Crédito del Perú, the Sociedad Nacional de Minería y Petróleo, the Asian Pacific Economic Council Business Advisory Committee, the Conferencia Episcopal Peruana, Pacífico Peruano Suiza, TECSUP and the Universidad Nacional de Ingeniería. Roberto Dañino (58) Deputy Chairman and Executive Director Roberto Dañino joined Hochschild Mining 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. He holds Law degrees from Harvard Law School and the Pontificia Universidad Católica del Perú. Miguel Aramburú (45) Chief Executive Officer Miguel Aramburú joined Hochschild in 1995 when he was appointed General Manager of Compañia Minera Pativilca. He was appointed Chief Financial Officer in 2002 and subsequently served as General Manager of the Mining Division and, most recently, as Chief Operating Officer. He assumed his current role of Chief Executive Officer in January 2008. Miguel serves as a director of TECSUP and Pacífico Peruano Suiza, Cia. de Seguros y Reaseguros. He graduated from the Pontificia Universidad Católica del Perú in 1987 in Industrial engineering and holds an MBA from Stanford University. Miguel was appointed to the Board from 1 January 2009. Independent Non-Executive Directors Sir Malcolm Field (71) Senior Non-Executive Director Sir Malcolm Field is currently the Senior Non-Executive Director of Aricom plc and a Non-Executive Director of Odgers Ray & Berndtson. 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. (46) 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 a Director 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 a Director of Mutual Investment Limited since 1997 and its Deputy Chairman since 2001. Jorge has also been a Director of Dufry South America S.A. of Rio de Janeiro since 2006. He is currently also President of the Bunge and Born Charitable Foundation. Jorge received a BSc in Economics from the Wharton School of the University of Pennsylvania in 1983. Nigel Moore (64) 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, JKX Oil & Gas plc, Ascent Resources plc and Production Services Network Ltd. 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 38 Hochschild Mining plc Annual Report & Accounts 2008 Ignacio Rosado (39) Chief Financial Officer Ignacio Rosado has been the Chief Financial Officer of the Group since 2005. Previously, he was Senior Engagement Manager for Latin America for McKinsey & Company from 2000 to 2005. Ignacio began his career in banking, having worked for Banco Wiese Sudameris in Peru (1992-1994) and at Banco de Crédito del Perú. He holds an MBA from the University of Michigan Business School and a BSc in Economics from the Universidad del Pacífico in Peru. Ignacio was appointed to the Board from 1 January 2009. 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 (72) 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 Perú, Banco de Crédito de Bolivia, Atlantic Security Bank and Pacífico Peruano Suiza, Cia. de Seguros y Reaseguros. In addition, Dionisio is a Director of Banco de Credito e Inversiones de Chile. He graduated with a BA degree in Economics from Pomona College, California in 1957, and earned an MBA from Stanford University in 1959. Senior management Isac Burstein (43) Business Development Corporate Manager Isac Burstein joined the Group as a geologist in 1995. Prior to his current position, Isac served as Manager for Project Evaluation, Exploration Manager for Mexico, and Exploration Geologist. He holds a BSc in Geological Engineering from the Universidad Nacional de Ingenieria, an MSc in Geology from the University of Missouri and an MBA from Krannert School of Management, Purdue University. Ignacio Bustamante (37) Chief Operating Officer Ignacio Bustamante joined Hochschild in 1992 and, prior to his appointment as Chief Operating Officer in January 2008, served as General Manager of the Peruvian operations. Between 1998 and 2003 he worked as Chief Financial Officer of Cementos Pacasmayo. Subsequently, 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. Ignacio holds a BSc in Business and a BSc in Accounting from the Universidad del Pacífico in Peru and an MBA from Stanford University. Raymond Jannas (55) Vice President, Exploration & Geology Raymond Jannas joined Hochschild in 2007 after working for eight years at Gold Fields Limited where he served as Worldwide Project Generation Manager between 2006 and 2007 and as South America Exploration Manager. Raymond has over 30 years of experience as a geologist throughout the Americas. He holds a BSc in Geology from the Universidad de Chile and an MSc and PhD in Geology from Harvard University. José Augusto Palma (41) Vice President & General Counsel José Augusto Palma joined Hochschild 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. José 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. Prior to his appointment as Vice President & General Counsel in October 2008, José served as Senior Adviser to the Executive Committee. Eduardo Villar (36) Vice President, Human Resources Eduardo Villar has been with the Group since 1996. Prior to his current position, he served as Human Resources Manager, Deputy HR Manager and Legal Counsel. Eduardo holds a Law Degree from the Universidad de Lima and an MBA from the Universidad Peruana de Ciencias Aplicadas. 39 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Directors’ report Directors’ interests Details of the beneficial interests of those Directors serving at 31 December 2008 in the share capital of the Company are shown below: Eduardo Hochschild1 Roberto Dañino2 Sir Malcolm Field Jorge Born Jr. Nigel Moore Dionisio Romero At 31 December At 1 January 2008 2008 181,350,426 181,350,426 1,725,000 1,725,000 14,285 14,285 0 14,285 100,000 0 14,285 0 1 Eduardo Hochschild holds an indirect interest in the Company through an intermediate holding company which he controls and which owns the entire issued share capital of Pelham Investment Corporation which, in turn, owns shares in the Company. 2 Roberto Dañino’s shareholding is held through Navajo Overseas Corporation. There have been no changes in the above interests in the period from 31 December 2008 to 24 March 2009. Relationship agreement Prior to the Company’s IPO, Pelham Investment Corporation, Eduardo Hochschild, Alberto Beeck and the Company entered into a relationship agreement to regulate the ongoing relationship between them (‘the Relationship Agreement’). 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 on the Relationship Agreement are set out in the Corporate Governance Report on pages 45 to 49. Corporate social responsibility (‘CSR’) The Directors are committed to ensuring the health and safety of the Group’s employees, operating the Group’s business with respect for the environment and by actively engaging with local communities. The Group has sought to reinforce this commitment by allocating resources and undertaking numerous initiatives over many years. The CSR Committee has continued to discharge its responsibilities during the year by: > monitoring the Group’s performance against agreed policy on all CSR-related issues, particularly on safety and occupational health, community relations, and the environment; reviewing management’s investigation of incidents or accidents that occur, in order to assess whether policy improvements are required; and reviewing 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. > > Further details on the Group’s activities in this area are given in the corporate social responsibility report on pages 30 to 35. The Directors have pleasure in presenting their report for the year ended 31 December 2008. Principal activities and business review Hochschild is a leading precious metals company with a primary focus on the exploration, mining, processing and sale of silver and gold. The Group has five underground mines in production supported by fully developed infrastructure, four of which are located in southern Peru and the fifth in Argentina. The Group also has one open pit mine in Mexico and numerous long-term prospects 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 Group. In addition, the Group has strategic investments in a number of mining companies including Lake Shore Gold Corporation, a Canadian gold company. The ‘overview’ and ‘business review’ sections of this Annual Report on pages 2 to 37 contain the information required to be disclosed in this report under section 417 of the Companies Act 2006 and which are incorporated into this report by reference. Results and dividend The Group’s adjusted EBITDA1 for the year amounted to $142.3 million (2007: $147.6 million). Turnover for the year was $433.8 million and attributable profit to equity shareholders after tax (before exceptional items) was $24.6 million. An interim dividend of $0.02 per share was paid to shareholders of the Company on 23 September 2008. The Directors recommend the payment of a final dividend of $0.02 per share (2007: $0.072 per share). Subject to shareholders approving this recommendation at the forthcoming Annual General Meeting (‘AGM’), the dividend will be paid in UK pounds sterling on 28 May 2009 to shareholders on the register at the close of business on 1 May 2009. Shareholders may elect to receive their dividend in US dollars. The US dollar dividend will be converted into UK pounds sterling at the exchange rate prevailing at the time of payment. Directors The names and biographical details of the Directors serving at the date of this report are given on page 38. Alberto Beeck stepped down from the Board on 30 September 2008. As Miguel Aramburú and Ignacio Rosado were appointed to the Board by the Directors, they will stand for election by shareholders at the forthcoming AGM in accordance with the Company’s Articles of Association. In addition, Jorge Born Jr and Nigel Moore will be retiring by rotation at this year’s AGM and, being eligible, offer themselves for re-election by shareholders. 1 Calculated as profit from continuing operations before exceptional items, net finance income/cost and income tax plus depreciation, amortisation and exploration expenses excluding ‘Personnel’ and ‘Other’ expenses. 40 Hochschild Mining plc Annual Report & Accounts 2008 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 $38.9 million, which includes amounts estimated for ongoing maintenance of sites. A provision for this amount was made as at 31 December 2008 (2007: $32.2 million) which was calculated following a review, in 2006, of the mines’ estimated closure costs by external consultants and which has been updated on an annual basis by management. Employees Employees of Minera Santa Cruz, S.A. are voluntarily affiliated to the Asociación Obrera Mineran Argentina (the Argentine Mineworkers Union). The Group’s employees at the Peruvian operations became members of unions which were formed during 2008. The Group maintains good relations with its workforce and, for almost 20 years, has not experienced any significant interruptions in production at any of its operating sites as a result of workplace disputes. This notwithstanding, the Group is currently experiencing some difficulties as referred to in the Chairman’s statement. Further details on the Group’s engagement with employees are provided in the corporate social responsibility report (on pages 30 to 35). 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. Substantial shareholdings As at 24 March 2009 the Company had been notified of the following interests in the Company’s Ordinary Share capital in accordance with Chapter 5 of the Financial Services Authority’s Disclosure Rules and Transparency Rules: Eduardo Hochschild Alberto Beeck Blackrock Investment Management (UK) Ltd Deutsche Bank AG Vanguard Group Inc. Percentage of issued Ordinary Shares share capital Number of 181,350,426 25,112,074 22,633,411 10,128,988 9,303,931 59.00% 8.17% 7.36% 3.30% 3.03% Additional share capital information This section provides information as at 31 December 2008 which is required to be disclosed in the Directors’ report following implementation of the Takeovers Directive into English law. References below to ‘the Articles’ are to the Company’s Articles of Association as at the date of this report, copies of which are available from the Registrar of Companies or on request from the Company Secretary. References below to ‘the Companies Act’ are to the Companies Act 1985 or the Companies Act 2006 as the context may require. (a) Structure of share capital The Company has a single class of share capital which is divided into Ordinary Shares of 25p each, which are in registered form. At 31 December 2008, the Company had an average of 23 days’ purchases owed to trade creditors (2007: 27 days). Details of the authorised and issued share capital of the Company are shown in note 26 to the Accounts. Political and charitable donations The Company does not make political donations. During the year, the Group expended $4.6 million (2007: $4.3 million) on social and community welfare activities surrounding its mining units. Events since the balance sheet date Details of events occurring since 31 December 2008 are set out in note 37 to the Groups’ financial statements on page 109. Share repurchase authority The Company obtained shareholder approval at the AGM held in May 2008 for the repurchase of up to 30,735,022 Ordinary Shares (representing 10% of the Company’s issued share capital) (‘the 2008 Authority’). Whilst no purchases were made by the Company pursuant to the 2008 Authority, it is intended that shareholder consent will be sought on similar terms at this year’s AGM when the 2008 Authority expires. (b) Rights and obligations attaching to shares The rights attaching to the Ordinary Shares are described in full in the Articles. In summary, on a show of hands at a general meeting or class meeting, every member present in person has one vote for every Ordinary Share held and on a poll, every member present in person or by proxy has one vote for every Ordinary Share held. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at a general meeting or class meeting. A member that is a corporation is entitled to appoint more than one individual to act on its behalf at a general meeting or class meetings as a corporate representative. 41 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Directors’ report continued The Directors may from time to time appoint one or more of their body to be the holder of any executive office for such period (subject to the Companies Act) and on such terms as they may determine and may revoke or terminate any such appointment. Each Director is required to retire at the AGM held in the third calendar year following the year in which he was elected or last re-elected by the Company. Each Director (other than the Chairman and any Director holding executive office) shall retire at each AGM following the ninth anniversary of the date on which he was elected by the Company. The Company may, in accordance with and subject to the provisions of the Companies Act by ordinary resolution of which special notice has been given, remove any Director before the expiration of his term of office. The office of Director shall be vacated if: (i) he is prohibited by law from acting as a Director; (ii) he resigns or offers to resign and the Directors resolve to accept such offer; (iii) he becomes bankrupt or compounds with his creditors generally; (iv) a relevant order has been made by any court on the ground of mental disorder; (v) he is absent without permission of the Directors from meetings of the Board for six months and the Directors resolve that his office be vacated; (vi) his resignation is requested in writing by not less than three- quarters of the Directors for the time being; or (vii) in the case of a Director other than the Chairman and any Director holding an executive office, if the Directors shall resolve to require him to resign and within 30 days of being given notice of such notice he so fails to do. In addition, under the terms of the Relationship Agreement: > for as long as the Major Shareholder has an interest of 30% or more in the Company, it is entitled to appoint up to two Non-Executive Directors and to remove such Directors so appointed; and for as long as the Major Shareholder has an interest of 15% or more of the Company, it is entitled to appoint up to one Non- Executive Director and to remove such Director so appointed. > (h) Amendment of Articles of Association Any amendments to the Articles may be made in accordance with the provisions of the Companies Act by way of special resolution. (i) Powers of the Directors Subject to the Company’s Memorandum of Association, the Articles, the Companies Act and any directions given by special resolution, the business and affairs of the Company shall be managed by the Directors who may exercise all such powers of the Company. Subject to applicable statutes and other shareholders’ rights, shares may be issued with such rights or restrictions as the Company may by ordinary resolution decide, or in the absence of any such resolution, as the Directors may decide. Subject to applicable statutes and any ordinary resolution of the Company, all unissued shares of the Company are at the disposal of the Directors. At each AGM the Company puts in place annual shareholder authority seeking shareholder consent to allot unissued shares, in certain circumstances for cash, in accordance with the guidelines of the Investor Protection Committee. (c) Transfer of shares The relevant provisions of the Articles state that: > > > registration of a transfer of an uncertificated share may be refused in the circumstances set out in the CREST Regulations and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated share is to be transferred exceeds four; the Directors may, in their absolute discretion, decline to register any transfer of any share which is not a fully paid share. The Directors may also decline to recognise any instrument of transfer relating to a certificated share unless the instrument of transfer: (i) is duly stamped (if required) and is accompanied by the relevant share certificate(s) and such other evidence of the right to transfer as the Directors may reasonably require; and (ii) is in respect of only one class of share. The Directors may, in their absolute discretion, refuse to register a transfer if it is in favour of more than four persons jointly; and the Directors may decline to register a transfer of any of the Company’s shares by a person with a 0.25% interest if such a person has been served with a notice under the Companies Act after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Act. (d) Restrictions on voting No member shall be entitled to vote at any general meeting or class meeting in respect of any shares held by him if any call or other sum then payable by him in respect of that share remains unpaid. Currently, all issued shares are fully paid. In addition, no member shall be entitled to vote if he failed to provide the Company with information concerning interests in those shares required to be provided under the Companies Act. (e) Deadlines for voting rights Votes are exercisable at the general meeting of the Company in respect of which the business being voted upon is being heard. Votes may be exercised in person, by proxy, or in relation to corporate members, by a corporate representative. Under the Articles, the deadline for delivering proxy forms cannot be earlier than 48 hours (excluding non-working days) before the meeting for which the proxy is being appointed. (f) Shareholder Agreements The Relationship Agreement entered into prior to the IPO between the Major Shareholder (as defined in the Relationship Agreement), Eduardo Hochschild, Alberto Beeck (collectively ‘the Controlling Shareholders’) and the Company: > contains provisions restricting the Controlling Shareholders’ rights to exercise their voting rights to procure an amendment to the Articles that would be inconsistent with the Relationship Agreement; and contains an undertaking by the Controlling Shareholders that they will, and they procure that their Associates will, abstain from voting on any resolution to approve a transaction with a related party (as defined in the FSA Listing Rules) involving the Controlling Shareholders or their Associates. > (g) Appointment and replacement of Directors Directors may be appointed by the Company by ordinary resolution or by the Board. A Director appointed by the Board holds office only until the next following AGM and is then eligible for election by the shareholders but is not taken into account in determining the Directors or the number of Directors who are to retire by rotation at that meeting. 42 Hochschild Mining plc Annual Report & Accounts 2008 (j) Repurchase of shares Subject to authorisation by shareholder resolution, the Company may purchase its own shares in accordance with the Companies Act. Any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon completion of the purchase, thereby reducing the amount of the Company’s issued share capital. The Company currently has authority to buy back up to 30,735,022 Ordinary Shares and which will expire at the 2009 AGM. The minimum price which must be paid for such shares is specified in the relevant shareholder resolution. (k) Dividends and distributions Subject to the provisions of the Companies Act, the Company may by ordinary resolution from time to time declare dividends not exceeding the amount recommended by the Directors. The Directors may pay interim dividends whenever the financial position of the Company, in the opinion of the Directors, justifies its payment. If the Directors act in good faith, they are not liable to holders of shares with preferred or pari passu rights for losses arising from the payment of interim dividends on other shares. (l) Significant agreements A change of control of the Company following a takeover bid may cause a number of agreements to which the Company, or any of its trading subsidiaries, is party, such as commercial trading contracts, joint venture agreements, banking arrangements to take effect, alter or terminate. Of these, the following arrangements may have a significant impact on the Group following a change of control: > the $200 million syndicated secured term loan facility agreement dated 28 January 2008. Under the terms of this facility, a change of control entitles JP Morgan Chase Bank N.A. (as the administrative agent), if so directed by a majority of the lenders, to cancel the facility and declare all outstanding loans, together with accrued interest and all other amounts accrued under the facility documentation immediately due and payable and furthermore, entitles the administrative agent to direct the enforcement of all liens and security interests created under the facility documentation. awards made under the Group’s Long-Term Incentive Plan shall, upon a change of control of the Company, vest early unless a replacement award is made. Vesting will be pro- rated to take account of the proportion of the period from the award date to the normal vesting date falling prior to the change of control and the extent to which performance conditions (and any other conditions) applying to the award have been met. > Essential contractual and other arrangements The Directors consider that the following are the contractual and other arrangements to which group companies are a party and which are considered to be essential to the business: > the mining concessions granted by the governmental authorities in the jurisdiction of the Group’s operations; and collective agreements with trade unions in respect of the workers at the Group’s mines in Peru. > Policy on financial risk management The Company’s objectives and policies on financial risk management can be found in note 36 to the Group financial statements. Information on the Company’s exposures to foreign currency, commodity prices, credit, equity, liquidity, interest rates and capital 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 Articles contain a provision whereby each of the Directors is indemnified by the Company in respect of liability in relation to: (i) any negligence, default, breach of duty or breach of trust relating to the Company or any associated company; (ii) execution of their duties as Directors of the Company; and (iii) the activities of the Company or any associated company as trustee of an occupational pension scheme. For these purposes, associated company has the meaning given to it by section 256 of the Companies Act 2006. 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 Company has purchased and maintains liability insurance for its Directors and officers as permitted by section 233 of the Companies Act 2006. Conflicts of interest The Companies Act 2006 allows Directors of public companies to authorise conflicts and potential conflicts of interest of directors where the Company’s Articles of Association contain a provision to that effect. Shareholders approved amendments to the Company’s Articles of Association at the AGM held on 9 May 2008 which included provisions giving the Directors authority to authorise matters which may result in the Directors breaching their duty to avoid a conflict of interest. The Board has established effective procedures to enable the directors to notify the Company of any actual or potential conflict situations and for those situations to be reviewed and, if appropriate, to be authorised by the Board, subject to any conditions that may be considered appropriate. Directors’ conflict situations will be reviewed annually. Directors of the Company who have an interest in matters under discussion at Board meetings are required to declare this interest and to abstain from voting on the relevant matters. Any related party transactions are approved by a committee of the Board consisting solely of Independent Directors. In addition, the Directors will be able to impose limits or conditions when giving any authorisation, if they think this is appropriate. 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 forthcoming AGM. 43 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Directors’ report continued Statement of Directors’ responsibilities The Directors confirm that to the best of their knowledge: > the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and the Management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Disclaimer Neither the Company nor the Directors accept any liability to any person in relation to this Annual Report except to the extent that such liability could arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A of the Financial Services and Markets Act 2000. The names and functions of the current Directors of the Company are set out on page 38 of this Annual Report. On behalf of the Board Raj Bhasin Company Secretary 24 March 2009 AGM The third AGM of the Company will be held at 10am on 26 May 2009 at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ. The shareholder circular incorporating the Notice of AGM is available at www.hochschildmining.com. The shareholder circular contains details on, amongst other things, the business to be considered at the meeting and the biographical details of the Directors standing for re-election at the AGM. > 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 his knowledge and belief, there is no relevant audit information of which the Company’s auditors are unaware. Furthermore, 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 that information. This confirmation is given, and should be interpreted, in accordance with the provisions of section 234ZA of the Companies Act 1985. 44 Hochschild Mining plc Annual Report & Accounts 2008 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 intends to comply, wherever possible, in the interests of shareholders and other stakeholders, with the Combined Code on Corporate Governance (‘the Code’). Statement of compliance The Company complied in 2008 with the provisions set out in Section 1 of the Code with the following exceptions: > the roles of Chairman and Chief Executive were not separated in the period from 1-8 January 2008; and the performance evaluation process undertaken during the year was focused principally on the performance of the Board collectively and hence individual directors’ performance, including that of the Chairman, was not appraised during the year as required by the Code. > The Board The Board is responsible for approving the Company’s 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 consists of four Executive Directors: Eduardo Hochschild (Chairman), Roberto Dañino (Deputy Chairman), Miguel Aramburú (Chief Executive Officer) and Ignacio Rosado (Chief Financial Officer), and four Non-Executive Directors: Sir Malcolm Field (Senior Independent Non-Executive Director), Jorge Born Jr., Nigel Moore and Dionisio Romero. Eduardo Hochschild, who controls the major shareholder of the Company, Pelham Investment Corporation (‘the Major Shareholder’), has considerable knowledge and experience in the Latin American gold and silver mining industry. Accordingly, the other Directors believe that Eduardo Hochschild’s membership of the Board and participation in the management of the Company is vital to the continued success and growth of the Company. Prior to the Company’s Listing, the Major Shareholder, its Controlling Shareholders at that time including Eduardo Hochschild, and the Company entered into an agreement regulating their ongoing relationship. Further details concerning this agreement are set out on page 46. 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. Such matters include the approval of annual and half-yearly results, the Group’s strategy, the annual budget and major items of capital expenditure. There were four scheduled meetings of the Board and a meeting dedicated to strategic planning held during the year, which were attended by all Directors. In addition, four ad-hoc meetings were convened to deal with operational matters. Attendance by Directors at the Board meetings held during the year is summarised in the table below. Director Eduardo Hochschild Roberto Dañino Alberto Beeck Sir Malcolm Field Nigel Moore Jorge Born Jr. Dionisio Romero Possible Actual attendance attendance 8 8 7 8 8 8 8 7 8 6 7 7 7 7 The principal matters considered by the Board during the year included: > > > > the Group’s strategic plan and annual budget. corporate development opportunities. board evaluation. various corporate social responsibility related issues. Directors receive a full pack of papers for consideration in advance of each Board meeting and in the event that a Director is unable to attend, comments are relayed to the Chairman who seeks to ensure that all views are represented on any given matter. In addition, Directors are kept abreast of latest developments through monthly reports on the Company’s operations and financial situation. Chairman and Chief Executive In the period from the Listing until 8 January 2008, Eduardo Hochschild served as the Executive Chairman and, with the support of the Executive Committee, he also fulfilled the function of Chief Executive Officer. As disclosed in previous Annual Reports, the Board considers that this dual role did not contravene the spirit of the Code as the Group established a governance structure with a number of checks and balances that ensured no individual or group dominates the Board’s decision-making. The above notwithstanding, the Board acknowledges that the management structure of the Group will need to evolve as it establishes its presence as a company with a main-market listing in London and becomes increasingly aware of the expectations of the UK market generally and of its investors in particular. In recognition of this, the Board announced the appointment of Miguel Aramburú as Chief Executive Officer with effect from 8 January 2008. In preparation for this appointment, documents setting out the division of responsibilities between the Chairman and the Chief Executive Officer were considered and approved by the Board. The Chairman, Eduardo Hochschild, is responsible for the running and leadership of the Board and, in conjunction with the Chief Executive Officer, the formulation of the vision and long-term corporate strategy of the Group. The approval of the Group’s strategy is a matter for approval by the Board. The Chief Executive Officer is responsible for leading an executive team in the day-to-day management of the Group’s business. 45 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Corporate governance report continued At the time the separate post of Chief Executive Officer was created, the Board felt time was needed for the new position to be established within the organisation and hence, a Board position was not conferred to the postholder at the outset. However, within 12 months of his appointment, the Board announced at the end of 2008 that Miguel Aramburú, together with Ignacio Rosado, the Chief Financial Officer, would be assuming their places on the Board with effect from 1 January 2009. Senior Independent Director Sir Malcolm Field has been appointed as the Senior Independent Director and, as such, is available to meet with major shareholders if their concerns have not been resolved by the Chairman or the other Executive Directors. Board balance and independence Despite the changes to the Board composition during the year, it remained compliant at all times with the requirement of the Code that a majority of Directors (excluding the Chairman) shall comprise Non-Executive Directors considered by the Board to be independent. The Board believes that its membership during the year was, and its current membership is, well balanced and capable of managing the Company in an effective and successful manner. Whilst the Chairman is not considered to be independent, the Board is satisfied that decisions can be made without any one Director exercising undue influence. The Board is also of the opinion that Eduardo Hochschild’s long-term relationship with the Company, and his importance to it, make his presence on the Board of vital importance and is in the best interests of the Company and its shareholders generally. Moreover, the undertakings given in the Relationship Agreement by the Major Shareholder and Eduardo Hochschild, ensure that the Company is managed in accordance with the Code. Accordingly, the Board believes that during the year under review, the Company was structured so as to ensure that no individual had unfettered powers of decision making. The Board considers that all of the Non-Executive Directors are independent of the Company as defined by the Code. In reaching its conclusion, the Board paid particular regard to the situations described below in relation to two of its Non-Executive Directors. (i) Dionisio Romero is Chairman of Banco de Credito del Perú, a provider of finance to the Company and a Director of TECSUP, a non-profit organisation affiliated to the Company. > the Board does not consider Dionisio’s involvement with either of these two organisations to be sufficiently material to interfere with the exercise of independent judgement when dealing with the Company’s affairs. Consequently, he is regarded as being independent for the purposes of the Code. (ii) Prior to the Listing, Jorge Born Jr. received payments of approximately $72,000 from the Company for his participation on the Company’s Advisory Board, which has since been dissolved. > the amount paid is not considered to be material and consequently, the Board regards Jorge as being independent for the purposes of the Code. The Board is of the opinion that all four independent Directors enhance the Board’s capacity to oversee and grow the Company’s operations. This notwithstanding, the membership of each main Board committee shall be reviewed by the Board on an on-going basis as a matter of good practice. In addition to their legal responsibilities as Directors, the Non-Executive Directors are expected to contribute to issues of strategy and management performance through the application of their independent judgement and to scrutinise management’s performance against objectives. To this end, the Non-Executive Directors have held informal private discussions with the Chairman. Consistent with the Code, consideration of the remuneration of the Non-Executive Directors is a matter reserved for the Board. Relationship Agreement Prior to the Company’s IPO, the Major Shareholder and its controlling shareholders at the time including Eduardo Hochschild (collectively ‘the Controlling Shareholders’) and the Company entered into an agreement regulating their ongoing relationship. 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 Controlling Shareholders and any of their respective associates, and that transactions and relationships with the Controlling Shareholders 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 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 continues for so long as the Company’s shares are traded on the London Stock Exchange or until such times as the Controlling Shareholders (including Eduardo Hochschild) cease to own or control in aggregate a minimum of 15% or more of the issued share capital or voting rights of the Company. Appointments to the Board and re-election of Directors Board nominations are recommended to the Board by the Nominations Committee which met during the year under review to consider the appointments of Miguel Aramburú (Chief Executive Officer) and Ignacio Rosado (Chief Financial Officer) to the Board with effect from 1 January 2009. These appointments were made in recognition of the significant contributions made to date by these senior executives and to ensure the representation of the appropriate skills at Board level in order to advance the Group’s strategy. In accordance with the provisions of the Articles of Association, Miguel Aramburú and Ignacio Rosado will be subject to election by shareholders at the forthcoming AGM. In addition, Jorge Born Jr. and Nigel Moore will retire by rotation and, being eligible, offer themselves for re-election by shareholders also at the forthcoming AGM. Biographical details of these Directors are given on page 38. 46 Hochschild Mining plc Annual Report & Accounts 2008 Board development The Directors have received regular briefings on their responsibilities as Directors of a UK listed company, particularly in light of the Companies Act 2006 and on other relevant UK legal developments. In addition, 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. An induction programme for new Board appointees incorporates 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. The Company has procedures by which members of the Board may take independent professional advice at the Company’s expense in the furtherance of their duties. Board evaluation As the Board undertook a process to evaluate its performance, the performance of its Directors and of its committees in the latter part of 2007, it was not considered necessary for an evaluation of similar scope to be conducted in 2008. Accordingly, an evaluation focusing on the workings of the Board was carried out during the year under review. In keeping with the previous year, the evaluation was conducted through the use of questionnaires which were designed to gauge the Board’s view on, amongst other things, the composition and workings of the Board. Directors were also given the opportunity to suggest how current practice could be amended to allow the Board to function more effectively. The findings were considered by the Chairman and the Senior Independent Director and a number of recommendations arising from the process were considered and approved by the Board. The recommendations principally relate to Board composition, contingency planning in respect of the Chairmanship and implementation of the Group’s strategic plan. As the Board did not consider that a detailed evaluation of individual directors’ performance was necessary, an evaluation of the Chairman’s performance was not carried out during the year. The Board’s committees The Board has delegated authority to the following standing committees which report regularly to the Board: > > > > the Audit Committee. the Remuneration Committee. the Nominations Committee. the Corporate Social Responsibility Committee. The terms of reference for all the Board committees are available for inspection on the Company’s website at www.hochschildmining.com. Audit Committee The role of the Audit Committee is to: > > monitor the integrity of the Company’s financial statements; monitor the effectiveness of the Company’s internal controls and risk management systems; oversee the relationship with the Company’s external auditors; and review the effectiveness of the external audit process. > > The Audit Committee is chaired by Nigel Moore who has extensive and substantial financial experience gained whilst holding a number of senior appointments with Ernst & Young. Further details are given in the biography on page 38. The other members of the Audit Committee are Sir Malcolm Field and Jorge Born Jr., both of whom are considered to be independent Directors. The lead partner of the external auditors, the Executive Directors and the Head of Internal Audit attend each Audit Committee meeting by invitation. During the year under review, there were four meetings of the Audit Committee each of which was attended by all members. The following matters featured among those considered by the Committee during the year: > Financial reporting – The Audit Committee reviewed the 2007 Annual Report and Accounts and the 2008 Half-yearly Report before recommending them to the Board for approval. As part of its review of each, the Audit Committee reviewed accounting policies, estimates and judgements that had been applied in preparing the relevant report and accounts and the transparency and clarity of disclosures contained within them. > Risk management – Risk matrices highlighting the significant risks at each of the Group’s operations have been considered by the Audit Committee together with the accompanying evaluation and action plans to manage the identified high risk areas. > Internal audit – The Audit Committee has overseen the Group’s adoption of a risk-based approach to internal audit and has approved the Internal Audit Work Plan for the current financial year. > Internal control – The Audit Committee has continued to review the monthly management accounts process and the adequacy of the Group’s information technology (‘IT’) systems. Treasury procedures and controls have also been the focus of separate reviews during the year. The Group continues to operate the arrangements under which staff may raise, in confidence, concerns about possible improprieties in matters of financial reporting or other matters and which enables proportionate and independent investigation of any such improprieties with suitable follow-up action. > External audit – The Audit Committee considered the re- appointment of the Company’s external auditors before making a recommendation to the Board that the same 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 and evaluated its performance. In addition, the Audit Committee has adopted policies, which it continues to oversee, with the aim of safeguarding the independence and objectivity of the auditors including a policy on the provision of non-audit services. This document specifies those non-audit services that the external auditor may provide (in the absence of any threat to its independence) which include support in relation to M&A, and Joint Ventures and tax advisory services which are not incompatible with the 47 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Corporate governance report continued auditors’ statutory responsibilities. The policy also sets out those services which the auditors are prohibited from rendering (and where it is not in the best interests of the Group for the work to be undertaken by the external auditor). Such services include management of, or significant involvement in internal audit services, advice to the Remuneration Committee and valuation services. Details on the fees paid to the external auditors during the year in respect of audit and non-audit work are provided in note 30 to the financial statements. Corporate Social Responsibility Committee The role of the CSR Committee is to oversee and to make all necessary recommendations to the Board in connection with corporate social responsibility issues as they affect the Company’s operations. In particular, it focuses 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 is also responsible for reviewing management’s investigation of incidents or accidents that occur in order to assess whether policy improvements are required. Remuneration Committee 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 CSR Committee is chaired by Roberto Dañino and its other members are Sir Malcolm Field and Eduardo Hochschild. During the year, the CSR Committee held two meetings which were attended by all members. In addition, detailed updates on CSR- related matters were presented at two of the Board meetings held during the year. The Remuneration Committee comprises the following independent Non-Executive Directors: Jorge Born Jr. (Chairman), Sir Malcolm Field and Nigel Moore. The Committee held 11 meetings during the year under review at which all members were in attendance with the exception that Nigel Moore was unable to attend one meeting. Further details concerning the activities of the Remuneration Committee are set out in the Directors’ remuneration report on page 50. 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 members of the Nominations Committee are Eduardo Hochschild (Chairman), Sir Malcolm Field and Dionisio Romero. All members of the Nominations Committee were present at the three meetings held during the year under review with the exception that Dionisio Romero was unable to attend one of these meetings. The matters considered by the Nominations Committee during the year were: > the appointment of Alberto Beeck as a Non-Executive Director. the relevant recommendations arising from the Board evaluation process. any potential conflicts of interests relating to, and the subsequent appointments to the Board of, Miguel Aramburú (CEO) and Ignacio Rosado (CFO) with effect from 1 January 2009. > > Further details concerning the CSR Committee and the Group’s activities in this area are set out in the corporate social responsibility report on pages 30 to 35. Internal control Whilst the Board has overall responsibility for the Group’s system of internal control (including risk management) and for reviewing its effectiveness, responsibility for the periodic review of the effectiveness of these controls has been delegated to the Audit Committee. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and it must be recognised that such a system can only provide reasonable and not absolute assurance against material misstatement or loss. These controls are managed by the use of formal procedures designed to highlight financial, operational, environmental and social risks and provide appropriate information to the Board enabling it to protect effectively the Company’s assets and, in turn, maintain shareholder value. The process used by the Audit Committee to assess the effectiveness of internal control includes: > > Review of budgets and reporting against budgets. Consideration of achievement of strategic plans and objectives. Monitoring the risks faced by the Group’s operations through reports from the Head of the Internal Audit function. Review of IT issues. Review of accounting and financial reporting together with the internal control environment existing at Group level. > > > Based on its review of the process, the Audit Committee is reasonably satisfied that the internal controls are in place at the operational level within the Group. In accordance with the Revised Turnbull Guidance, the Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company, and that it has been in place for the year under review and up to the date of approval of this Annual Report. The Board, via the Audit Committee, 48 Hochschild Mining plc Annual Report & Accounts 2008 continues to monitor the internal control environment of the Group alongside the development of risk management processes. Overall, the Board acknowledges that the steps taken to initiate a risk management framework are appropriate to the Group’s circumstances. Going concern A statement on the Directors’ position regarding the Company as a going concern is contained in the Directors’ report on page 43. Company Secretary The Company Secretary is appointed and removed by the Board and is responsible for advising the Board on governance matters and the provision of administrative and other services to the Board. All the Directors have access to the Company Secretary. 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 Executive Officer, 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 release of the annual and half-yearly results as well as to join discussions on the quarterly production results. The Executive Directors, Chief Executive Officer and the Chief Financial Officer are available to discuss the concerns of major shareholders at any time during the year. The Chairman, Deputy Chairman and the Chief Executive Officer, 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 Half-yearly Reports (which are available on request). The Company also uses the AGM as an opportunity to communicate with its shareholders. Notice of the 2008 AGM was circulated to all shareholders at least 20 working days prior to the meeting and the Chairmen of the Audit, CSR, Remuneration and Nominations Committees were available at the meeting to answer questions. A poll vote was taken on each of the resolutions put before shareholders. It is intended that this approach will also be taken at the 2009 AGM and, in keeping with historic practice, results of the voting at the AGM will be announced and published on the Company’s website as soon as possible after the meeting. Further information on matters of particular interest to investors is available on page 132 and on the Company’s website at www.hochschildmining.com 49 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Directors’ remuneration report Introduction This Directors’ remuneration report sets out information on the remuneration of the Directors of Hochschild Mining plc for the year ended 31 December 2008. This report has been prepared in accordance with Schedule 7A of the Companies Act 1985 and the requirements of the Financial Services Authority’s Listing Rules. As required by legislation, the information provided in the table in the section entitled ‘Long-Term Incentive Plan’ and the table on Directors’ total remuneration and accompanying notes 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. Remuneration Committee The Remuneration Committee is chaired by Jorge Born Jr. and its other members are Sir Malcolm Field and Nigel Moore. All the members of the Remuneration Committee are independent Non-Executive Directors. 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 other members of the Executive Committee and the Company Secretary, as well as their specific remuneration packages including pension rights and, where applicable, any compensation payments. In determining such policy, the Remuneration 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 rewarded in a fair and responsible manner for their individual contributions to the success of the Group. 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 was advised during the year on remuneration matters generally by Kepler Associates and most notably, on a review of the remuneration packages of the Executive Directors and senior management, and the structure of the Long-Term Incentive Plan (‘LTIP’) which was put to shareholders for approval at the 2008 AGM. Kepler Associates did not provide any other services to the Group during the year. Remuneration policy The Remuneration Committee continued to implement in 2008, and intends to implement in 2009, its agreed policy on executive remuneration as previously disclosed. The principal objectives of the Group’s policy are to attract, retain, and motivate its executives and senior management and to align management incentives with the creation of shareholder value. It is considered critical that this alignment is achieved over both the short and long-term and this is done through the use of annual performance-related bonuses which reward the achievement of a balanced mix of financial and operational performance measures, and the Total Shareholder Return (‘TSR’) related performance conditions attached to awards under the Long-Term Incentive Plan. 2008 Remuneration Review In the early part of 2008, the Remuneration Committee undertook a review of the remuneration packages of the Executive Directors and of senior management within the following parameters: > total compensation shall be weighted in favour of variable compensation, in order to provide the appropriate level of incentive to perform. total cash compensation shall be in the lower quartile of the Group’s peers, with total remuneration in the upper quartile. > During the review, the Committee made reference to pay levels of other international mining companies of comparable size. The benchmarking exercise was completed at the end of February 2008 and revised packages, where appropriate, were put in place from 1 March 2008. Fixed and variable pay The following chart sets out the split between fixed and variable pay at both target and maximum performance. The maximum bonus percentages are set out in each Executive Director’s service contract and have been set to ensure that the majority of the remuneration is performance based. 50 Hochschild Mining plc Annual Report & Accounts 2008 Executive Director pay mix (% of total remuneration) Target Maximum 100 90 80 n o 70 i t r a e n u m e r l t a o t f o % 60 50 40 30 20 10 0 Eduardo Hochschild Roberto Dañino Eduardo Hochschild Roberto Dañino 67% LTIP Variable proportion: 50% 73% 53% Bonus Pension Salary Components of fixed pay for the Executive Directors in office as at 31 December 2008 Director Eduardo Hochschild Roberto Dañino Annual entitlements before Remuneration Review Annual entitlements after Remuneration Review (effective 1 March 2008) US$000 Pension Salary Supplement 800 800 200 200 US$000 Pension Salary Supplement 800 600 200 200 Total 1,000 1,000 Total 1,000 800 Notes Each Executive Director has service contracts with both Hochschild Mining plc and Compañía Minera Ares S.A.C., a Group subsidiary. 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 As stated above, the remuneration packages of the Executive Directors were reviewed in early 2008 resulting in revised salaries being paid with effect from 1 March 2008. Base salaries for each Executive Director are paid 20% by the Company and 80% by Compania Minera Ares S.A.C. (a wholly owned subsidiary). The review of remuneration packages carried out during the year sought to ensure that the Executive Directors were paid in line with comparable companies taking into account individual contribution and scope of responsibility. Short-term incentives Each year the Remuneration Committee approves objectives for each of the Executive Directors based on individual roles and responsibilities and are intended to reward strong financial performance of the Group and achievement of key operational targets within the individual’s scope of responsibilities. The level of bonus paid depends on performance against these objectives and are subject to the discretion of the Remuneration Committee. Maximum bonus opportunities for Eduardo Hochschild and Roberto Dañino are 175% and 150% of base salary respectively. 2008 Bonus Awards A summary of the objectives set in respect of 2008 and performance against each one is given below: Objectives relating to Group Performance: > > > specified targets on share price performance and level of EBITDA, which were not met; production targets and the level of success in replenishing reserves and resources, for which a bonus was payable; the actions taken to reduce the cost base arising from the changes in financial climate for which a bonus was payable; 51 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Directors’ remuneration report continued Objectives relating to personal areas of responsibility include: (i) for Eduardo Hochschild > > targets on strategic and succession planning, for which a bonus was payable; targets on the delivery of best practice in relation to health, safety and environmental matters, for which a bonus was payable; (ii) for Roberto Dañino > targets in relation to the implementation of best practice on corporate governance and board process for which a bonus was payable; execution of the Group’s CSR strategy and targets relating to investor and institutional relations for which a partial bonus was payable; > The Committee wishes to acknowledge Eduardo Hochschild’s decision to waive his entitlement to a bonus in respect of 2008 in recognition of the changes in trading conditions during the year. The amount of the bonus paid to Roberto Dañino in respect of 2008 is detailed in the table on page 54. 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 $200,000 each year in lieu of pension. Of this supplement, $160,000 is paid by Compañía Minera Ares, S.A.C. and $40,000 is paid by the Company. In addition, under Peruvian law, mining companies with more than 20 employees 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 Executive Directors with medical insurance and motor cars (or an allowance in place thereof). Performance graph The following graph shows the TSR (Total Shareholder Return) for the Company compared to the FTSE 350 Index, assuming £100 was invested on 3 November 2006, the date that conditional dealings in the Company’s shares commenced. The Board considers that the FTSE 350 index currently represents the most appropriate of the published indices for these purposes as it provides a view of performance against the broad equity market index that the Company is a constituent of. Total shareholder return – value of hypothetical £100 holding £200 £150 £100 £50 £0 FTSE 350 Index Hochschild Mining plc 31 Dec 06 Source: Bloomberg 31 Dec 07 31 Dec 08 Long-Term Incentive Plan (‘LTIP’) In order to achieve its policy objective to motivate Executive Directors and senior employees for the long-term, the Company submitted for shareholder approval at the 2008 AGM a cash-based LTIP which further aligns selected executives’ and senior employees’ long-term interests with those of shareholders. Initial awards under the LTIP were made subject to shareholders approving the Plan at the 2008 AGM. Awards made under the Plan to Executive Directors are subject to a normal limit, capping awards to a value not exceeding six times salary at the date of grant (excluding interest on the deferred proportion of the award). 52 Hochschild Mining plc Annual Report & Accounts 2008 As at 31 December 2008, Eduardo Hochschild was the only Executive Director participating in the Plan and details of his award are given in the table below. Interests in the LTIP at 31/12/2007 Maximum awards made during the year Eduardo Hochschild – $4m Awards vested during the year – Interests in the LTIP at 31/12/2008 $4m Going forward, the Committee intends to make LTIP awards no less than every three years, subject to the limit specified above. The vesting of initial awards under the Plan is subject to the Company’s TSR over a three year period to 31 December 2010, relative to a tailored peer group of listed international gold and silver mining companies (‘the Comparator Index’). These companies are Agnico-Eagle Mines Ltd, Alamos Gold, AngloGold Ashanti Ltd, Apex Silver Mines Ltd, Barrick Gold Corp, Cia des Minas Buenaventura SA, Couer d’Alene Mines Corp, Eldorado Gold Corp, Gold Fields Ltd, Goldcorp Inc, Highland Gold Mining Ltd, Iamgold Corp, Kinross Gold Corp, Minefinders Corp, Newmont Mining Corp, PAN American Silver Corp, Peter Hambro Mining Plc, Polymetal and Silver Standard Resources Inc. 25% of the maximum cash payment vests if the Company achieves median TSR performance, 75% of the maximum cash payment vests at upper quartile TSR performance and the whole award vests at upper decile TSR performance. Vesting occurs on a straight-line basis for TSR performance between median and upper quartile and between upper quartile and upper decile. Awards are subject to two clawbacks (in relation to a whole, or part of an, award); firstly, if based on a discretionary assessment by the Remuneration Committee, the overall underlying business performance of the Company during the performance period is not satisfactory; and secondly, if there are failures relating to safety, environment, community and legal compliance that the Remuneration Committee considers would entitle it to exercise its discretion. On a change of control, awards made under the LTIP may vest early (unless a replacement award is made), but would be pro-rated to take account of the proportion of the period from the award date to the normal vesting date completed prior to the change of control, and the extent to which performance conditions applying to the award have been met. In respect of the year ended 31 December 2008, the Company’s TSR was below the median of that of the Comparator Index. 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 (as subsequently amended). The contracts have no fixed terms and 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, a provision for immediate dismissal with no compensation payable in the event of unsatisfactory performance is included in each Director’s contract. External appointments The Group recognises that certain Executive Directors are, in addition, Directors of other companies and that such appointments can bring benefits to the Group. Details of the directorships of those Executive Directors in office as at 31 December 2008 are given in the table below, together with the amounts received by them during the year under review. The amounts received by Eduardo Hochschild in his capacity as Executive Director of Cementos Pacasmayo, as well as advisory fees received from Inversiones Pacasmayo, both companies in which he is the controlling shareholder, are also included below. Name of Director Eduardo Hochschild Roberto Dañino Company Banco Crédito del Perú Cementos Pacasmayo Cementos Selva Fees received $100,000 Peruvian nuevo sol 4,282,233 ($1,463,511) Peruvian nuevo sol 228,262 ($78,012) Inversiones Pacasmayo SA Peruvian nuevo sol 5,287,717 ($1,807,149) Pacifico Peruano Suiza Cía de Seguros y Reaseguros Cementos Pacasmayo Gold Fields La Cima S.A. MiBanco Peruvian nuevo sol 28,980 ($9,904) Peruvian nuevo sol 41,658 ($14,237) Peruvian nuevo sol 31,253 ($10,681) Peruvian nuevo sol 143,294 ($48,973) Radio Programas del Peru Peruvian nuevo sol 40,840 ($13,958) Non-Executive Directors In accordance with each of their letters of appointment dated and effective from 16 October 2006, the Group’s Non-Executive Directors serve for an initial period of three years which is automatically extended for a further three years. Notwithstanding the foregoing, Non-Executive Directors like all Directors are subject to periodic re-election by the Company in general meeting and the appointments of Non-Executive Directors may be 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 amount of time and level of involvement required in order to carry out their duties as members of the Board and its committees. 53 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Directors’ remuneration report continued The current fees for the Non-Executive Directors of the Company are as set out in the table below: Director Sir Malcolm Field Jorge Born Jr. Nigel Moore Dionisio Romero Director’s fee £100,000 ($183,517) per annum £100,000 ($183,517) per annum £120,000 ($220,220) per annum £100,000 ($183,517) per annum Table of Directors’ total remuneration The following table sets out the remuneration of the Directors serving during the year in respect of the years ended 31 December 2008 and 31 December 2007. Base salary/fees US$000 Pension supplement US$000 Statutory profit share US$000 Benefits in kind US$000 Performance related bonus US$000 Total remuneration Year to 31 December (or date of Total 2008 remuneration Year to resignation, 31 December 2007 US$000 if earlier) US$000 800 633 184 184 220 184 332 2,537 200 200 0 0 0 0 65 465 31 25 0 0 0 0 11 67 252 46 0 0 0 0 45 343 04 450 0 0 0 0 n/a 450 1,283 1,354 184 184 220 184 2,223 1,790 200 200 240 200 453 1,415 3,862 6,268 Director Eduardo Hochschild1,2,3 Roberto Dañino1,2,3,5 Sir Malcolm Field Jorge Born Jr Nigel Moore6 Dionisio Romero Former Director Alberto Beeck1,2,3,7 Total 1 Each Executive Director has (or in the case of Alberto Beeck, had) a service contract with both Hochschild Mining plc and Compañía Minera Ares S.A.C., a Group subsidiary. 2 In each case, the proportion of aggregate base salary paid by the Company and by Compañía Minera Ares S.A.C. is 1/5 and 4/5 respectively. In addition, $160,000 per annum of pension supplement is/was payable by Compañía Minera Ares S.A.C. and $40,000 of pension supplement is/was payable by the Company. 3 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. 4 Mr Hochschild waived his entitlement to a bonus – see section of this Report entitled ‘2008 Bonus Awards’. 5 Performance related bonuses are paid by the Company and Compañía Minera Ares S.A.C. in the proportion each company pays the Director’s base salary. 6 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. 7 Mr Beeck served as an Executive Director of the Company until 9 May 2008 when he assumed a non-executive directorship. Mr Beeck resigned as a Director of the Company on 30 September 2008. Directors’ interests in shares The interests of the Directors are set out in the Directors’ report on page 40. Approval This report has been approved by the Board of Directors of Hochschild Mining plc and is signed on its behalf by: Nigel Moore Member, Remuneration Committee 24 March 2009 54 Hochschild Mining plc Annual Report & Accounts 2008 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 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 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 Group financial statements comply with the Companies Act 1985, Companies Act 2006 and, in the case of Group financial statements, with 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. 55 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Independent auditor’s 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 2008 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 37. We have also audited the Parent Company Financial Statements (the ‘financial statements’) of Hochschild Mining plc for the year ended 31 December 2008 which comprise the Company Balance Sheet, the Company Cash Flow Statement, the Company Statement of Changes in Equity and the related notes 1 to 17. 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 auditors’ 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 (‘IFRSs’) 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 the 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 and 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, in addition, the Group Financial Statements have been properly prepared in accordance with Article 4 of the IAS Regulation. 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 Operational Review 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 Report reflects the Company’s compliance with the nine provisions of the 2006 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 financial statements. The other information comprises only the Chairman’s Statement, the Operational and Financial Reviews, the Directors’ Report, the unaudited part of the Directors’ Remuneration Report, and the Corporate Governance Report. 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. 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 2008 and of its loss for the year then ended; the Parent Company Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2008 and of its loss for the year then ended; 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 as regards to the Group Financial Statements in accordance with Article 4 of the IAS Regulation; the information given in the Directors’ Report is consistent with the financial statements. > > > Ernst & Young LLP Registered auditor London 24 March 2009 56 Hochschild Mining plc Annual Report & Accounts 2008 Consolidated income statement For the year ended 31 December 2008 Continuing operations Revenue Cost of sales Gross profit Administrative expenses Exploration expenses Selling expenses Other income Other expenses Impairment of property, plant and equipment Profit from continuing operations before net finance income/(cost), foreign exchange loss and income tax Share of post tax losses of associates and joint ventures accounted under equity method Finance income Finance costs Foreign exchange loss Profit/(loss) from continuing operations before income tax Income tax expense Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Notes Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 Total US$000 3(a), 5 6 433,779 (240,441) – 433,779 (234) (240,675) 305,021 (106,272) – – 305,021 (106,272) 7 8 9 11 11 15 17 12 12 193,338 (68,751) (23,841) (11,257) 5,025 (8,246) – (234) (1,127) (69) – 252 (1,984) (34,706) 193,104 (69,878) (23,910) (11,257) 5,277 (10,230) (34,706) 198,749 (68,817) (26,890) (2,780) 5,695 (2,027) – – – – – 932 (1,501) – 198,749 (68,817) (26,890) (2,780) 6,627 (3,528) – 86,268 (37,868) 48,400 103,930 (569) 103,361 (8,214) 9,382 (18,833) (7,161) – 3,914 (18,088) – (8,214) 13,296 (36,921) (7,161) – 19,783 (7,517) (4,363) – 5,474 (71) – – 25,257 (7,588) (4,363) 61,442 (29,762) (52,042) 6,848 9,400 (22,914) 111,833 (34,453) 4,834 (1,299) 116,667 (35,752) 13 Profit/(loss) for the year from continuing operations 31,680 (45,194) (13,514) 77,380 3,535 80,915 Attributable to: Equity shareholders of the Company Minority shareholders Basic and diluted earnings per Ordinary Share from continuing operations and for the year (expressed in US dollars per share) 24,643 7,037 (43,646) (1,548) (19,003) 5,489 81,538 (4,158) 31,680 (45,194) (13,514) 77,380 3,535 – 3,535 85,073 (4,158) 80,915 14 0.08 (0.14) (0.06) 0.27 0.01 0.28 57 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Consolidated balance sheet As at 31 December 2008 ASSETS Non-current assets Property, plant and equipment Intangible assets Investments accounted under equity method Available-for-sale financial assets Trade and other receivables Income tax receivable Deferred income tax assets Current assets Inventories Trade and other receivables Income tax receivable Financial assets at fair value through profit and loss Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves attributable to shareholders of the Parent Equity share 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 As at 31 December Notes 2008 US$000 2007 US$000 15 488,984 2,668 16 17 136,019 – 17,794 18 38,304 19 802 20,795 27 263,062 2,896 15,100 25,518 616 22,400 705,366 329,592 49,220 20 19 123,726 14,470 5,569 21 22 116,147 47,012 134,180 1,003 8,039 301,426 309,132 491,660 1,014,498 821,252 26 146,466 26 395,928 146,466 395,928 (250,831) (205,556) 182,612 229,202 474,175 566,040 68,843 50,008 543,018 616,048 627 23 24 231,692 37,687 25 15,839 27 859 55,209 30,821 9,091 285,845 95,980 23 24 25 82,291 98,070 4,277 997 52,176 33,169 13,029 10,850 185,635 109,224 471,480 205,204 1,014,498 821,252 These financial statements were approved by the Board of Directors on 24 March 2009 and signed on its behalf by: Ignacio Rosado Chief Financial Officer 24 March 2009 58 Hochschild Mining plc Annual Report & Accounts 2008 Consolidated cash flow statement For the year ended 31 December 2008 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 Investment in an associate Purchase of available-for-sale financial assets Purchase of software licences Loan to Exmin, S.A. de C.V. Loan to Minera Andes Inc. Proceeds from sale of available-for-sale financial assets Proceeds from sale of property, plant and equipment Other Net cash used in investing activities Cash flows from financing activities Proceeds of borrowings Repayment of borrowings Transaction costs associated with borrowing Dividends paid Transaction costs associated with issue of shares Capital contribution from minority shareholders Cash flows generated from financing activities Net decrease in cash and cash equivalents during the year Exchange difference Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Year ended 31 December Notes 2008 US$000 2007 US$000 31 102,167 7,512 (4,302) (1,476) (25,260) 34,338 18,390 (1,217) (2,023) (28,084) 78,641 21,404 (296,027) (134,119) (164,211) – (19,240) (37) – – 3,321 – 392 12 – (4,669) (876) (746) (22,036) 167 12, 18 (475,790) (162,279) 484,041 177,168 (257,300) (150,194) (2,408) – (28,531) – 16,926 (24,729) (11,722) 16,175 212,728 6,698 (184,421) (134,177) 60 435,543 (858) 301,426 22 116,147 301,426 59 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Consolidated statement of changes in equity For the year ended 31 December 2008 Other reserves Unrealised gain/(loss) on available- Equity share capital US$000 Share premium US$000 Notes financial for-sale Cumulative translation assets adjustment US$000 US$000 Capital and reserves attributable to shareholders of the Parent US$000 Retained earnings US$000 Merger reserve US$000 Total Other reserves US$000 Minority interest US$000 Total equity US$000 Balance at 1 January 2007 Fair value gains on available-for-sale financial assets Deferred income tax 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 2007 Transaction costs associated with issue of shares Dividends Adjustment to deferred consideration1 Capital contribution from minority shareholders Balance at 31 December 2007 Net fair value losses on available-for-sale financial assets Deferred income tax on available-for-sale financial assets Recycling of fair value losses on impairment of available-for-sale financial assets Deferred income tax on impairment of available-for-sale financial assets 146,466 396,156 1,374 3,633 (210,046) (205,039) 152,577 490,160 14,489 504,649 18 27 26 28 – – – – – – – – – – – – – – – – 1,415 (927) – – – (1,005) 488 – (1,005) – 488 (1,005) (228) – – – – – – – – – – – – – – – – – – – – – 1,415 (927) (1,005) – – – 1,415 87 1,502 (927) – (927) (1,005) 882 (123) (517) – – 85,073 (517) 85,073 969 (4,158) 452 80,915 (517) 85,073 84,556 (3,189) 81,367 – – – – – (8,448) (228) (8,448) – – (228) (8,448) – – – 5,627 5,627 – 33,081 33,081 146,466 395,928 1,862 2,628 (210,046) (205,556) 229,202 566,040 50,008 616,048 18 27 27 – – – – – (3,306) – 390 – 1,979 – (151) – – – – – (3,306) – (3,306) (127) (3,433) – 390 – 390 35 425 – 1,979 – 1,979 – 1,979 – (151) – (151) – (151) 60 Hochschild Mining plc Annual Report & Accounts 2008 Other reserves Unrealised gain/(loss) on available- Equity share capital US$000 Share premium US$000 Notes financial for-sale Cumulative translation assets adjustment US$000 US$000 27 28 – – – – – – – – – – – – (1,562) – – – (43,003) 378 – – (2,272) – (43,003) – (2,272) – (43,003) – – – – – – – – – – – – – – – – – Capital and reserves attributable to shareholders of the Parent US$000 Retained earnings US$000 Merger reserve US$000 Total Other reserves US$000 Minority interest US$000 Total equity US$000 – (1,562) – (1,562) (51) (1,613) – – – – – – – – – – 378 – 378 12 390 – 620 620 – 620 (43,003) – (43,003) (76) (43,079) (45,275) – 620 (19,003) (44,655) (19,003) (207) 5,489 (44,862) (13,514) (45,275) – (18,383) (28,331) (63,658) (28,331) 5,282 – (58,376) (28,331) – – – – – 1,220 1,220 124 124 4 128 – – 12,329 12,329 Recycling of realised fair value gains on available-for-sale financial assets Deferred income tax on realised fair value gains on available-for-sale financial assets Share in gains directly recognised in equity by associates Translation adjustment for the year Net income recognised directly in equity (Loss)/profit for the year Total recognised income for 2008 Dividends Adjustment to deferred consideration1 Expiration of dividends payable Capital contribution from minority shareholders Balance at 31 December 2008 146,466 395,928 (410) (40,375) (210,046) (250,831) 182,612 474,175 68,843 543,018 1 This amount represents the increase in the minority interest’s share of the assets of Pallancata, following the Group’s investment during the year in accordance with the agreement signed with Minera Oro Vega S.A.C. (refer to note 23(2)). 61 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements For the year ended 31 December 2008 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 office is located at 46 Albemarle Street, London W1S 4JL, United Kingdom. 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, a Cayman Islands company. 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. The Group’s principal business is the mining, processing and sale of silver and gold. The Group has four operating mines (Ares, Arcata, Selene and Pallancata) located in southern Peru, one operating mine (San José) located in Argentina and one operating mine (Santa Maria de Moris) located in Mexico. The Group also has a portfolio of projects located across Peru, Argentina, Mexico, Chile and Canada at various stages of exploration and development. These consolidated financial statements were approved for issue by the Board of Directors on 24 March 2009. The principal activities of the Company’s subsidiaries are as follows: Company Hochschild Mining (Argentina) Corporation S.A. (formerly Hochschild Mining (Argentina) Corporation)1 Hochschild Mining (Peru) S.A. (formerly Hochschild Mining (Peru) Corporation)1,2 Larchmont S.A. (formerly Larchmont Corporation)1,2 Garrison S.A. (formerly Garrison Corporation)1,2 Ardsley S.A. (formerly Ardsley Corporation)1,2 Hochschild Mining Mexico, S.A. de C.V. (formerly Hochschild Mining (Mexico) Corporation)1 Hochschild Mining Holdings Limited Compañía Minera Ares S.A.C. Compañía Minera Arcata S.A. Empresa de Transmisión Callalli S.A.C. Asociación Sumac Tarpuy3 Pallancata Holding S.A.C. (formerly Compañía Minera Coriorco S.A.) Minera Suyamarca S.A.C. MH Argentina S.A. Minera Hochschild Chile S.C.M. (formerly 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. Servicios Corporativos Hochschild Mining Mexico, S.A. de C.V. Hochschild Mining (US) Inc. (formerly MH Nevada, Inc.) Minera Santa Cruz S.A. Hochschild Mining Chile S.A. HMX, S.A. de C.V. Inmaculada Holdings S.A.C.4 Liam Holdings S.A.C.4 Hochschild Mining Ares (UK) Ltd.4 Minera Minasnioc S.A.C.5 . . Principal activity Country of incorporation 2008 US$000 2007 US$000 Equity interest at 31 December Holding company Argentina Holding company Holding company Holding company Holding company Peru Peru Peru Peru Holding company Holding company Production of gold and silver Production of gold and silver Power transmission Not-for-profit Mexico England and Wales Peru Peru Peru Peru Holding company Production of gold and silver Exploration office Exploration office Exploration office Production of gold and silver Holding company Peru Peru Argentina Chile Mexico Mexico Mexico Service company Exploration office Production of gold and silver Holding company Exploration office Holding company Holding company Subsidiary Subsidiary Mexico USA Argentina Chile Mexico Peru Peru England and Wales Peru 100 100 – – – 100 100 100 96.8 100 – 100 60 100 100 100 70 100 100 100 51 100 100 100 100 100 100 100 100 10 100 100 100 100 100 96.8 100 – 100 60 100 100 100 70 100 100 100 51 100 100 – – – – 1 These subsidiaries were previously domiciled in the Cayman Islands. Between 2007 and 2008, the place of domicile of these subsidiaries was transferred to Peru, Argentina and Mexico. In 2008 Hochschild Mining (Perú) S.A. merged with Larchmont S.A., Garrison S.A. and Ardsley S.A. 2 3 Asociación Sumac Tarpuy is an unincorporated entity, which receives donations from Compañía Minera Ares S.A.C., and spends this money on the community and social welfare activities around its mine units at the direction of Ares. As a result, the Group consolidates this entity. 4 Companies incorporated during 2008. 5 Company incorporated due to the purchase of shares of Compañía de Minas Buenaventura S.A.A. on 31 October 2008. 62 Hochschild Mining plc Annual Report & Accounts 2008 2 Significant accounting policies (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union (EU) and with Companies Acts 1985 and 2006, where relevant. 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 2008 and 2007 are set out below. These accounting policies have been consistently applied, except for the effects of adoption of new and amended accounting standards (refer to note 2(c)). The financial statements have been prepared on a historical cost basis, except for certain classes of property, plant and equipment which were revalued at 1 January 2003 to determine the deemed cost (refer to note 2(f)), available-for-sale financial instruments and financial assets at fair value through profit and loss which have been measured at fair value. The financial statements are presented in US dollars ($) and all monetary amounts are rounded to the nearest thousand ($000) except when otherwise indicated. 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 2009 or later periods but which the Group has not early adopted. Those that are applicable to the Group are as follows: > IFRS 8 ‘Operating Segments’ applicable for annual periods beginning on or after 1 January 2009. IFRS 8 replaces IAS 14 ‘Segment Reporting’ upon its effective date. The Group concluded that the operating segments determined in accordance with IFRS 8 are the same as the geographical segments identified under IAS 14. This conclusion is based on the definition of operating segment included in IFRS 8 which defines an operating segment as the component of an entity: (a) that engages in business activities from which it may earn revenues and incur expenses; (b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (c) for which discrete financial information is available. > IAS 23 Amendment, ‘Borrowing Costs’, applicable for annual periods beginning on or after 1 January 2009. The amendment requires that borrowing costs relating to the acquisition, construction or production of a qualifying asset be capitalised as part of the cost of the asset. All other borrowing costs should be expensed as incurred. > IFRS 3 ‘Business Combinations (revised January 2008)’, applicable for annual periods beginning on or after 1 July 2009. IFRS 3 introduces a number of changes in the accounting for business combinations occurring after this date that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. > IFRS 2 ‘Amendment to IFRS 2 – Vesting Conditions and Cancellations’, applicable for annual periods beginning on or after 1 January 2009. The amendment clarifies the definition of a vesting condition and prescribes the treatment for an award that is cancelled. > IAS 27 ‘Consolidated and Separate Financial Statements (revised January 2008)’, applicable for annual periods beginning on or after 1 July 2009. IAS 27 requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by partially-owned subsidiaries as well as the loss of control of a subsidiary. > IAS 1 ‘Presentation of Financial Statements’, applicable for annual periods beginning on or after 1 January 2009. The standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income which it presents all items of recognised income and expense, either in one single statement, or in two linked statements. > IAS 32 and IAS 1 Amendment ‘Puttable Financial Instruments and Obligations Arising on Liquidation’, applicable for annual periods beginning on or after 1 January 2009. The amendments to IAS 32 address the classification of puttable financial instruments and obligations arising only on liquidation, with the object of providing a ‘short-term, limited scope amendment’ designed to avoid outcomes arising under the general principles of IAS 32 that were counter-intuitive. 63 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 2 Significant accounting policies continued > IFRS 1 and IAS 27 Amendment ‘Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate’, applicable for annual periods beginning on or after 1 January 2009. The amendments deal with the measurement of the cost of investments in subsidiaries, jointly controlled entities and associates when adopting IFRSs for the first time, and they address concerns that the previous requirement to retrospectively determine cost and to apply the cost method in accordance with IAS 27 could not, in some circumstances, be achieved without undue cost or effort for first-time adopters. The amendments have removed from IAS 27 the requirement to distinguish between pre- and post-acquisition dividends. IAS 27 has also been amended to deal with circumstances where a parent reorganises the structure of its group by establishing a new entity as its parent. Under the new rules, the new parent measures the cost of its investment in the previous parent at the carrying amount of its share of the equity items show in the separate financial statements of the original parent at the date of the reorganisation. > 2008 Annual Improvements to IFRS, applicable for annual periods beginning on or after 1 January 2009. In May 2008, the International Accounting Standards Board (IASB) issued its first omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. This is the first Standard published under the IASB’s annual improvements process which is intended to deal with non-urgent, minor amendments to Standards. The Standard includes 35 amendments, and is split into two parts: • Part I – amendments that result in accounting changes for presentation, recognition or measurement purposes, that includes changes in: – IFRS: 5, 7 – IAS: 1, 7, 16 , 19, 20, 23, 27, 28, 29, 31, 32, 36, 38, 39, 40, 41 • Part II – amendments that are terminology or editorial changes only, which the Board expects to have no or minimal effect on accounting, that includes: – IFRS: 7 – IAS: 8, 10, 18, 20, 29, 34, 40, 41 > IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’, applicable for annual periods beginning on or after 1 October 2008. IFRIC 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risk that qualify for hedge accounting in the hedge of a net investment, where within the Group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on the disposal of the net investment. > IFRIC 17 ‘Distributions of Non-cash Assets to Owners’, applicable for annual periods beginning on or after 1 July 2009. It clarifies that a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity. It also clarifies that an entity should measure the dividend payable at the fair value of the net assets to be distributed and that an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss. > IAS 39 ‘Financial Instruments: Recognition and Measurement – Eligible Hedged Items’, applicable for annual periods beginning on or after 1 July 2009. The amendment addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. It clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The Directors do not anticipate that the adoption of the above standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application. Other standards and interpretations not included above are not expected to have impact on the financial statements. IAS 23 has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional provisions in the Standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs which will result in future economic benefits will be capitalised on qualifying assets from 1 January 2009. No changes will be made for borrowing costs incurred prior to this date that have been expensed. In accordance with our current accounting policy borrowing costs are not capitalised and are expensed. 64 Hochschild Mining plc Annual Report & Accounts 2008 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 managements’ 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 financial statements include: > > > > > > > > > Determination of functional currencies – note 2(e). Determination of useful lives of assets for depreciation and amortisation purposes – note 2(f). Determination of ore reserves and resources – note 2(g). Review of asset carrying values and impairment charges – notes 2(h), (k), (u) and note 15. Estimation of the amount and timing of mine closure costs – notes 2(o) and 25. Income tax – notes 27(s), 13 and 28. Contingent liabilities regarding claims from tax authorities – note 33. Estimation of the executive long-term incentive plan – note 25. Judgement in deciding if a company is a subsidiary of the Group – note 2(d). (c) Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: Adoption of new and amended standards The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the financial performance or position of the Group. > > IFRIC 11, IFRS 2 ‘Group and Treasury Shares Transactions’, applicable for annual periods beginning on or after 1 March 2007. IFRIC 14, IAS 19, ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction’, applicable for annual periods beginning on or after 1 January 2008. Amendment to IAS 39 and IFRS 7 ‘Reclassification of Financial Assets’. > (d) Basis of consolidation The consolidated financial statements set out the Group’s financial position and the Group’s operations and cash flow as at 31 December 2008 and 31 December 2007 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. However, minority shareholders’ rights to safeguard their interest are fully considered in assessing whether the Group controls a subsidiary. 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 Minas Santa María de Moris 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 within equity. 65 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 2 Significant accounting policies continued (e) 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 this currency 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 statements 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. The source of uncertainty is related to the change of exchange rates in the future. This change could affect the Group’s results. (f) 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 directly attributable costs of acquisition or construction required to bring the asset to the condition necessary for the asset to be capable of operating in the manner intended by management. 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 at 1 January 2003 at the time of the 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 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 and 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: Years Buildings Plant and equipment Furniture, fixtures and fittings Vehicles 3 to 33 5 10 5 Borrowing costs are not capitalised and are expensed. 66 Hochschild Mining plc Annual Report & Accounts 2008 2 Significant accounting policies continued 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 commercial 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. (g) 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. It is the Group’s policy to get the report audited by a Competent Person. 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. (h) Investment in associates The Group’s investment in an associate is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence. Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is not amortised or separately tested for impairment. The income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The share of profit of associates is shown on the face of the income statement. This is the profit attributable to equity holders of the associate and therefore is profit after tax and minority interests in the subsidiaries of the associate. The financial statements of the associate are prepared for the same reporting period as the parent company. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associates. The Group determines at each balance sheet date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the income statement. (i) Interest in a joint venture The Group has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. The Group recognises its interest in the joint venture using the equity method of accounting and presents its aggregate share of the profit or loss of joint ventures on the face of its income statement. The investment is presented as non-current assets on the face of the balance sheet. The financial statements of the joint venture are prepared for the same reporting period as the parent company. Adjustments are made where necessary to bring the accounting policies in line with those of the Group. 67 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 2 Significant accounting policies continued (j) Intangible assets 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 impairment testing purposes. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Other intangible assets Other intangible assets are primarily computer software which are capitalised at cost and are amortised on a straight-line basis over their useful life of three years. (k) 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. The assessment require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, exploration potential and operating performance. Changes in these assumptions will affect the recoverable amount of the property, plant and equipment. 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. (l) Inventories Inventories are valued at the lower of cost or net realisable value. Cost is determined using the weighted average method. The cost of work in progress and finished goods (ore inventories) is based on the 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; 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. (m) 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. (n) Share capital Ordinary Shares are classified as equity. Excess to par value of shares received upon issuance of shares is classified as share premium. 68 Hochschild Mining plc Annual Report & Accounts 2008 2 Significant accounting policies continued (o) 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. Significant estimates and assumptions are made in determining the provision for mine closure costs as there are numerous factors that will affect the ultimate liability payable. These factors include estimates of the extent and costs of rehabilitation activities, technological changes, regulatory changes, cost increases, and changes in discount rates. Those uncertainties may result in future actual expenditure differing from the amounts currently provided. The provision at balance date represents management’s best estimate of the present value of the future rehabilitation costs required. Changes to estimated future costs are recognised in the balance sheet by adjusting the rehabilitation asset and liability. If, for mature mines, the revised mine assets net of rehabilitation provisions exceeds the carrying value, that portion of the increase is charged directly to expense. For closed sites, changes to estimated costs are recognised immediately in the income statement. Workers’ profit sharing and other employee benefits In accordance with Peruvian Legislation, companies in Peru must provide for workers’ profit sharing equivalent to 8% of taxable income of each year. Mexican Law also requires Mexican companies to provide for workers’ profit sharing equivalent to 10% of the profit of each year. This amount is charged to the income statement within personnel expenses (refer to note 10) and is considered deductible for income tax purposes. The Group has no pension or retirement benefit schemes. Share based payments The fair value of cash-settled share plans is recognised as a liability over the vesting period of the awards. Movements in that liability between accounting dates are recognised as an expense. The fair value of the awards is taken to be the market value of the shares at the date of award adjusted by a factor for anticipated relative Total Shareholder Return (‘TSR’) performance. Fair values are subsequently remeasured at each accounting date to reflect the number of awards expected to vest based on the current and anticipated TSR performance. Uncertainties in estimating the award include potential changes in the TSR, the number of participants in the plan, and levels of interest rates. 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. (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 are disclosed in the notes if their recovery is deemed probable. (q) Revenue recognition The Group is involved in the production and sale of gold and silver from 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 gold and silver from 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 customer. Revenue excludes any applicable sales taxes. 69 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 2 Significant accounting policies continued 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. In addition, certain sales are ‘provisionally priced’ where the selling price is subject to final adjustment at the end of a period, normally ranging from 15 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 29) is recognised in income when services are provided. (r) Finance income and costs Finance income and expenses comprise interest expense on borrowings, the accumulation of interest on provisions, interest income on funds invested, 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. (s) 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, with the following exceptions: > Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. > 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. Judgement is required in determining whether deferred tax assets are recognised on the balance sheet. Deferred tax assets, including those arising from unutilised tax losses require management to assess the likelihood that the Group will generate taxable earnings in future periods, in order to utilise recognised deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Group to realise the net deferred tax assets recorded at the balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods. (t) Leases Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction of the lease liability so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement. The depreciation policy for leased assets is consistent with that for similar assets owned. A lease is classified as an operating lease if it does not transfer substantially all of the risks and rewards incidental to ownership. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. 70 Hochschild Mining plc Annual Report & Accounts 2008 2 Significant accounting policies continued (u) Financial instruments Financial assets and liabilities are recognised when the Group becomes party to the contracts that give rise to them and are classified as loans or borrowings, receivables, payables, financial instruments fair valued through profit and loss or as available-for- sale financial assets, as appropriate. The Group determines the classification of its financial assets and liabilities at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end. When financial assets and liabilities are recognised initially, they are measured at fair value, being the transaction price plus, in the case of financial assets not at fair value through profit or loss and borrowings, directly attributable transaction costs. The Group considers whether a contract contains an embedded derivative when the entity first becomes a party to it. The embedded derivatives are separated from the host contract if it is not measured at fair value through profit or loss and when the economic characteristics and risks are not closely related to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. All regular way purchases and sales of financial assets are recognised on the trade date, being the date that the Group commits to purchase or sell the asset. Regular way transactions require delivery and receipt of assets within the timeframe generally established by regulation or convention in the marketplace. The subsequent measurement of financial assets depends on their classification, as follows: Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit and loss. The Group considers whether a contract contains an embedded derivative when the entity first becomes a party to it. Embedded derivatives are separated from the host contract which is not measured at fair value through profit or loss when the analysis shows that the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on financial assets held for trading are recognised in the income statement. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss 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 the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as such or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit and loss. After initial recognition, available-for-sale financial assets are measured at fair value with unrealised gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. Loans and borrowings Borrowings are recognised initially at fair value. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. 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. Fair values The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. These include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis and pricing models. 71 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 2 Significant accounting policies continued Impairment of financial assets The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on assets carried at amortised cost 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 (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced, through the use of an allowance 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 income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as irrecoverable. Assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, 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 discounted at the current market rate of return for a similar financial asset. Available-for-sale financial assets If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its fair value is transferred from equity to the income statement. Reversals of impairment losses on debt instruments are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. Reversals in respect of equity instruments classified as available- for-sale are not recognised in the income statement. Derecognition of financial instruments A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: > > the rights to receive cash flows from the asset have expired; or the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either: (a) the Group has transferred substantially all the risks and rewards of the asset; or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. A financial liability is generally derecognised when the contract that gives rise to it is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss. (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. 72 Hochschild Mining plc Annual Report & Accounts 2008 2 Significant accounting policies continued (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: > Impairments of assets, including goodwill, assets held for sale, and property, plant and equipment. > Gains or losses arising on the disposal of subsidiaries, investments or property, plant and equipment. > Fair value gains or losses arising on financial instruments not held in the normal course of trading. > Any gain or loss resulting from any restructuring within the Group. > The related tax impacts of these items. (y) Comparatives Where applicable, certain comparatives have been reclassified to present them in a comparable manner to the current period’s figures. 3 Segment reporting The Group’s activities are principally related to mining operations which involve the 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 Canada. Therefore, the geographical segment is the Group’s secondary reporting format. Transfer prices between geographical segments are set on an arm’s length basis in a manner similar to that used for third parties. Segment revenue, segment expense and segment results include transfers between business segments. Those transfers are eliminated in consolidation. (a) Revenue Revenue for the year is allocated based on the country in which the customer is located. External customer USA Peru Mexico Belgium Canada Germany Switzerland United Kingdom Chile Total Inter-segment Peru Mexico Total The allocation of revenue based on the country in which the asset is located is as follows: External customer Peru Argentina Mexico Total Inter-segment Peru Mexico Argentina Total Year ended 31 December 2008 US$000 2007 US$000 130,631 125,171 15 6,011 50,465 54,570 66,883 – – 33 158,092 48,147 47,919 22,415 9,606 9,370 8,202 1,270 433,779 305,021 25,164 – 4,455 – 463,398 305,021 Year ended 31 December 2008 US$000 2007 US$000 319,516 88,891 25,372 303,377 1,270 374 433,779 305,021 2,359 – 4,455 – 22,805 – 463,398 305,021 73 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 3 Segment reporting continued (b) Profit/(loss) for the year from continuing operations Profit/(loss) for the year is based on country of operation as follows: Year ended 31 December 2008 | Year ended 31 December 2007 Peru Cayman Islands Argentina Mexico Chile USA United Kingdom Total Before exceptional items US$000 Exceptional items US$000 71,070 – (13,925) (8,249) (5,593) (10) (11,613) (14,111) – (29) (20,776) – (7) (10,271) Total US$000 56,959 – (13,954) (29,025) (5,593) (17) (21,884) Before exceptional items US$000 Exceptional items US$000 94,415 68 (5,689) (11,403) (2,718) (1,212) 3,919 2,454 393 – – – 8 680 3,535 Total US$000 96,869 461 (5,689) (11,403) (2,718) (1,204) 4,599 80,915 31,680 (45,194) (13,514) 77,380 (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 Income tax receivable Total assets (d) Capital expenditure1 Capital expenditure is allocated based on where the assets are located: Peru Argentina Mexico Chile USA United Kingdom Total As at 31 December 2008 US$000 2007 US$000 349,502 234,667 – 6 274,508 66,203 634 78 287,506 978,431 20,795 15,272 194,176 37,915 972 234 329,263 797,233 22,400 1,619 1,014,498 821,252 Year ended 31 December 2008 US$000 2007 US$000 164,773 80,422 65,646 – – 430 68,226 62,929 13,386 43 49 105 311,271 144,738 1 In 2007 the amounts shown above exclude increases in the mine rehabilitation asset amounting to US$1,056,000. In 2008 there is no amount of increases in the mine rehabilitation included within capital expenditures (refer to note 15). 74 Hochschild Mining plc Annual Report & Accounts 2008 3 Segment reporting continued (e) Total segment liabilities Total segment liabilities, which exclude income tax liabilities, are allocated based on where the liabilities are located: Peru Argentina Mexico Chile USA United Kingdom Total segment liabilities Deferred income tax liabilities Income tax payable Total liabilities (f) Depreciation1 Depreciation is allocated based on where the assets are located: Peru Argentina Mexico Chile USA United Kingdom Total As at 31 December 2008 US$000 2007 US$000 115,066 127,600 5,574 1,336 36 205,032 454,644 15,839 997 80,284 97,853 4,192 267 304 2,363 185,263 9,091 10,850 471,480 205,204 Year ended 31 December 2008 US$000 2007 US$000 24,484 12,483 5,251 25 11 89 19,170 4,818 1,940 19 29 24 42,343 26,000 1 Includes US$111,000 of depreciation capitalised in Minera Hochschild Mexico S.A. de C.V. due to the San Felipe project (2007: US$861,000 of depreciation charged on equipment used to construct the Moris and San José mines capitalised as property, plant and equipment). (g) Non-cash expenses Non-cash expenses for the year based on country of operation were as follows: Peru Mexico United Kingdom Total Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items US$000 2,384 32 57 21,806 21,830 12,572 Total US$000 24,190 21,862 12,629 2,473 56,208 58,681 Before exceptional items US$000 Exceptional items US$000 – – – – 1,501 – 71 1,572 Total US$000 1,501 – 71 1,572 75 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 4 Acquisitions (a) Acquisition of jointly controlled assets Liam On 20 August 2008, the Group signed an assignment agreement with Newmont Peru Limited (‘Newmont’) by which Newmont assigned all of its rights to acquire, explore and exploit, under its Venture Agreement with Southwestern Resources Corp. (‘Southwestern’) the Liam properties located in Peru, and transferred its 50% interest in the joint venture with Southwestern, to the Group for a consideration of US$33,333,333. Under the terms of the agreement, the Group and Southwestern will each contribute 50% of the exploration funding. In addition, when the technical committee determines that any of the properties or group of properties constitutes a viable project, a new company will be incorporated and the Group may elect to increase its interest up to 70% in the new company by producing a feasibility study and financing 100% of the costs to initiate commercial production. A total of 38 exploration prospects have been identified and evaluated in the project area with the Crespo project being the most important property which is in the inferred mineral resource category. The investment of US$33,333,333 was made mainly to acquire the Crespo resources and immediately commence an exploration programme to transform these inferred resources into reserves. The consideration has been allocated to the mining rights and the subsequent investment of US$197,000 during 2008 has been capitalised within exploration and evaluation costs. (b) Acquisition of assets San Felipe On 15 May 2006 the Group signed a joint venture agreement which gave the Group the right to earn a 70% interest in the San Felipe project once investment thresholds in exploration and mine development of US$33,300,000 were met. On 4 June 2008 the Group acquired 100% ownership of the San Felipe project in Mexico for a total consideration of US$51,500,000 payable to its former local partner, Grupo Serrana S.A. de C.V. With the acquisition of the San Felipe project, the original joint venture agreement was terminated. As at the acquisition date, the Group had invested approximately US$8,800,000 in the property which has been expensed to the income statement in accordance with the Group’s accounting policy (see also note 15). Further on 4 June 2008, the Group acquired a group of assets related to the project for a total consideration of US$1,000,000 payable to Grupo Serrana S.A. de C.V. (c) Acquisition of associates Lake Shore Gold Corp. During 2008, the Group acquired a 39.99% interest in Lake Shore Gold Corp. (‘Lake Shore’), a gold mining company listed on the Toronto Stock Exchange for a total consideration of US$163,997,000. The acquisition was made in the following tranches: > > > 19.99% acquired through a share issue on 19 February 2008 for US$64,806,000. 15.00% acquired through a share issue on 13 June 2008 for US$78,029,000. 5.00% acquired from a third party on 23 June 2008 for US$21,162,000. The interest in Lake Shore gives the Group the right to exercise significant influence over that company. In compliance with the Group’s policy and IAS 28, the investment has been treated as an associate and accounted for using the equity method. Management has assessed the fair value of the Group’s interest in the assets and liabilities acquired as being US$151,698,000, resulting in goodwill of US$12,513,000 on acquisition. The fair value includes transaction costs incurred by the Group of US$214,000. 5 Revenue Gold (from doré bars) Silver (from doré bars) Concentrate Services Total 76 Hochschild Mining plc Annual Report & Accounts 2008 Year ended 31 December 2008 US$000 2007 US$000 124,772 98,738 210,145 124 105,975 64,713 134,212 121 433,779 305,021 5 Revenue continued The concentrate sold contained: Gold Silver Other minerals Total concentrate Year ended 31 December 2008 US$000 2007 US$000 44,451 165,339 355 19,275 114,127 810 210,145 134,212 Included within revenue is a loss of US$14,561,723 provisional pricing adjustments representing the change in the fair value of embedded derivatives (2007: US$6,303,000) arising on sales of concentrates and doré bars (refer to notes 2(q) and 21(3)). The total volumes of gold and silver sold are as follows: Total in thousands of ounces: Gold Silver 6 Cost of sales Included in cost of sales are: Year ended 31 December 2008 2007 198 20,593 198 13,670 Depreciation Amortisation of software licences Personnel expenses1 Mining royalty Change in products in process and finished goods Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items US$000 41,373 – 47,286 5,935 9,310 – – 234 – Before exceptional items US$000 Exceptional items US$000 24,679 6 20,565 4,218 (23,591) – – – – – Total US$000 41,373 – 47,520 5,935 9,310 Total US$000 24,679 6 20,565 4,218 (23,591) 1 The exceptional item corresponds to termination benefits paid to the employees due to the restructuring process of the Group made at the end of 2008. 7 Administrative expenses Personnel expenses1 Professional fees Social and community welfare expenses2 Lease rentals Travel expenses Communications Indirect taxes Depreciation Amortisation of software licences Contribution to Peruvian Government Technology and systems Security Supplies Other Total Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items US$000 35,504 10,012 4,635 1,447 2,696 732 3,159 859 266 944 1,204 587 466 6,240 68,751 1,127 – – – – – – – – – – – – – 1,127 Total US$000 36,631 10,012 4,635 1,447 2,696 732 3,159 859 266 944 1,204 587 466 6,240 69,878 Before exceptional items US$000 Exceptional items US$000 33,262 15,159 4,317 1,969 2,823 356 1,606 460 65 940 1,744 320 332 5,464 68,817 – – – – – – – – – – – – – – – Total US$000 33,262 15,159 4,317 1,969 2,823 356 1,606 460 65 940 1,744 320 332 5,464 68,817 1 The exceptional item corresponds to termination benefits paid to the employees due to the restructuring process of the Group made at the end of 2008. 2 Represents amounts expended by the Group on social and community welfare activities surrounding its mining units. 77 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information 8 Exploration expenses Mine site exploration1 Arcata Ares Selene Pallancata San José Moris Prospects2 Peru Argentina Mexico Chile Generative3 Peru Argentina Mexico Chile USA South Africa Mining rights Personnel4 Other Total Notes to the consolidated financial statements continued For the year ended 31 December 2008 Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 1,333 869 859 151 547 527 4,286 286 193 2,676 2,450 5,605 501 126 902 1,708 – – 3,237 398 6,498 3,817 23,841 – – – – – – – – – – – – – – – – – – – – 69 – 69 Total US$000 1,333 869 859 151 547 527 4,286 286 193 2,676 2,450 5,605 501 126 902 1,708 – – 3,237 398 6,567 3,817 930 1,657 987 – 264 112 3,950 1,805 599 – 312 2,716 959 3,149 6,491 346 110 104 11,159 641 5,434 2,990 23,910 26,890 Total US$000 930 1,657 987 – 264 112 3,950 1,805 599 – 312 2,716 959 3,149 6,491 346 110 104 11,159 641 5,434 2,990 26,890 – – – – – – – – – – – – – – – – – – – – – – – 1 Mine site exploration is performed with the purpose of identifying potential minerals within an existing mine site, with the goal of maintaining or extending the mine’s life. Once an inferred resource has been identified, costs incurred converting it to indicated and measured resources are capitalised. 2 Prospects expenditure relates to detailed geological evaluations in order to determine zones which have mineralisation potential that is economically viable for exploration. Exploration expenses are generally incurred in the following areas: detail mapping, detail sampling, geophysics, identification of local targets and reconnaissance drilling. 3 Generative expenditure is very early stage exploration expenditure related to the basic evaluation of the region to identify prospects areas that have the geological conditions necessary to contain mineral deposits. Related activities include regional and field reconnaissance, satellite images, compilation of public information and identification of exploration targets. 4 The exceptional item corresponds to termination benefits paid to the employees due to the restructuring process of the Group made at the end of 2008. The following table lists the liabilities (generally payables) outstanding at the year end, which relate to the 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 the exploration activities of these companies from their operating liabilities. Liabilities related to exploration activities Cash flows of exploration activities are as follows: Payments 78 Hochschild Mining plc Annual Report & Accounts 2008 Year ended 31 December 2008 US$000 2007 US$000 1,247 709 Year ended 31 December 2008 US$000 2007 US$000 8,304 13,486 9 Selling expenses Transportation of doré, concentrates and maritime freight Sales commissions Personnel expenses Warehouse services Other Total 10 Personnel expenses Salaries and wages1 Workers’ profit sharing2 Other legal contributions Termination benefits3 Statutory holiday payments Executive Long-Term Incentive Plan (note 25(2)) Other Total Personnel expenses are distributed as follows: Total Cost of sales (note 6) Administrative expenses (note 7) Exploration expenses (note 8) Selling expenses (note 9) Property, plant and equipment Total Year ended 31 December 2008 US$000 4,636 1,144 97 4,022 1,358 11,257 2007 US$000 1,559 651 82 191 297 2,780 Year ended 31 December 2008 US$000 2007 US$000 65,984 4,273 12,873 4,096 3,683 302 3,260 35,815 11,621 6,566 2,538 1,960 799 2,033 94,471 61,332 Year ended 31 December 2008 2007 US$000 US$000 47,520 36,631 6,567 97 3,656 20,565 33,262 5,434 82 1,989 94,471 61,332 1 2 Included in salaries and wages is the Directors’ remuneration (refer to note 29(b)) and defined pension contributions of US$524,869 (2007: US$662,000). In accordance with Peruvian Legislation, companies in Peru must provide for workers’ profit sharing equivalent to 8% of taxable income of each year. Mexican Law also requires Mexican companies to provide for workers’ profit sharing equivalent to 10% of the profit of each year. 3 The amount includes US$1,430,000 termination benefits paid to the employees due to the restructuring process of the Group made at the end of 2008. Average number of employees for 2008 and 2007 were as follows: Peru1 Argentina Mexico Chile USA United Kingdom Total Year ended 31 December 2008 2007 2,084 699 217 21 – 4 12 1,020 512 94 16 11 3,033 1,657 1 The increase in number of employees is due to the inclusion of contractors in the payroll of the Group. The amount of contractors hired by the Group during the year was 1,304 employees. 79 Hochschild Mining plc Annual Report & Accounts 2008 Notes to the consolidated financial statements continued For the year ended 31 December 2008 Overview Business review Governance Financial statements Further information 11 Other income and other expenses Other income: Decrease in provision for mine closure1 Export incentive (refer to note 19(2)) Gain on recovery of expenses Gain on sale of property, plant and equipment Lease rentals Reversal of impairment of supplies Recognition of assets on restructuring2 Other Total Other expenses: Increase in provision for mine closure1 Impairment of deposits in Kaupthing, Singer and Friedlander Bank3 Electroperu contingency4 Loss on sale of Sipán (subsidiary)5 Cost of maintenance of equipment Penalty on cancellation of contract Provision for obsolescence of supplies Loss on sale of property, plant and equipment Other Total Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items US$000 – 2,622 225 – 217 – – 1,961 5,025 – – – 252 – – – – 252 Before exceptional items US$000 Exceptional items US$000 2,647 – 519 – 235 355 – 1,939 5,695 450 – – – – – 482 – 932 Total US$000 – 2,622 225 252 217 – – 1,961 5,277 Total US$000 3,097 – 519 – 235 355 482 1,939 6,627 (3,216) – (3,216) – – – – – – (1,165) – (634) – (3,231) (1,292) (692) – – – – – – – (1,292) (692) (1,165) – (634) – (3,231) – – – (713) (13) – – (1,301) – – (1,034) – – – (467) – – – (1,034) (713) (13) – (467) (1,301) (8,246) (1,984) (10,230) (2,027) (1,501) (3,528) 1 Decreases in the provision for mine closure costs are recorded in ‘Other income’ where the mine to which it relates has fully depreciated the mine rehabilitation asset 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. Out of the 2007 amount, US$450,000 represents a reduction in cost (being the VAT component now deemed to be recoverable) due to the transfer of the mine rehabilitation provision from Minera Sipan to Minera Ares as part of the internal restructuring prior to the disposal of Minera Sipan. Increases in the provision for mine closure costs are recorded in ‘Other expenses’ when there is an addition to the estimate of the total mine closure cost. 2 Represents VAT assets that will now be recoverable due to the transfer of assets from Minera Sipan to Minera Ares as a result of the internal restructuring. 3 This amount represents the impairment of cash deposits with Kaupthing, Singer and Friedlander Bank which went into administration in October 2008. 4 Compañía Minera Ares has a dispute with Electroperú S.A. regarding the electric power it used during November and December 2002 which was simultaneously billed by Electroperú 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 Electroperú and SEAL should each have half the billing. Electroperú has filed an administrative court action against the resolution issued by Osinerg and initiated an arbitration process seeking to additionally collect S/.832,135 (US$264,842) plus interest. Management, having consulted legal counsel, considers that there is a reasonable possibility that the outcome of these proceedings will not be favourable for Compañía Minera Ares, and accordingly has provided in full for the claim. 5 On 28 December 2007, the Group’s wholly owned subsidiary, Compañía Minera Sipan was sold to Avignon Business Corporation (a third party) for US$199,996. This disposal resulted in a loss to the Group of US$1,034,000. The book value of the individual assets and liabilities disposed of are as follows: Income tax receivable Other assets Net book value of assets disposed Year 2007 US$000 1,205 29 1,234 80 Hochschild Mining plc Annual Report & Accounts 2008 12 Finance income and finance costs Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 5,934 2,605 1,613 2,623 – 47 474 17,169 – – 2,324 – 118 172 Finance income: Interest on time deposits1 Gain from changes in the fair value of financial instruments2 Gain on sale of available-for-sale financial assets3 Interest on loans to minority shareholders (note 19) Discount on purchase of EXMIN shares4 Interest on loans to third parties Other Total 5,934 304 – 2,623 – 47 474 9,382 – 2,301 1,613 – – – – Finance costs: Interest on bank loans and long-term debt Unwind of discount rate5 Loss from changes in the fair value of financial instruments6 Impairment of available-for-sale financial assets7 Premium paid on purchase of available-for-sale financial assets8 Other (13,387) (4,590) – – – (856) – – (6,246) (11,421) (421) – (13,387) (4,590) (6,246) (11,421) (421) (856) (5,966) (1,227) – – – (324) Total (18,833) (18,088) (36,921) (7,517) 3,914 13,296 19,783 Total US$000 17,169 4,331 – 2,324 1,143 118 172 25,257 (5,966) (1,227) – (71) – (324) (7,588) – 4,331 – – 1,143 – – 5,474 – – – (71) – – (71) 1 Mainly corresponds to interest on liquidity funds (refer to note 22). 2 In 2008 the amount corresponds to the change in the fair value of the option over 4,330,000 shares of Gold Resource Corp. and a gain of US$304,000 due to changes in the fair value of derivative instruments according to the contracts signed in December 2008 with Citibank and INTL Commodities Inc. with the intention of removing the risk of fluctuations in metal prices (refer to note 21(4)). In 2007 this amount related mainly to the change in fair value of 2,475,355 warrants over the same number of shares in Fortuna Silver Mines Inc. (refer to note 21(1)). 3 Corresponds to the sale of 1,660,150 shares in Fortuna Silver Mines Inc. at a price of CAD$2 per share for a total consideration of CAD$3,320,300 (US$3,321,450) resulting in a realised gain of US$1,613,000 which has been recycled from equity into the income statement. 4 On 9 July 2007 the Group acquired 7,875,000 common shares of EXMIN Resources Inc. (‘EXMIN’) for US$3,000,000. In addition, on the same date, the Group converted an outstanding loan receivable from EXMIN of US$1,570,000 into 4,127,231 common shares. The common shares were acquired at a discount of 20% to the market price, resulting in a gain on the issue of shares. 5 Corresponds to the unwind of the discount on the provision for mine closure of US$669,000 (2007: US$1,134,000) (refer to note 25) and the unwind of discount on VAT of Minera Santa Cruz of US$3,921,000 (2007: US$93,000). 6 Mainly corresponds to the change in fair value of warrants in Fortuna Silver Mines Inc. of US$6,245,000 (refer to note 21(1)). 7 Corresponds to the impairment of the investment in the shares of EXMIN (US$8,229,000), Mirasol Resources Inc. (US$323,000), Electrum Capital Inc. (US$2,637,000), Fortuna River (US$157,000) and Ventura Gold Corp. (US$75,000). 8 Corresponds to the premium paid on the acquisition of the shares of Iron Creek Capital Corp. and Mariana Resources Ltd. amounting to US$173,000 and US$248,000 respectively. Interest income and expense from assets and liabilities that are not at fair value through the profit and loss are as follows: Interest income from financial assets that are not at fair value through the profit and loss Interest expense from financial liabilities that are not at fair value through the profit and loss Total Year ended 31 December 2008 US$000 2007 US$000 8,604 (13,387) 19,611 (5,966) (4,783) 13,645 81 Hochschild Mining plc Annual Report & Accounts 2008 Notes to the consolidated financial statements continued For the year ended 31 December 2008 Overview Business review Governance Financial statements Further information 13 Income tax expense Current tax: Current tax charge from continuing operations Deferred taxation: Origination and reversal of temporary differences from continuing operations (note 27) Withholding taxes Year ended 31 December 2008 | Year ended 31 December 2007 Before exceptional items US$000 Exceptional items1 US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 Total US$000 13,058 13,058 (56) (56) 13,002 13,002 44,933 44,933 – – 44,933 44,933 15,809 (6,792) 15,809 (6,792) 895 – 9,017 9,017 895 (11,641) (11,641) 1,161 1,299 1,299 (10,342) (10,342) – 1,161 Total taxation charge in the income statement 29,762 (6,848) 22,914 34,453 1,299 35,752 1 This amount corresponds to the related tax impact of exceptional items (refer to note 2(x)). The weighted average statutory income tax rate was 40.6% for 2008 and 29.7% for 2007. 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 Group companies in their respective countries as included in the consolidated financial statements. The change 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. The total taxation charge on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to the consolidated profits of the Group companies as follows: Profit from continuing operations before income tax At average statutory income tax rate of 40.6% (2007: 29.7%) Expenses not deductible for tax purposes Non-taxable income Deferred tax recognised on special investment regime1 Recognition of previously unrecognised deferred tax assets2 Non-taxable share of losses of associates Net deferred tax assets generated in the year not recognised3 Change in tax regime4 Change in statutory Income Tax Rate5 Recognition of deferred tax assets on restructuring Foreign exchange rate effect6 Other At average effective income tax rate of 243.8% (2007: 30.6%) Taxation charge attributable to continuing operations Total taxation charge in the income statement Year ended 31 December 2008 US$000 2007 US$000 9,400 116,667 3,818 5,315 (2,055) (6,063) (1,102) 2,534 – 13,871 (1,544) 786 – – 7,731 (377) 34,598 2,381 (505) (4,479) (2,917) 5,214 3,403 (767) (1,611) 435 22,914 35,752 22,914 35,752 22,914 35,752 1 Corresponds to the deferred tax income asset recognised for the additional tax losses generated during the year arising from the double deduction claimed for tax purposes by Minera Santa Cruz during the year (refer to note (i) on page 83). 2 Mainly corresponds to the tax effect of certain mine closure expenses which are now expected to be deductible against taxable income, when incurred. 82 Hochschild Mining plc Annual Report & Accounts 2008 13 Income tax expense continued 3 Deferred tax assets generated in the year not recognised are comprised by: Tax losses not recognised Impairment of available-for-sale financial assets Impairment of the San Felipe project Provision for mine closure Write-off of bank account Change in fair value of derivative instruments Other As at 31 December 2008 US$000 3,851 3,234 4,350 – 1,483 364 341 248 – 2007 US$000 4,672 – 542 – – 13,871 5,214 4 Corresponds to the effect of the change in the Mexican tax regime (refer to note (ii) below). 5 Corresponds to an increase in the statutory corporate income tax rate for the Arcata mining unit from 30% to 32% with effect from 1 January 2009, refer to note 34. 6 Mainly corresponds to the foreign exchange effect from converting tax bases and monetary items from local currency to the functional currency. (i) Special investment regime Minera Santa Cruz benefits from a special investment regime that allows for a double deduction in the calculation of its corporate income tax liability for all costs relating to prospecting, exploration and metallurgical analysis, pilot plants and other expenses incurred prior to the completion of the feasibility studies for mining projects. In this regard, the total investment eligible for additional deduction amounts to approximately 95,061,000 Argentinian pesos (US$27,853,000) as at 31 December 2008 (2007: 79,680,000 Argentinian pesos (US$25,596,000)). As this additional deduction does not affect either taxable profit or accounting profit on initial recognition, no deferred tax was recognised in accordance with IAS 12 ‘Income Taxes’. However under the Argentina tax regime, following commencement of operations in 2007, this amount could be claimed in equal amounts over 1 to 5 years. At 31 December 2007, the Group decided to make this claim over 2 years, resulting in 50% of the available deduction being included in the tax losses for the year 2007. In 2008 the Group included in the tax losses of the year 54,797,000 Argentinian pesos (US$17,324,000). This amount includes the remaining 50% of eligible costs calculated as at 31 December 2007 of 79,680,000 Argentinian pesos plus 15,381,000 Argentinian pesos of additional eligible costs. The balance of the eligible costs of 1,582,000 Argentinean pesos (US$464,000) will be claimed in 2009. (ii) Change in Mexican tax regime On 28 September 2007, the Mexican Government enacted a bill for tax reform that significantly changed the current income tax structure in Mexico. Effective from 1 January 2008, the tax reform requires companies to pay tax equal to the greater of the tax charge calculated under the new flat rate business tax (‘IETU’ as abbreviated in Spanish) or the tax charge calculated under the current income corporate tax regime (‘ISR’ as abbreviated in Spanish). The Group has performed an analysis of the future impact of this tax reform on its Mexican companies and has determined that Santa Maria de Moris S.A. de C.V. (the operator of the Moris mine) will be required to pay IETU in each period until the end of the mine’s life. Therefore, as at 31 December 2007 the Group recognised a deferred tax liability in connection with IETU of US$3,403,000 due to the resulting reduction in the amount of capital allowances arising on the investment in the mine to date. As at 31 December 2008 the IETU deferred tax liability had decreased by US$1,554,000 to U$1,859,000. 14 Basic and diluted earnings per share Earnings per share (‘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 at 31 December 2008 and 2007, EPS has been calculated as follows: Year ended 31 December 2008 2007 (Loss)/profit for the year and from continuing operations attributable to equity holders of the Company US$000 Weighted average number of ordinary shares in issue (thousands) Basic and diluted earning/(loss) per share from: Before exceptional items US$ Exceptional items US$ Total for the year and from continuing operations US$ (19,003) 307,350 85,073 307,350 0.08 (0.14) (0.06) 0.27 0.01 0.28 83 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information 15 Property, plant and equipment Year ended 31 December 2007 Cost At 1 January 2007 Additions Change in discount rate Disposals Sale of subsidiary – Colorada Change in mine closure estimate Transfers and other movements Foreign exchange Notes to the consolidated financial statements continued For the year ended 31 December 2008 Exploration and Mining properties and evaluation development costs US$000 costs US$000 Land and buildings US$000 Plant and equipment1 US$000 Vehicles US$000 Construction in progress and capital advances US$000 Mine closure asset US$000 Total US$000 1,282 8,279 – – – – (3,535) 8 106,011 48,004 – – – – 3,535 161 23,706 1,004 – (110) – – 40,717 118 53,456 9,450 – (2,221) (2) – 45,114 149 1,528 400 – (104) – – 976 24 34,516 1,056 2,611 – – 105 – – 23,851 77,601 – (6) – – (86,807) (618) 244,350 145,794 2,611 (2,441) (2) 105 – (158) At 31 December 2007 6,034 157,711 65,435 105,946 2,824 38,288 14,021 390,259 Accumulated depreciation At 1 January 2007 Depreciation for the year Disposals Sale of subsidiary – Colorada Foreign exchange At 31 December 2007 Net book amount at 31 December 2007 Year ended 31 December 2008 Cost At 1 January 2008 Additions Change in discount rate Disposals Write-off Change in mine closure estimate Transfers and other movements Sales during preoperating stage in Minera Santa Cruz Foreign exchange – – – – – – 37,360 12,665 – – 2 9,417 3,548 (110) – 3 24,554 8,767 (1,615) (2) 45 50,027 12,858 31,749 528 421 (82) – (7) 860 31,104 599 – – – 31,703 – – – – – – 102,963 26,000 (1,807) (2) 43 127,197 6,034 107,684 52,577 74,197 1,964 6,585 14,021 263,062 6,034 68,311 – – – – (2,960) 157,711 79,496 – – – – 768 65,435 4,253 – – – – 30,748 105,946 9,375 – (120) (24) – 68,535 – (10,905) (125) (32) – (43) – (467) 2,824 77 – (158) – – 746 – (69) 38,288 – 3,113 – – 280 – 14,021 149,759 – – – – (97,837) 390,259 311,271 3,113 (278) (24) 280 – – – – (10) (125) (11,526) At 31 December 2008 60,480 237,818 100,393 183,245 3,420 41,681 65,933 692,970 Accumulated depreciation and impairment At 1 January 2008 Depreciation for the year Impairment2 Disposals Write-off Sales during preoperating stage in Minera Santa Cruz Foreign exchange – – 15,754 – – 50,027 19,732 10,076 – – – – (12) – 12,858 7,697 754 – – – 2 31,749 13,729 6,286 (54) (4) – (78) 860 455 105 (84) – – (30) 31,703 730 943 – – – – – – 788 – – – – 127,197 42,343 34,706 (138) (4) (12) (106) At 31 December 2008 15,754 79,823 21,311 51,628 1,306 33,376 788 203,986 Net book amount at 31 December 2008 44,726 157,995 79,082 131,617 2,114 8,305 65,145 488,984 1 The carrying value of plant and equipment held under finance leases at 31 December 2008 was US$7,482,000. Additions during the year include US$7,872,000 of plant and equipment under finance leases. Leased assets are pledged as security for the related finance lease. 2 The amount of impairment losses recognised in profit and loss during the period was US$34,706,000. As a result of the impairment testing, the Group has impaired the Selene mine by US$ 13,651,000, the Moris mine by US$5,652,000 and the San Felipe project by US$15,403,000. The triggers for the impairment test were primarily the effect of the current economic environment and significantly reduced gold, silver and zinc prices. The Group tested for impairment all its mining units: Arcata, Ares, Selene, Pallancata, San José, Santa Maria de Moris and its project San Felipe. In assessing whether impairment is required to the carrying value of the assets related to each mining unit, its carrying value is compared with its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and the value in use. Given the nature of the Group’s activities, information on the fair value of an asset is usually difficult to obtain unless negotiations with potential purchasers or similar transactions are taking place. Consequently, unless indicated otherwise, the recoverable amount used in assessing the impairment charges described below is value in use. The Group generally estimates value in use using a discounted cash flow model for each mining unit covering its remaining useful life. 84 Hochschild Mining plc Annual Report & Accounts 2008 15 Property, plant and equipment continued The calculation of value in use is most sensitive to the following assumptions: > > > > > > Commodity prices – Commodity prices of gold and silver are based on external market consensus forecasts. Gold prices range from $750/oz to $879/oz, silver prices range from $11.84/oz to $13.00/oz and zinc prices range from $1.521/oz to $1.984/oz. Estimation of reserves and resources – Reserves and resources are based on management’s estimate using appropriate exploration and evaluation techniques. Production volumes and grades – Tonnage produced was estimated at plant capacity with 12 days of maintenance per year. Capital expenditure – The cash flows for each mining unit include capital expenditures to maintain the mine and to convert resources to reserves. Operating costs – Costs are based on historical information from previous years and current market conditions. Discount rates – The cash flows are discounted at real pre-tax rates that reflect the current market assessments of the time value of money and the risks specific to the cash-generating unit. These rates are based on the weighted average cost of capital specific to each cash-generating unit. Mining unit Arcata Ares Selene Pallancata San José Santa Maria de Moris San Felipe 16 Intangible assets Cost Balance at 1 January 2007 Additions Balance at 31 December 2007 Additions Balance at 31 December 2008 Accumulated amortisation Balance at 1 January 2007 Amortisation for the year Balance at 31 December 2007 Amortisation for the year Foreign exchange difference Balance at 31 December 2008 Net book value as at 31 December 2007 Net book value as at 31 December 2008 Real pre-tax discount rate % Real post-tax rate % 20.5 28.5 5.0 18.5 17.0 19.0 11.5 Goodwill US$000 Software licences US$000 2,091 – 2,091 – – 876 876 37 5.1 5.1 5.1 5.1 9.2 4.3 8.2 Total US$000 2,091 876 2,967 37 2,091 913 3,004 – – – – – – 2,091 2,091 – 71 71 266 (1) 336 805 577 – 71 71 266 (1) 336 2,896 2,668 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 determined at the cash-generating unit level, in this case being the San José mine, by discounting the expected cash flows estimated by management over the life of the mine. Due to the current economic environment, the Group has tested all its mining units for impairment, refer to note 15(2) for the key assumptions used in calculating value in use for the San José mining unit. Management believes that the following changes to the main assumptions would cause the carrying value of the goodwill to equal its recoverable amount. Therefore, any higher deviation would cause the carrying value of goodwill to exceed its recoverable amount and an impairment provision would be required. Assumption Gold price Silver price Reserves and resources Costs Discount rates Variation –6.5% –7.0% –12.5% 9.5% 4.5% 85 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 17 Investments accounted under equity method Lake Shore Gold Corp(a) Minas Pacapausa S.A.C.(b) Cabo Sur(c) Total (a) Lake Shore Gold Corp The following table summarises the financial information of the Group’s investment in Lake Shore Gold Corp: Share of the associate’s balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Goodwill on acquisition Carrying amount of the investment Share of the associate’s revenue and losses: Revenue Losses Carrying amount of the investment Year ended 31 December 2008 US$000 2007 US$000 136,376 (170) (187) 136,019 – – – – Year ended 31 December 2008 US$000 2007 US$000 29,217 – 128,913 – (5,839) – (28,428) – 123,863 – 12,513 – 136,376 – – – (3,925) – 136,376 – The fair value of the investment with reference to the market price as at 31 December 2008 is US$85,269,000 (CAD$1.42 per share). This may appear as an indicator for impairment, however management has reviewed the factors affecting the impairment and believes that the increase in the gold prices and a reduction in the discount rate due to a decrease in the risk free return, has resulted in an increase in the net present value of the investment since acquisition. (b) Minas Pacapausa S.A.C. On 21 June 2005, Minera Oro Vega S.A.C. (‘Minorva’, the Group’s partner of its subsidiary Minera Suyamarca S.A.C.) and Minera del Suroeste (‘Misosa’) entered into an option and joint venture agreement (‘Framework Agreement’) in respect of the Pacapausa properties located in Peru. On 16 November 2007, Minera Suyamarca S.A.C. (‘Suyamarca’) signed an amendment to the Framework Agreement with Misosa and Minorva, incorporating the terms under which Suyamarca would acquire Minorva’s contractual position. Under the arrangement, Suyamarca paid US$200,000 to Minorva in exchange for its contractual position in the Framework Agreement. The new joint venture company, Minas Pacapausa S.A.C. (‘Pacapausa’), was incorporated on 4 March 2008 and Suyamarca contributed US$1,200,000 (solely funded by the Group) in exchange for a 50% interest in Pacapausa. Subsequently, Minorva transferred to Pacapausa all technical reports and other assets obtained as a result of its exploration activities in the properties in exchange for US$1,200,000 in cash. In compliance with the Group’s policy, Pacapausa recognises all expenses related to the project within exploration expenses since the project has not yet reached the inferred mineral resource category. 86 Hochschild Mining plc Annual Report & Accounts 2008 17 Investments accounted under equity method continued The following table summarises the financial information of the Group’s investment in Minas Pacapausa S.A.C.: Share of the joint venture’s balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of the joint venture’s revenue and loss: Revenue Loss Carrying amount of the investment Year ended 31 December 2008 US$000 2007 US$000 10 – – – (180) – – – (170) – – – (2,132) – (170) – (c) Cabo Sur On 21 February 2007, the Group signed an option and joint venture agreement with Mirasol Resources Ltd. (‘Mirasol’). The Group has the right to acquire a 51% interest in the Claudia projects by investing, over a period of four years, at least US$6,000,000 and making payments to Mirasol of US$650,0000 within four years. On 13 March 2007 Mirasol incorporated Cabo Sur S.A. (‘Cabo Sur’) and during 2008 transferred all the rights of Claudia property into Cabo Sur. Until the exercise of Claudia’s option, Mirasol and the Group will own 99% and 1% of Cabo Sur, respectively. However, the Group exercises joint control over Cabo Sur since the strategic financial and operating decisions require the consent of both parties. Accordingly, in compliance with the Group’s policy and IAS 31, the investment has been treated as a jointly controlled entity accounted for using the equity method. In compliance with the Group’s policy, Cabo Sur recognises all expenses related to the project within exploration expenses since the project has not yet reached the inferred mineral resource category. The following table summarises the financial information of the Group’s investment in Cabo Sur: Share of the joint venture’s balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of the joint venture’s revenue and loss: Revenue Loss Carrying amount of the investment Year ended 31 December 2008 US$000 2007 US$000 32 – 2 – (221) – – – (187) – – – (2,157) – (187) – 87 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 18 Available-for-sale financial assets Beginning balance Additions1 Fair value change Impairment recorded in the income statement2 Foreign exchange Disposals3 Ending balance Year ended 31 December 2008 US$000 2007 US$000 15,100 18,902 (2,914) (9,442) (519) (3,333) 6,285 7,384 (398) (71) 1,900 – 17,794 15,100 1 The amount represents the fair value of shares at the date of acquisition and mainly includes the purchase of shares of Pembrook Mining Corp., Gold Resource Corporation and Electrum Capital Inc. at a fair value of US$9,888,000, US$5,010,000 and US$2,637,000, respectively. 2 Corresponds to the decrease in the fair value of the investment in the shares of EXMIN Resources Inc., Ventura Gold Corp., Fortuna River and Mirasol Resources Inc. assessed as an impairment loss during the year and consequently transferred from equity to the income statement (refer to note 12). It also includes the impairment of the shares of the Electrum Capital Inc. of US$2,637,000. 3 Mainly corresponds to the sale of 1,660,150 shares in Fortuna Silver Mines Inc. at a price of CAD$2 per share for a total consideration of CAD$3,320,300 (US$3,321,450) (refer to note 12). Available-for-sale financial assets include the following: Equity securities – listed Canadian companies Equity securities – listed US companies Equity securities – listed Australian companies Equity securities – unlisted1 Bonds Total 1 Includes Pembrook Mining Corp and Electrum Capital Inc. shares. Year ended 31 December 2008 US$000 1,631 5,845 422 9,888 8 2007 US$000 15,080 – – – 20 17,794 15,100 88 Hochschild Mining plc Annual Report & Accounts 2008 18 Available-for-sale financial assets continued The breakdown of the investments in equity securities held is as follows (number of shares): Fortuna River Rio Fortuna Silver Mine Mirasol Resources Ltd Pembrook Mining Corp1 Gold Resource Corp2 Electrum Capital Inc3 Iron Creek Capital Corp4 Mariana Resources Ltd5 EXMIN Resources Inc6 Ventura Gold Corp7 Number of shares held at 1 January 2007 663,600 2,472,365 – – – – – – 3,435,278 – Number of shares held at 31 December 2007 663,600 2,472,365 500,000 – – – – – 18,387,487 100,000 Number of shares held at 31 December 2008 Additions Disposals – – – 5,714,286 1,670,000 4,205,462 2,000,000 11,002,948 – 200,000 663,600 – 812,215 1,660,150 500,000 – 5,714,286 – 1,670,000 – 4,205,462 – – 2,000,000 – 11,002,948 – 18,387,487 300,000 – Additions Disposals – – 500,000 – – – – – 14,952,209 100,000 – – – – – – – – – – 1 The investment in Pembrook Mining Corp. (5.6%), a privately held exploration company with projects in Peru and Canada, relates to the purchase of common shares on 14 May 2008 (2,857,143 common shares) and 11 September 2008 (2,857,143 common shares). 2 The investment in Gold Resource Corp. (4.9%), an underground precious metals mining company with a number of prime development projects in Mexico, relates to the purchase of common shares on 5 December 2008 in connection with a Strategic Alliance Agreement signed with this company. 3 The investment in Electrum Capital Inc. (15.8%), a privately held exploration company with projects in Brazil, Mexico, Peru and Argentina, relates to the purchase of common shares occurring on 25 April 2008 (1,538,462 common shares) and 22 October 2008 (2,667,000 common shares). 4 The investment in Iron Creek Capital Corp. (17.6%) relates to the purchase of common shares on 24 September 2008 in connection with the Letter of Intent signed with this company for an Option and Joint Venture Agreement to develop the Vaquillas project in Chile (refer to note 32(b)). 5 The investment in Mariana Resources Ltd. (16.2%), an exploration company with projects in Argentina, Chile and Ecuador, relates to the purchase of common shares on 12 December 2008 for US$495,000. 6 The 2007 addition in the equity investment in EXMIN Resources Inc. (2008: 18%, 2007: 20.3%) is due to the common share purchases occurring on 17 June 2007 (213,660 common shares), 9 July 2007 (12,002,231 common shares) and 5 December 2007 (2,736,318 common shares). The last two purchases were made in accordance with the Strategic Alliance Agreement signed with EXMIN. This investment has always been treated as an available-for-sale financial asset on the basis that the Group does not have significant influence over EXMIN. 7 On 19 December 2008 Ventura Gold Corp. exercised its option to acquire 51% in the Inmaculada project (refer to note 32(b)) generating the obligation to issue 1,000,000 shares to the Group. As at 31 December 2008 Ventura Gold Corp. only issued 300,000 shares and the issue of the remaining 700,000 shares is still pending. The Group has recognised in Other income US$103,000 relating to the right to receive 700,000 shares that is disclosed under other income. The fair value of the listed shares is determined by reference to published price quotations in an active market. . The investments in unlisted shares (Pembrook Mining Corp. and Electrum Capital Inc.) are recognised at their acquisition cost since there is no active market for these investments. The investment in Electrum Capital Inc. was impaired resulting in a loss of US$2,637,000. The Company assessed for impairment its investment in Pembrook Mining Corp. at 31 December 2008 of US$9,888,000 and concluded that no impairment was required. Available-for-sale financial assets are denominated in the following currencies: Canadian dollars US dollar Pounds sterling Total 2008 US$000 2007 US$000 11,519 5,853 422 – 15,080 20 17,794 15,100 89 Hochschild Mining plc Annual Report & Accounts 2008 Notes to the consolidated financial statements continued For the year ended 31 December 2008 Overview Business review Governance Financial statements Further information 19 Trade and other receivables Trade receivables1 Advances to suppliers Credit from exports2 Loan to minority shareholder3 Due from minority shareholder4 Receivables from related parties (note 29) Loans to employees Assigned funds Interest receivable5 Receivable from Kaupthing, Singer and Friedlander Bank (refer to note 11(3)) Other Provision for impairment6 Financial assets classified as receivables Prepaid expenses Value Added Tax (VAT)7 Total As at 31 December 2008 | 2007 Current US$000 47,348 7,097 1,444 6,502 11,116 1,048 336 – 141 1,292 1,581 (1,987) 75,918 2,652 45,156 Non- current US$000 – – – 19,110 – – 449 30 – – – – 19,589 847 5,082 Current US$000 56,820 9,162 – 15,100 16,927 – 434 – 1,198 – 1,688 (548) 100,781 2,347 31,052 Non- current US$000 – – 465 30,331 – – 607 – – – – – 31,403 412 6,489 38,304 123,726 25,518 134,180 The fair values of trade and other receivables approximate their book value. 1 At 31 December 2008, trade accounts receivable mainly comprised of amounts receivable from Consorcio Minero S.A. US$16,382,000, Teck Cominco Metals Ltd US$13,902,000 and Louis Dreyfus Peru S.A. US$7,143,000. At 31 December 2007, trade accounts receivable mainly comprised of amounts receivables from Consorcio Minero S.A. US$20,226,000, Traxys Belgium SA/NV of US$14,728,000 and Norddeutsche Affinerie AG of US$8,768,000. Trade receivables are denominated in the following currencies: • US dollars 47,330,000 (2007: 56,820,000) • Peruvian nuevos soles 18,000 (2007: nil) 2 Corresponds to the credits due on exports of Minera Santa Cruz. This credit is calculated as the 1% of total sales of concentrates and 2% of total sales of doré delivered through the Patagonico Port in Argentina. 3 This relates to loans to Minera Andes Inc. The effective interest rate is between 7.86 % and 8.21% in 2008 (between 7.86% and 8.21% in 2007) (refer to note 36(f)). 4 Mainly corresponds to capital contributions due from a minority shareholder of Minera Santa Cruz S.A. (Minera Andes) of US$11,115,000 (2007: US$16,927,000). 5 Mainly corresponds to interest receivable on JP Morgan liquidity funds (refer to note 22(1)). 6 Includes provision for impairment of other receivables of US$1,987,000 as at 31 December 2008 (2007: US$548,000). It mainly corresponds to the impairment of deposits in Kaupthing, Singer and Friedlander Bank of US$1,292,000 (refer to note 11(3)). 7 This includes an amount of US$32,220,000 (2007: US$24,842,000) of value added taxes paid in the development and plant expansion of the San José project that will be recovered through the future sales of gold and silver by Minera Santa Cruz S.A. It also includes the VAT of Minera Suyamarca of US$12,741,000 (2007: US$4,988,000) and Minas Santa María de Moris of US$2,369,000 (2007: US$1,758,000). Movements in the provision for impairment of receivables: At 1 January 2007 Charge for the year Utilised At 31 December 2007 Charge for the year Utilised At 31 December 2008 As at 31 December, the ageing analysis of trade and other receivables is as follows: Individually Collectively impaired US$000 impaired US$000 451 208 (111) 548 1,628 (189) 1,987 – – – – – – – Total US$000 451 208 (111) 548 1,628 (189) 1,987 Neither past due nor impaired US$000 Less than 30 days US$000 30 to 60 days US$000 Over 60 days US$000 Total receivable before impairment US$000 161,804 159,698 – – 15 – 2,198 164,017 160,246 548 Year 2008 2007 90 Hochschild Mining plc Annual Report & Accounts 2008 20 Inventories Finished goods Products in process Raw materials Supplies and spare parts Provision for obsolescence of supplies Total As at 31 December 2008 US$000 2007 US$000 2,720 21,323 1,741 24,437 3,551 29,802 494 13,563 50,221 (1,001) 47,410 (398) 49,220 47,012 Finished goods include ounces of gold and silver and concentrate. Doré is an alloy containing a variable mixture of silver and gold and minor impurities delivered in bar form to refiners and is considered as a product in process. The refined products are then sold to the customers and/or refiners. Concentrate is a product containing sulphides with variable content of base and precious metals and are sold to smelters. The amount of doré on hand at 31 December 2008 included in products in process is US$4,359,000 (2007: US$3,160,000). As part of the management’s short-term financing policies, the Group acquires pre-shipment loans which are guaranteed by the inventory (refer to note 24(a)). 21 Financial assets at fair value through profit and loss Warrants in Fortuna Silver Mines Inc.1 Warrants in Mirasol Resources Ltd. Option over shares of Gold Resource Corp.2 Embedded derivatives3 Swap contracts4 Total As at 31 December 2008 US$000 745 – 1 2,301 – 2,219 304 – 2007 US$000 6,990 1,048 5,569 8,039 1 At 31 December 2008 this item represented 2,475,355 (2007: 2,475,355) warrants of Fortuna Silver Mines Inc. The expiry dates of the warrants are 27 June 2010 and 17 November 2010 (for 862,117 and 1,613,238 warrants respectively). Warrants are fair valued using the Black-Scholes option pricing model. 2 At 31 December 2008 this item represented option over 4,330,000 (2007: nil) shares of Gold Resource Corp. with an expiry date of 2 March 2009. Options are fair valued using the Black-Scholes option pricing model. 3 Sales of concentrates and certain gold and silver volumes 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 or the refiner to process the doré into gold and silver), 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’. The gain or loss that arises on the fair value of the embedded derivative is recorded in ‘Revenue’ (refer to note 5). 4 The Group holds contracts of derivative instruments with the intention to remove the risk of fluctuations in metal prices. As at 31 December 2008 the Company did not meet all the criteria stated in IAS 39 to account for the derivative instruments as cash flow hedges. Accordingly, the Group recognised a gain of US$304,000 due to the changes in the fair value occurring during 2008, which is recognised within ‘finance income’ (refer to note 12(5)). The fair value of the forward contracts is calculated based on spot prices plus forward points estimated using SIFO (Silver Forward Mid Rates) and GOFO (Gold Forward Offered Rates) for silver and gold, respectively, as published by the London Bullion Market Association at 31 December 2008. 91 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 21 Financial assets at fair value through profit and loss continued The following tables include the information of the contracts signed: Silver Organisation Citibank Citibank INTL Commodities Inc. INTL Commodities Inc. Total Gold Organisation INTL Commodities Inc. Total 22 Cash and cash equivalents Cash at bank Liquidity funds1 Current demand deposit accounts2 Time deposits3 Quantity as at 31 December 2008 (ounces) Quotation (US$/oz) | | Quotation period From To January 2009 January 2009 January 2009 January 2009 December 2009 December 2009 – – Quotation period 11.00 11.00 10.50 10.75 Quantity as at 31 December 1,500,000 1,000,000 389,000 389,000 3,278,000 2008 (ounces) 1,900 1,900 Quotation (US$/oz) From 840 January 2009 To – As at 31 December 2008 US$000 2007 US$000 171 93,131 14,567 8,278 539 285,015 8,499 7,373 Cash and cash equivalents considered for the cash flow statement 116,147 301,426 The fair value of cash and cash equivalents approximates their book value. 1 The liquidity funds are mainly invested in certificate of deposit, commercial papers and floating rate notes with a weighted average annual effective interest rate of 3.98% and a weighted average maturity between 30 to 54 days as at 31 December 2008 (2007: 5.09% and 34 days) (refer to note 36(f)). 2 Relates to bank accounts which are freely available and do not bear interest. 3 The effective interest rates as at 31 December 2008 was 2.67% (2007: 5.26%). These deposits have an average maturity from 1 to 30 days (refer to note 36(f)). 92 Hochschild Mining plc Annual Report & Accounts 2008 23 Trade and other payables Trade payables1 Professional fees Deferred consideration2 Interest payable Taxes and contributions Salaries and wages payable Mining royalty (note 35) Dividends payable3 Accrued expenses Guarantee deposits Other Total As at 31 December 2008 | 2007 Non- current US$000 – – – – 543 – – – 84 – – Current US$000 50,904 1,260 – 421 9,622 11,955 1,012 228 2,158 2,745 1,986 627 82,291 Non- current US$000 – – – – 847 – – – 8 – 4 859 Current US$000 29,273 868 1,326 324 6,938 7,205 1,024 578 1,386 1,616 1,638 52,176 The fair value of trade and other payables approximate their book values. 1 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. Trade payables are denominated in the following currencies: US dollar Peruvian nuevos soles Argentinian pesos Mexican pesos Pounds sterling Chilean pesos Canadian dollars Australian dollars Total 2008 US$000 20,935 14,112 15,128 390 68 213 49 9 – 2007 US$000 17,131 6,231 4,651 846 266 106 42 50,904 29,273 2 Corresponds to the deferred consideration generated for the Pallancata project in Minera Suyamarca. During 2008 the Group completed the construction of the mine and the deferred consideration was reduced to nil. 3 Corresponds to dividends payable to minority shareholders of US$228,000 (2007: US$378,000). 24 Borrowings Secured bank loans (note 24(a)) Amount due to minority shareholders (note 24(b)) Amounts due to related parties (note 29) Total As at 31 December 2008 | 2007 Non- current US$000 Current US$000 202,094 29,598 – 56,625 40,409 1,036 Non- current US$000 – 55,209 – Current US$000 23,750 9,299 120 231,692 98,070 55,209 33,169 93 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 24 Borrowings continued (a) Secured bank loans As at 31 December 2008, the balance corresponds to: i. Pre shipment loans for a total amount of US$18,380,000 in Compañía Minera Ares, US$11,280,000 in Compañía Minera Suyamarca S.A.C. and US$20,000,000 in Minera Santa Cruz S.A. These obligations accrue an effective annual interest rate ranging from 5.55% to 8.70% and are guaranteed by the inventories of the company (refer to note 20). Pre shipments are credit lines given by the Banks to pay obligations related to the exports of the Group. ii. Leasing agreement with Banco de Credito for an amount of US$7,207,000 in Compañía Minera Ares. This obligation accrues an effective annual interest rate ranging from 6.80% to 7.45%. The following table demonstrates the present value and maturity of future minimum lease payments as at 31 December 2008: Not later than one year Between 1 and 2 years Between 2 and 5 years Total As at 31 December 2008 US$000 2007 US$000 2,705 – 2,604 – 1,898 – 7,207 – The following table demonstrates the reconciliation between the total minimum lease payments and the present value as at 31 December 2008 and 2007. Present value of leases Future interest Total minimum lease payments As at 31 December 2008 US$000 2007 US$000 7,207 – 728 – 7,935 – The carrying amount of net lease liabilities approximate their fair value. iii. Loan facility with a syndicate of lenders with JP Morgan Chase Bank N.A. acting as the Administrative Agent. Total secured term loan facility of US$200,000,000 that accrues an effective interest rate of LIBOR + 1% and is guaranteed by all the equity share capital, free and clear of any liens, of Compañía Minera Ares S.A.C. The balance as at 31 December 2008 is comprised of the secured term loan facility of US$200,000,000 plus accrued interest of $4,260,000 and net of transaction costs of US$2,408,000. The Company has granted the following guarantees on its $200,000,000 bank syndicated loan: > > Pledge of all shares in Compañía Minera Ares (wholly-owned subsidiary). Subsidiary guarantees by certain wholly-owned subsidiaries whereby these subsidiaries guarantee with their cash flows the repayment of the loan. The main administrative and financial covenants that the Company and Compañía Minera Ares must comply with during the term of the syndicated loan are as follows: > > > Quarterly unaudited and annual audited financial statements for Hochschild Mining plc and Compañía Minera Ares. Investments in restricted and unrestricted subsidiaries based on an agreed upon limit (unlimited within restricted subsidiaries). It is intended for every wholly-owned subsidiary to participate in the subsidiary guarantee. Maintain the following ratios (at a consolidated and Compañía Minera Ares level) beginning on the date of execution of the agreement and during the term of effect of the loan: – Interest expense coverage ratio greater than 3:1. – Debt to EBITDA ratio lower than 2.5:1 from 2009 onwards (up to 3:1 in 2008). Compliance with the restrictive covenants described in the preceding paragraph is overseen by Compañía Minera Ares’ management and the Administrative Agent. The Group and Compañía Minera Ares have complied with the commitments and financial covenants mentioned in the syndicated loan agreement. As at 31 December 2007, the balance corresponded to: > Pre shipment loans for a total amount of US$23,750,000 in Compañía Minera Suyamarca S.A.C. and Minera Santa Cruz S.A. These obligations accrue an effective annual interest rate ranging from 6.00% to 7.50% and are guaranteed by the inventories of the Company (refer to note 20). 94 Hochschild Mining plc Annual Report & Accounts 2008 24 Borrowings continued (b) Amounts due to minority shareholders As at 31 December 2008 the balance mainly corresponds to a loan from Minera Andes Inc. to Minera Santa Cruz S.A. for an amount of US$62,105,000 (2007: US$57,065,000) with interest rates between 7.86% and 12%. There is also a loan of US$7,902,000 to Minera Santa Cruz S.A. from Minera Andes S.A. (2007: US$7,358,000) with an interest rate of 12% (refer to note 36(f)). The maturity of non-current borrowings is as follows: Between 1 and 2 years Between 2 and 5 years Total As at 31 December 2008 US$000 81,284 150,408 2007 US$000 41,286 13,923 231,692 55,209 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: Bank loans Secured Amounts due to minority interest and related parties (fixed rates) Total 25 Provisions At 1 January 2007 Increase/(decrease) to existing provision Accretion resulting from unwinding of discount rate Change in discount rate Change in estimate Payments Foreign exchange At 31 December 2007 Less current portion Non-current portion At 1 January 2008 Increase to existing provision Accretion resulting from unwinding of discount rate Change in discount rate Change in estimate Payments Foreign exchange At 31 December 2008 Less current portion Non-current portion Carrying amount as at 31 December | Fair Values as at 31 December 2008 US$000 2007 US$000 2008 US$000 2007 US$000 202,094 29,598 – 213,408 – 33,263 55,209 60,158 231,692 55,209 246,671 60,158 Provision for mine closure1 US$000 32,364 1,056 1,134 2,401 (2,782) (2,023) – 32,150 (2,400) 29,750 32,150 2,105 669 4,042 1,409 (1,476) – 38,899 (1,379) 37,520 profit Workers’ Contributions to Peruvian sharing Government US$000 US$000 Executive long-term incentive plan2 US$000 Other US$000 Total US$000 6,618 11,620 – – – (9,461) 418 9,195 (9,195) 800 940 – – – (306) – 1,434 (1,434) – – 9,195 4,273 – – – (13,248) 641 861 (861) – 1,434 944 – – – (1,368) (19) 991 (991) – – 799 – – – – – 799 – 799 799 302 – – – (1,101) – – – – 293 (13) – – – – (8) 272 – 272 272 962 – – – (21) – 1,213 (1,046) 40,075 14,402 1,134 2,401 (2,782) (11,790) 410 43,850 (13,029) 30,821 43,850 8,586 669 4,042 1,409 (17,214) 622 41,964 (4,277) 167 37,687 1 The provision represents the discounted values of the estimated cost to decommission and rehabilitate the mines at the expected date of depletion of each of the deposits. The present value of the provision has been calculated using a real pre-tax annual discount rate, based on a US Treasury bond of an appropriate tenure as at 31 December 2008 and 2007 respectively, and the cash flows have been adjusted to reflect the risk attached to these cash flows. Uncertainties in the timing for using this provision includes changes in the future that could impact the time of closing the mines, as new resources and reserves are discovered. 2 The 2007 Executive Long-Term incentive plan was replaced by a new plan with different variables. To terminate the first plan, the Group paid to the employees under the plan an amount of US$1,101,000, during the first semester of 2008. The comparative effect on Group´s results is presented in the following table: 95 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information 25 Provisions continued Administrative expenses Exploration expenses Total Notes to the consolidated financial statements continued For the year ended 31 December 2008 Year ended 31 December 2008 US$000 2007 US$000 275 27 302 727 72 799 The new plan reduces the number of variables and only considers Total Shareholder Return (‘TSR’). The plan comprises an amount to be paid in cash to participants depending on the achievement of the three-year performance measures during the performance period which ends on 31 December 2010. The cash award will be held for an additional period and delivered 50% on 31 December 2010 and the remaining 50% on 31 December 2011, accumulating notional interest at the prevailing inter-bank interest rate. Only employees who remain with the Company until this date will have right of the benefit, with some exemptions that have to be approved by the Remuneration Committee of the Board. The provision represents the discounted values of the estimated cost of the long-term employee benefit. There is no provision in 2008 because TSR over the period did not reach the performance level required under the rules of the plan. 26 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 2008 and 2007 is as follows: Class of shares Ordinary shares Authorised | Issued Number Amount Number Amount 500,000,000 £125,000,000 307,350,226 £76,837,557 At 31 December 2008 and 2007, all issued shares with a par value of 25p (weighted average of US$0.476 per share) each 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 and by proxy 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/proxy. The changes in share capital are as follows: Shares issued as at 1 January 2007 Transaction costs associated with issue of shares1 Shares issued as at 31 December 2007 Shares issued as at 31 December 2008 Number of shares Share capital US$000 Share Premium US$000 307,350,226 146,466 – – 396,156 (228) 307,350,226 146,466 395,928 307,350,226 146,466 395,928 1 Corresponds to the underaccrual of transaction costs relating to the Company’s listing on the London Stock Exchange in 2006. (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 where it will remain until disposal or impairment of the investment, when the cumulative unrealised gains and losses are recycled through the income statement. Cumulative translation adjustment The cumulative translation adjustment account is used to record exchange differences arising from the translation of the financial statements of subsidiaries with a functional currency different to the reporting currency of the Group. Merger reserve The merger reserve represents the difference between the value of the net assets of the Cayman Holding Companies (Ardsley, Garrison, Larchmont and Hochschild Mining (Peru)) acquired under the Share Exchange Agreement and the nominal value of the shares issued in consideration of such acquisition. 96 Hochschild Mining plc Annual Report & Accounts 2008 27 Deferred income tax The changes in the net deferred income tax assets/(liabilities) are as follows: Beginning of the year Income statement credit Deferred income tax arising on net unrealised gains on available-for-sale financial assets recognised in equity End of the year As at 31 December 2008 US$000 2007 US$000 13,309 (9,017) 3,894 10,342 664 (927) 4,956 13,309 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 is as follows: Deferred income tax liabilities: At 1 January 2007 Income statement (credit) charge Net deferred income tax from unrealised gain on available-for-sale financial assets At 31 December 2007 Income statement (credit) charge Net deferred income tax from unrealised gain on available-for-sale financial assets At 31 December 2008 Differences in cost Mine of PP&E development US$000 US$000 Financial instruments US$000 Others US$000 Total US$000 1,878 3,314 – 5,192 (851) 3,347 5,735 1,652 726 – 927 9,082 11,108 3,305 (1,405) 3,596 (983) – 2,613 (642) 10,473 8,792 927 20,192 8,210 – – (664) – (664) 4,341 20,190 1,236 1,971 27,738 Deferred income tax assets: At 1 January 2007 Income statement credit (charge) Use of loss carry forward At 31 December 2007 Income statement credit (charge) At 31 December 2008 Differences in cost of PP&E US$000 Provision for mine Mine closure development US$000 US$000 Tax losses US$000 Interest payable US$000 Others US$000 Total US$000 1,711 2,396 – 4,107 (2,059) 2,048 1,480 3,375 – 4,855 887 5,742 2,498 (649) – 1,849 (1,849) 5,464 8,688 – 14,152 (2,593) – 11,559 507 3,121 – 3,628 3,640 7,268 2,707 2,203 – 4,910 1,167 14,367 19,134 – 33,501 (807) 6,077 32,694 The amounts after offset, as presented on the face of the balance sheet, are as follows: Deferred income tax assets Deferred income tax liabilities As at 31 December 2008 US$000 2007 US$000 20,795 (15,839) 22,400 (9,091) 97 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information 27 Deferred income tax continued Tax losses expire in the following years: Recognised1: 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 Notes to the consolidated financial statements continued For the year ended 31 December 2008 As at 31 December 2008 US$000 2007 US$000 – 4,598 6,458 20,080 2,360 54 502 8,320 12,232 20,433 33,496 41,541 1,625 1,646 2,280 4,035 41,355 188 1,812 1,831 2,558 38,947 50,941 45,336 84,437 86,877 Total tax losses (recognised and unrecognised) 1 Deferred tax assets have been recognised in respect of tax losses to the extent that they are expected to be offset against taxable profits arising in future periods, based on the profit forecast prepared by management. Other unrecognised deferred income tax assets comprises (gross amounts): Provision for mine closure1 Impairments of available-for-sale financial assets As at 31 December 2008 US$000 20,641 11,421 – 2007 US$000 16,777 1 This relates to provision for mine closure expenditure which is expected to be incurred in periods in which it is expected that there will not be taxable profits against which the expenditure can be offset. Unrecognised deferred tax liability 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 tax liability should be recognised. 28 Dividends paid and proposed Year ended 31 December 2007 Total dividends paid or provided for during the year1 Total dividends declared after year-end and not provided for2 Year ended 31 December 2008 Total dividends paid during the year3 Total dividends declared after year-end and not provided for Amount US$000 24,729 22,184 28,531 6,147 1 Corresponds to dividends paid and provided during 2007 of US$8,448,000 and the payment of accrued dividends as at 31 December 2006 of US$16,281,000. 2 Corresponds to dividends declared after 31 December 2007 to Pelham Investment Corporation, Navajo Overseas Corporation and public shareholders (‘Parent company’s shareholders’) 3 Corresponds to dividends paid and provided during 2008 of US$22,184,667 and US$6,147,005, and the payment of accrued dividends as at 31 December 2007 of US$200,000 to Dona Limited for dividends declared in 2006. Dividends per share The dividends declared in August 2008 were US$6,147,005 (US$0.020 per share). A dividend in respect of the year end 31 December 2008 of US$0.020 per share, amounting to a total dividend of US$6,147,005 is to be proposed at the Annual General Meeting on 26 May 2009. These financial statements do not reflect this dividend payable. 98 Hochschild Mining plc Annual Report & Accounts 2008 29 Related-party balances and transactions (a) Related-party accounts receivable and payable The Group had the following related-party balances and transactions during the years ended 31 December 2008 and 2007. The related parties are companies owned or controlled by the main shareholder of the parent company, joint ventures or associates. Accounts receivable At 31 December | Accounts payable At 31 December 2008 US$000 2007 US$000 2008 US$000 2007 US$000 Trade Cementos Pacasmayo S.A.A. Mauricio Hochschild & Cía. Ltda. S.A. Other Compañía Minera Corianta S.A. Cementos Selva S.A. Joint ventures Cabo Sur Minas Pacapausa S.A.C. Dividends payable Dona Ltd. Loans Cementos Pacasmayo S.A.A. Total Comprised of: Dividends payable to Dona Ltd Current related party balances Total – – – – – – 1,005 2 1,007 – – 41 41 1,048 – 1,048 1,048 As at 31 December 2008 and 2007 all other accounts are, or were, non-interest bearing. No security has been granted or guarantees given by the Group in respect of these related party balances. Principal transactions between affiliates are as follows: Income Recovery of expenses Services provided Proceeds from sale Sales of Colorada shares to Cementos Pacasmayo Expenses Purchase of supplies Services received – – – – – – – – – – – – – – – – – 119 120 200 200 – – 1 – 1 – 43 – 44 – 992 – – – 992 – – – – – – – 1,036 320 – 1,036 1,036 200 120 320 Year ended 31 December 2008 US$000 2007 US$000 34 – – – 39 – 2 24 14 28 During the year, in addition to the normal arrangements the Group has with its related parties, the Group purchased a building from Cementos Pacasmayo, a company under common control to that of the Group, for US$3,622,000 representing an arm’s length purchase price. Transactions between the Group and these companies are on an arm’s length basis. 99 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 29 Related-party balances and transactions continued (b) Compensation of key management personnel of the Group Key management personnel include the members of the senior management team and Directors who receive remuneration. Salaries and bonuses Total compensation paid to key management personnel Year ended 31 December 2008 US$000 8,718 8,718 2007 US$000 9,910 9,910 This amount includes the remuneration paid to the Directors of the parent company of the Group of US$3,847,865 (2007: US$6,268,000), out of which US$463,218 (2007: US$600,000) relates to pension payments. 30 Auditor’s remuneration The auditor’s remuneration for services provided to the Group during the years ended 31 December 2008 and 2007 is as follows: Audit fees pursuant to legislation1 Other services relating to taxation Services relating to corporate finance transactions Other services Total Ernst & Young Year ended 31 December | Others Year ended 31 December 2008 US$000 2,332 410 263 106 3,111 2007 US$000 2008 US$000 2007 US$000 1,756 443 501 110 2,810 7 – – – – – – – 7 – 1 Includes US$1,178,000 (2007: US$1,164,000) relating to the audit fees of the parent company together with a proportion of the fees in relation to the consolidated Group audit which has been incurred by the parent company. All fees are included in administrative expenses, within the ‘professional fees’ caption (refer to note 7). 100 Hochschild Mining plc Annual Report & Accounts 2008 31 Notes to the cash flow statement Reconciliation of profit for the year to net cash generated from operating activities (Loss)/profit for the year Adjustments to reconcile Group operating profit to net cash inflows from operating activities: Depreciation (note 3(f)) Amortisation of software licences Impairment of property, plant and equipment (Gain)/loss on sale/disposal of property, plant and equipment Write-off of property, plant and equipment Impairment of available-for-sale financial assets Premium paid on purchase of available-for-sale financial assets Gain on sale of available-for-sale financial assets Share of post tax losses of associates and joint ventures accounted under equity method Loss on sale of Sipán (subsidiary) Increase in provision for mine closure Finance income Finance costs Income tax expense Provision for claims Provision for obsolescence of supplies Other Increase (decrease) of cash flows from operations due to changes in assets and liabilities: Trade and other receivables Income tax receivable Derivative financial instruments Inventories Trade and other payables Provisions Cash generated from operations Transactions that did not affect cash flows The main transactions that did not affect cash flows were the following: Purchase of property, plant and equipment through leasing Transfer of loan to EXMIN to available-for-sale financial assets Write-off goodwill of Colorada (previously impaired) Year ended 31 December 2008 US$000 2007 US$000 (13,514) 80,915 42,232 266 34,706 – (252) 20 – 11,421 421 – (1,613) – 8,214 – – 3,216 (11,683) 25,079 22,914 – 634 – (3,687) 25,139 71 467 71 1,034 (3,097) (25,257) 7,517 35,752 27 (185) (9,922) (13,653) – (1,171) (2,842) 20,016 (8,635) (74,420) 2,314 (30,479) 10,480 3,989 102,167 34,338 Year ended 31 December 2008 US$000 2007 US$000 7,872 – – – 1,572 230 101 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information 32 Commitments (a) Gold and silver future contracts Silver Organisation INTL Commodities Inc Total Gold Organisation INTL Commodities Inc Total Notes to the consolidated financial statements continued For the year ended 31 December 2008 Quantity as at 31 December Quotation period 2008 (ounces) 2007 (ounces) Type of Quotation (US$/oz) contract From 157,300 – Forward 10.19 January 2009 157,300 – Quantity as at 31 December Quotation period 2008 (ounces) 2007 (ounces) Type of Quotation (US$/oz) contract From 2,950 2,950 – – Forward 815.06 January 2009 to – to – The contracts mentioned above are not fair valued in the books as they were entered into for the purpose of the delivery of a non-financial item in accordance with the Group’s expected sales requirements. (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. Generally, under the terms of these agreements, the Group has the option to acquire the concession or invest in the entity holding the concession. In order to exercise these options the Group must satisfy certain financial and other obligations during the term of the agreement. The options lapse in the event that the Group does not meet its financial requirements. At any point in time, the Group may cancel the agreements without penalty, except where specified below. The Group continually reviews its requirements under the agreements and determines, on an annual basis, whether to proceed with its financial commitment. Based on management’s current intention regarding these projects, the commitments at the balance sheet date are as follows: Commitment for the subsequent 12 months More than one year Some of the significant transactions are explained below: As at 31 December 2008 US$000 1,293 19,192 2007 US$000 2,675 59,355 (i) Ventura Gold Corp. On 8 January 2007, the Group granted an option to Ventura Gold Corp (‘Ventura’) for the acquisition of an interest in the Immaculada property, located in Peru. Under the option and joint venture agreement signed on 13 August 2007, in order to acquire an initial 51% controlling interest, Ventura was required to complete a total of 15,000 metres of drilling at the property and issue a total of 1,000,000 common shares to the Group within a three-year period. On 19 December 2008 Ventura exercised its option to acquire 51% in the project having completed its drilling requirement. Of the 1,000,000 common shares required to be issued to the Group, only 300,000 shares have been issued as at 31 December 2008 which are disclosed as ‘Available-for-sale financial assets’. In order to maintain the option, Ventura shall issue an additional 2,000,000 common shares to the Group within the next five years. Additionally, the Group has the option to become the operator of the project and to buy back 11%, giving the Group a controlling interest in the project in consideration for a payment to Ventura of three times the total investment made in drilling and related exploration work which has been completed. If the Group does not exercise the aforementioned option, Ventura may elect to increase its controlling interest by an additional 19%, upon the completion of a feasibility study on the project within six years from 23 October 2007. (ii) IAMGOLD On 20 December 2007, the Group entered into an option and joint venture agreement with IAMGOLD Corporation (‘IAMGOLD’) to explore and develop minerals in the two groups of properties located in Argentina, which comprise the projects ‘Santa Cruz-Río Negro’ and ‘Cañón del Moro’. 102 Hochschild Mining plc Annual Report & Accounts 2008 32 Commitments continued Under the arrangements, the Group will have the right to acquire a 70% interest in each group of properties by investing US$200,000 and US$1,500,000 within two years and completing a pre-feasibility study on the properties before the end of the seventh and sixth year for Santa Cruz and Cañón del Moro, respectively. The Group can withdraw from the agreement without incurring any further expenditures or penalties. (iii) Andina Minerals Chile Limitada (Encrucijada Project) On 31 January 2008 the Group entered into an option and joint venture agreement with Andina Minerals Chile Ltda. (‘Andina’) to earn a 51% interest in respect of the Encrucijada project located in Chile. A payment of US$500,000 was made to Andina upon signing of the agreement. Under the arrangements, the Group will have the right to acquire a 51% interest in the project by investing US$3,000,000 within three years. The Group cannot withdraw from the agreement without investing a minimum of US$800,000 in the project. At 31 December 2008 the Group has invested US$1,165,000. (iv) Santos Bahamondes Latorre (Casualidad Project) On 4 March 2008, the Group entered into an option agreement with Santos Bahamondes Latorre Compañía Minera in order to acquire the mining rights of three groups of properties (Juana I, Juana II and Casualidad) located in Chile. Under the arrangements, the Group will have the right to acquire the mining rights by making payments of US$1,000,000, US$1,000,000 and US$1,500,000 for Juana I, Juana II and Casualidad, respectively. If the Group exercises its option it shall pay a 1.5% Net Smelter Return once commercial production begins. The Group can withdraw from the agreement without incurring any further expenditures or penalties. (v) Iron Creek Capital Corp. (Vaquillas Project) On 24 September 2008, the Group signed a letter of intent with Iron Creek Capital Corp. (‘Iron Creek’) in respect of an option and joint venture agreement to earn a 60% interest in the Vaquillas project, located in Chile. A payment of US$750,000 was made to Iron Creek upon signing of the letter of intent. Under the arrangements, the Group will have the right to acquire a 60% interest by incurring expenditure on exploration activities of US$6,000,000 over a five-year period and has to invest at least US$750,000 before withdrawing from the venture. At December 2008 the Group has provided for this amount and recorded it under ‘trade and other payables’. In addition, the Group participated in a private placement whereby the Group subscribed for shares in Iron Creek for cash consideration of US$1,000,000, the proceeds of which will be invested in a specific area of the project (the Porphiry Area) in the two year period from the closing of the private placement (refer to note 18). (c) Operating lease contract The Group has a number of operating lease agreements. The lease expenditure charge to the income statement during the years 2008 and 2007 are included in the production costs and administrative expenses. As at 31 December 2008 and 2007, 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 For the year ended 31 December 2008 US$000 1,365 1,593 2007 US$000 1,541 744 (d) Finance lease contract During 2008 Compañía Minera Ares S.A.C. signed lease agreements of equipments with Banco de Credito del Perú (refer to note 15 and 24). As at 31 December 2008 and 2007, 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 For the year ended 31 December 2008 US$000 2007 US$000 3,157 – 4,778 – 103 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information 32 Commitments continued (e) Capital commitments Peru Mexico Argentina Notes to the consolidated financial statements continued For the year ended 31 December 2008 For the year ended 31 December 2007 US$000 15,113 2008 31,860 19 – 14,112 – 45,991 15,113 33 Contingencies As at 31 December 2008, the Group had the following contingencies: (a) Taxation Fiscal periods remain open to review by the tax authorities for four years in Peru and five years in Argentina and Mexico, preceding the year of review. During this 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. (b) 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. The assessment of contingencies inherently involves exercise of significant judgement and estimates of the outcome of future events. Uncertainties in estimating the liability includes changes in the legal interpretation that the authorities could make in respect of the Group’s transactions. 34 Guarantees and tax stability agreements Compañía Minera Ares Ares Unit On 28 October 1999, the Ministry of Energy and Mines granted legal stability for the Ares operating unit, starting 1 January 1999 for a 10-year term, expiring on 31 December 2008. Under this agreement, the Peruvian Government is obliged to guarantee legal stability to the Ares operating unit of the Company covering the following areas: > Free trade of its products > Removal of currency restrictions > Stability of tax rates > Fixed rate on the annual validity fee or ‘good standing’ payment for mining concessions As a result of the Ares stability agreement currently in force, Ares pays income tax in Peru at a rate of 30% in respect of income generated by the Ares operating unit, and the annual validity fee or ‘good standing’ payment for mining concessions are fixed at the rate of US$2.00 per hectare per year. The Ares operating unit is exempt from paying the governmental royalties covered by Law 28258 – Mining Royalties Law with respect to revenues generated at the Ares operating unit for so long as the stability agreement remains in effect. The expiration of the agreement results in the Ares unit being subject to the actual tax law and Mining Royalties law from 1 January 2009. There is no effect related to the change of income tax rate, considering that the current tax rate is 30% which was the same during the stability agreement. Arcata Unit On 31 July 2007, the Ministry of Energy and Mines granted legal stability to Compañía Minera Ares for the Arcata operating unit, starting 1 January 2009 for a 10-year term. As a result of the stability agreement Compañía Minera Ares will pay income tax in Peru at a rate of 32% in respect of income generated by the Arcata operating unit, and the Peruvian Government is obliged to guarantee stability of the tax regime that was in effect as at 5 February 2007 during the period of 10 years. 104 Hochschild Mining plc Annual Report & Accounts 2008 34 Guarantees and tax stability agreements continued Minera Santa Cruz Minera Santa Cruz has been granted with two tax stability certificates in relation to provincial and national taxes in Argentina in respect of the San José project. The stability certificates run for a 30-year period commencing on 21 November 2005. Under these certificates, Minera Santa Cruz’s tax stability in respect to the San José operating unit covers, among others, the following areas: > The mining royalty cannot exceed 3% of the pit-head value of the production; however, it must be noted that the Provincial Government may not agree with such construction and, on the contrary, may argue that the tax stability does not cover the mining royalty. So far, in accordance with such 3% cap, the Provincial Government fixed the mining royalty applicable to the San José operating unit at: (i) 1.85% of the pit-head value of the production when the final product is doré; and (ii) 2.55% of the pit-head value of the production when the final product are mineral concentrates or precipitates. The National Export tax is 5% when the final product is doré and 10% when the final product is gold or silver concentrates although rebates are available for the first three years, if shipped from port (3%, 2% and 1% rebate for years 2007, 2008 and 2009, respectively). Income tax rate not higher than 35%. > > 35 Mining royalty Peru In accordance with Peruvian legislation, owners of mining concessions must pay a mining royalty for the exploitation of metallic and non-metallic resources. Mining royalties are calculated with rates ranging from 1% to 3% of the value of mineral concentrates or equivalent, based on the quoted market prices published by the Ministry of Energy and Mines. As at 31 December 2008, the amount payable as mining royalties for the mining units of Selene, Arcata and Pallancata amounted to approximately US$876,000 (US$1,024,000 at 31 December 2007), 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 until 31 December 2008 due to the fact that it has the legal stability agreement (refer to note 34). Argentina In accordance with Argentinean legislation, Provinces (being the legal owners of the mineral resources) are entitled to request royalties from mine operators. For San José, the mining royalty is fixed at 1.85% of the pit-head value of the production when the final product is doré and 2.55% when the final product are mineral concentrates or precipitates. As at 31 December 2008, the amount payable as mining royalties amounted to US$136,000. 36 Financial risk management The Group is exposed to a variety of risks and uncertainties which may have a financial impact on the Group and which also impact the achievement of social, economic and environmental objectives. These risks include strategic, commercial, operational and financial risks and are further categorised into risk areas to facilitate consolidated risk reporting across the Group. (a) Foreign currency risk The Group principally produces silver and gold which are typically priced in US dollars. A proportion of the Group’s costs are incurred in pounds sterling, Peruvian nuevos soles, Argentine pesos and Mexican pesos. Accordingly, the Group’s financial results may be affected by exchange rate fluctuations between the US dollar and the local currency. The long-term relationship between commodity prices and currencies in the countries in which the Group operates provides a certain degree of natural protection. The Group does not use derivative instruments to manage its foreign currency risks. The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before tax and the Group’s equity. Year 2008 Pounds sterling Argentinian pesos1 Mexican pesos Peruvian nuevos soles Canadian dollars 2007 Pounds sterling Argentinian pesos1 Peruvian nuevos soles Mexican pesos Canadian dollars Increase/ decrease in US$/other currencies rate Effect on profit before tax US$000 +/–10% +/–430 +/–10% +/–1,362 –/+48 +/–10% –/+1,161 +/–10% –/+75 +/–10% Effect on equity US$000 – – – – +/–205 – +/–10% +/–42 – +/–10% –/+11,730 – +/–10% +/–2,539 –/+166 +/–10% – –/+699 –/+1,509 +/–10% 1 Minera Santa Cruz, one of the Group’s subsidiaries which is the legal owner of the San José mine, had debts denominated in US dollars. As Minera Santa Cruz’s functional currency was the peso during 2007, the translation of this loan into Pesos created a loss. Following the commencement of operations the Group was required to change the functional currency in Minera Santa Cruz to US dollars and as a result, these loans were no longer being exposed to foreign currency risk. 105 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 36 Financial risk management continued (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; thus, the Group’s profitability is ensured through the control of its cost base and the efficiency of its operations. The Company had a no-hedging policy which has been approved by the Board. However, due to extenuating circumstances in late 2008 (i.e. the global financial crisis) and the consequent high volatility of commodity prices, the Board approved a temporary authorisation to hedge up to 50% of the Company’s 2009 production schedule. As a result of the financial crisis, the Company found itself constrained on its ability to use its cash balance given uncertainty surrounding commodity prices. Authorisation was granted in order to allow the Company to free-up its cash balance in order to pursue higher growth opportunities through acquisition and strategic investments. The Group has embedded derivatives arising from the sale of concentrates and doré bars which were provisionally priced at the time the sale is recorded (refer to notes 5 and 21(3)). For these derivatives (sales price adjustments and hedges), the sensitivity of the fair value to an immediate 10% favourable or adverse change in the price of gold and silver (assuming all other variables remain constant), is as follows: Year 2008 2007 Increase/ decrease price of ounces of: Effect on profit before tax US$000 Gold +/–10% –/+157 Silver +/–10% –/+2,063 Gold +/–10% Silver +/–10% +/–107 +/–523 (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). The Group is primarily exposed to credit risk as a result of commercial activities and non-compliance, by counterparties, in transactions in cash which are primarily limited to cash balances deposited in banks and accounts receivable at the balance sheet date. Counterparty credit exposure based on commercial activities, cash balances in banks and hedging activities as at 31 December 2008. As at 31 December 2008 US$000 16,382 13,902 7,143 6,606 3,129 186 47,348 Credit rating NA BBB NA NA NA NA As at 31 December 2008 US$000 490 (186) 304 Summary commercial partners Consorcio Minero S.A. – Cormin Teck Cominco Metals Ltd Louis Dreyfus Peru S.A. Norddeutsche Affinerie AG Sudamericana Trading S.R.L. Others Hedging counterparties Citibank INTL Commodities Inc Total 106 Hochschild Mining plc Annual Report & Accounts 2008 36 Financial risk management continued Financial counterparties JP Morgan Citibank Banamex. Banco de Crédito del Perú BBVA Banorte Others (including Cash in hand) Total As at 31 December 2008 US$000 93,131 8,061 5,460 2,966 745 66 5,718 116,147 Credit rating Aa1 A1 Aa3 Baa2 Aa1 BBB NA As a result of the recent and ongoing financial crisis, the Group has evaluated and introduced additional efforts to try to mitigate credit risk exposure. To manage the credit risk associated with commercial activities, the Group has identified the following options which it is using/ implementing: > > > > > > > Aggressively using prepayment/advance clauses in sales contracts. Delaying delivery of title and/or advance payments to reduce exposure timeframe (potential delay in sales recognition). Obtaining parent guarantees to shore up credit profile of customer (where possible). Maintaining a diversified portfolio of clients (as diversified as possible). Evaluating the credit worthiness of customers. Analysing insurance products available. Limiting delivery of product (to the extent possible) based on open exposures. To manage credit risk associated with cash balances deposited in banks, the Group is using/implementing the following options: > Increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit and to diversify credit risk. Investing cash (to the extent possible) with counterparties with whom the Group has debt outstanding. Investing cash in short-term, highly liquid and low risk instruments (money market accounts). Maintaining excess cash abroad in hard currency. > > > Receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in note 19. (d) Equity risk on financial instruments The Group acquires financial instruments in connection with strategic alliances with third parties. The Group constantly monitors the fair value of these instruments in order to decide whether or not it is convenient to dispose of these investments. The disposal decision is also based on management’s intention to continue with the strategic alliance, the tax implications and changes in the share price of the investee. The following table demonstrates the sensitivity to reasonable movements in the share price of available-for-sale financial assets and derivative financial instruments (excluding embedded derivatives from provisionally prices sales), with all other variables held constant: Year 2008 2007 Increase/ decrease in prices +10% –10% +10% –10% Effect on profit before tax US$000 +1,615 –1,391 +780 –2,534 Effect on equity US$000 +730 –730 +1,500 –1,126 107 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the consolidated financial statements continued For the year ended 31 December 2008 36 Financial risk management continued (e) Liquidity risk Liquidity risk arises from the Group’s inability to obtain the funds it requires to comply with its commitments, including the inability to sell a financial asset quickly enough and at a price close to its fair value. Management constantly monitors the Group’s level of short- and medium-term liquidity, and their access to credit lines, in order to ensure appropriate financing is available for its operations. The table below categorises the Group’s financial liabilities into relevant maturity groupings based on the remaining period as at the balance sheet to the contractual maturity date: At 31 December 2008 Trade and other payables Borrowings Total At 31 December 2007 Trade and other payables Borrowings Total Less than 1 year US$000 Between 1 and 2 years US$000 Between 2 and 5 years US$000 Over 5 years US$000 Total US$000 82,359 102,705 402 98,800 292 161,792 185,064 99,202 162,084 52,276 33,176 334 41,397 657 17,575 85,452 41,731 18,232 – – 83,053 363,297 – 446,350 – – – 53,267 92,148 145,415 (f) 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 applies 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. It is important to note that all existing financial obligations are at fixed rates. As at 31 December 2008 Within 1 year US$000 Between 1 and 2 years US$000 Between 2 and 5 years US$000 Over 5 years US$000 Total US$000 Fixed rate Cash at bank (note 22) Time deposits (note 22) Loans to minority shareholders (note 19) Amounts due to minority shareholders (note 24) Secured bank loans (note 24) Floating rate Liquidity funds (note 22) Secured bank loans (note 24) Fixed rate Cash at bank (note 22) Time deposits (note 22) Loans to minority shareholders (note 19) Assigned funds (note 19) Amounts due to minority shareholders (note 24) Secured bank loans (note 24) Floating rate Liquidity funds (note 22) 171 8,278 6,502 – – 22,269 (40,409) (22,248) (2,604) (52,365) – – 8,062 (7,350) (1,898) – – – – – 171 8,278 36,833 (70,007) (56,867) 93,131 – (4,260) (56,432) (141,160) – – 93,131 – (201,852) As at 31 December 2007 Within 1 year US$000 Between 1 and 2 years US$000 Between 2 and 5 years US$000 Over 5 years US$000 Total US$000 539 7,373 15,100 – (9,299) (23,750) – – 19,110 30 (41,286) – – – – – (13,923) – – – – – – – 539 7,373 34,210 30 (64,508) (23,750) 285,015 – – – 285,015 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. 108 Hochschild Mining plc Annual Report & Accounts 2008 36 Financial risk management continued The following table demonstrates the sensitivity to a reasonable movement in the interest rate, with all other variables held constant, of the financial instruments with a floating rate. The Group is exposed to the fluctuation of rates expressed in US dollars. This assumes that the amount remains unchanged from that in place at 31 December 2008 and 2007 and that the change in interest rates is effective from the beginning of the year. In reality, the floating rate will fluctuate over the year and interest rates will change accordingly. Year 2008 2007 Increase/decrease interest rate +/–50bps +/–50bps Effect on profit before tax US$000 –/+520 +/–1,430 (g) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. Management considers as part of its capital, the financial sources of funding from shareholders and third parties (refer to notes 24 and 26). In order to ensure an appropriate return for shareholders’ capital invested in the Company, management thoroughly evaluates all material projects and potential acquisitions and approves them at its Executive Committee before submission to the Board for ultimate approval, where applicable. In addition to such controls, management and the Board have decided to secure commodity prices in 2009 in order to guarantee an appropriate capital level and shareholder return. 37 Subsequent events > > > > On 25 February 2009 the Group exercised its option to purchase a further 4,330,000 shares of Gold Resource Corporation for approximately US$12,900,000 (US$3 per share), representing a 41% discount to the closing price of the same date. After the purchase the Group owns a 14.6% interest in Gold Resource Corporation. On 6 March 2009 the Group served a notice of termination of the existing commercial agreement with Argor Heraeus. We are in the process of seeking more favourable commercial terms for the Group from alternative customers. On 9 March 2009 the Group acquired 14,900,000 shares of its associate Lake Shore for CAD$23,100,000 (approximately US$18,000,000) as part of its commitment to participate in the bought-deal financing agreement entered into by Lake Shore to raise approximately CAD$60,000,000. The proceeds from the financing will be used for the advancement of Lake Shore’s mineral projects. After completion of the transaction, the Group’s ownership in Lake Shore is maintained at 40%. On 23 March 2009 the Group signed a definitive Arrangement Agreement to acquire all the outstanding shares of Southwestern Resources Corp. (‘Southwestern’), a Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern Peru, for a total cash consideration of US$17,600,000 (US$0.39 per share). Southwestern is the strategic partner of the Group in the Liam and Pacapausa joint ventures. With the acquisition, the Group will own the remaining 50% of the Liam joint venture property and increase its interest in the Pacapausa joint venture from 30% to 80% (refer to notes 4(a) and 17(b)). This transaction is subject to the approval of Southwestern’s shareholders which is expected to occur by 8 May 2009. 109 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Parent company balance sheet As at 31 December 2008 ASSETS Non-current assets Property, plant and equipment Investments in subsidiaries Available-for-sale financial assets Deferred income tax assets Current assets Other receivables Income tax receivable Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity share capital Share premium Other reserves Retained earnings Total equity Non-current liabilities Borrowings Provision for Executive Long-Term Incentive Plan Current liabilities Trade and other payables Borrowings Income tax payable Total liabilities Total equity and liabilities As at 31 December Notes 2008 US$000 2007 US$000 426 4 85 5 1,133,589 1,734,831 57 380 6 – 21 13 1,134,072 1,735,317 7 8 8 726 8 – 83,946 3,755 285,036 84,680 288,791 1,218,752 2,024,108 9 9 146,466 146,466 416,154 416,154 347,766 1,315,396 104,201 142,746 1,014,587 2,020,762 11 12 10 11 197,592 – – 197,592 2,313 4,260 – – 6,573 204,165 32 32 3,146 168 3,314 3,346 1,218,752 2,024,108 The accompanying accounting policies and notes on pages 113 to 124 are an integral part of these financial statements. The financial statements on pages 110 to 112 were approved by the Board of Directors on 24 March 2009 and signed on its behalf by: Ignacio Rosado Chief Financial Officer 24 March 2009 110 Hochschild Mining plc Annual Report & Accounts 2008 Parent company cash flow statement For the year ended 31 December 2008 Reconciliation of (loss)/profit for the year to net cash used in operating activities (Loss)/profit for the year Adjustments to reconcile Company operating profit to net cash outflows from operating activities: Depreciation Impairment of investments in subsidiaries Impairment of available-for-sale financial assets Income tax expense Finance income Finance costs (excluding impairment of available-for-sale financial assets) Foreign exchange gain Increase (decrease) of cash flows from operations due to changes in assets and liabilities: Other receivables Trade and other payables Provision for Executive Long-Term Incentive Plan Cash used in operating activities Interest received Interest paid Tax paid Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Investments in subsidiaries Purchase of available-for-sale financial assets Loan to Minera Hochschild Chile, S.C.M. (formerly Minera MH Chile Ltda.) Repayment of loan from Minera Hochschild Chile, S.C.M. Repayment of loan from Minera Hochschild Mexico, S.A. de C.V. Net cash used in investing activities Cash flows from financing activities Proceed of borrowing Transaction costs associated with borrowing Dividends paid Transaction costs associated with issue of shares Cash flows generated from/(used in) financing activities Net decrease in cash and cash equivalents during the year Foreign exchange gain Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Transactions that did not affect cash flows Disposal of shares in subsidiaries Acquisition of shares in subsidiary Year ended 31 December Notes 2008 US$000 2007 US$000 (977,844) 2,917 89 4 5 967,630 – 323 6 21 13 (4,915) 5,332 (1,534) 151 (855) (32) 12 (11,634) 5,900 (1,050) (168) 24 71 1,372 (17,177) 346 (232) (60) (4,644) 32 (17,351) 18,211 (325) (1,972) (6,952) (1,437) (430) 4 5 (366,388) – 6 – 1,885 – – (105) (126,379) (451) (1,385) 7,000 (364,933) (121,320) 11(a) 200,000 – (2,408) – 11(a) (28,331) 15 – (8,448) (5,335) 169,261 (13,783) (202,624) 1,534 285,036 (136,540) 232 421,344 8 83,946 285,036 5 5 – 1,606,860 – (1,606,860) 111 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Parent company statement of changes in equity For the year ended 31 December 2008 Other reserves Equity share capital US$000 Share premium US$000 Merger reserve US$000 Total other reserves US$000 Retained earnings US$000 Total equity US$000 Balance at 31 December 2006 Profit for the year 146,466 – 416,191 – 1,315,396 – 1,315,396 – 148,277 2,026,330 2,917 2,917 Total recognised income for 2007 Transaction costs associated with issue of shares Dividends Balance at 31 December 2007 Loss for the year Total recognised loss for 2008 Transfer from merger reserve Dividends – – – – (37) – – – – – – – 2,917 – (8,448) 2,917 (37) (8,448) 146,466 – 416,154 – 1,315,396 – 1,315,396 – 142,746 (977,844) 2,020,762 (977,844) – – – – – – – (967,630) – – (967,630) – (977,844) 967,630 (28,331) (977,844) – (28,331) Balance at 31 December 2008 146,466 416,154 347,766 347,766 104,201 1,014,587 112 Hochschild Mining plc Annual Report & Accounts 2008 Notes to the parent company financial statements For the year ended 31 December 2008 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 office is located at 46 Albemarle Street, London W1S 4JL, 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 (‘the 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 and its subsidiaries (together ‘the Group’ or ‘Hochschild Mining Group’) is held through Pelham Investment Corporation, a Cayman Islands company. 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 year ended 31 December 2008 and are also consistent with IFRS issued by the IASB. In addition, the financial statements have been prepared in accordance with those parts of the Companies Acts 1985 and 2006, where applicable. The financial statements of the Company have been prepared on a historical cost basis, except for derivatives and available-for- sale financial instruments which have been valued at fair value. The financial statements are presented in US dollars (US$) and all monetary amounts are rounded to the nearest thousand ($000) except when otherwise indicated. (b) Exemptions The Company’s financial statements are included in the Hochschild Mining Group consolidated financial statements for the year ended 31 December 2008 and 31 December 2007. As permitted by section 230 of the Companies Act 1985, the Company has not presented its own profit and loss account. (c) 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 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. (d) Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: Adoption of new and amended standards The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the financial performance or position of the Group. > > IFRIC 11, IFRS 2 ‘Group and Treasury Shares Transactions’, applicable for annual periods beginning on or after 1 March 2007. IFRIC 14, IAS 19, ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction’, applicable for annual periods beginning on or after 1 January 2008. Amendment to IAS 39 and IFRS 7 ‘Reclassification of Financial Assets’. > 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 2009 or later periods but which the Group has not early adopted. A list of these items is included in note 2(a) of the Group financial statements. (e) Currency translation The functional currency of 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. 113 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the parent company financial statements continued For the year ended 31 December 2008 2 Significant accounting policies continued (f) 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 investment is reviewed for impairment if there are indications that the carrying value may not be recoverable. (g) Dividends 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 post-acquisition profits are recorded in the income statement. (h) Other receivables Current 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. (i) 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. (j) 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. (k) Provisions Provisions are recognised when the Company 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. Share based payments The fair value of cash-settled share plans is recognised as a liability over the vesting period of the awards. Movements in that liability between accounting dates are recognised as an expense. The fair value of the awards is taken to be the market value of the shares at the date of award adjusted by a factor for anticipated relative Total Shareholder Return (‘TSR’) performance. Fair values are subsequently remeasured at each accounting date to reflect the number of awards expected to vest based on the current and anticipated TSR performance. (l) Finance income and costs Finance income and costs mainly comprise interest income on funds invested, interest expense on borrowings, 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 and costs are recognised as they accrue, taking into account the effective yield on the asset and liability, respectively. (m) 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: > Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. > 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. 114 Hochschild Mining plc Annual Report & Accounts 2008 2 Significant accounting policies continued 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. (n) Financial instruments Financial assets and liabilities are recognised when the Company becomes party to the contracts that give rise to them and are classified as loans or borrowings, receivables, payables, financial instruments at fair value through profit and loss or as available-for- sale financial assets, as appropriate. The Company determines the classification of its financial assets and liabilities at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end. When financial assets and liabilities are recognised initially, they are measured at fair value, being the transaction price plus, in the case of financial assets not at fair value through profit or loss and borrowings, directly attributable transaction costs. The Company considers whether a contract contains an embedded derivative when the entity first becomes a party to it. The embedded derivatives are separated from the host contract if it is not measured at fair value through profit or loss and when the economic characteristics and risks are not closely related to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. All regular way purchases and sales of financial assets are recognised on the trade date, being the date that the Company commits to purchase or sell the asset. Regular way transactions require delivery and receipt of assets within the timeframe generally established by regulation or convention in the marketplace. The subsequent measurement of financial assets depends on their classification, as follows: Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit and loss. The Company considers whether a contract contains an embedded derivative when the entity first becomes a party to it. Embedded derivatives are separated from the host contract which is not measured at fair value through profit or loss when the analysis shows that the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on financial assets held for trading are recognised in the income statement. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss 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 the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as such or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit and loss. After initial recognition, available-for-sale financial assets are measured at fair value with unrealised gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. Loans and borrowings Borrowings are recognised initially at fair value. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Fair values The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. These include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis and pricing models. Impairment of financial assets The Company assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. 115 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the parent company financial statements continued For the year ended 31 December 2008 2 Significant Accounting Policies continued Assets carried at amortised cost If there is objective evidence that an impairment loss on assets carried at amortised cost 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 (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced, through the use of an allowance 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 income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as irrecoverable. Assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, 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 discounted at the current market rate of return for a similar financial asset. Available-for-sale financial assets If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its fair value is transferred from equity to the income statement. Reversals of impairment losses on debt instruments are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. Reversals in respect of equity instruments classified as available- for-sale are not recognised in the income statement. Derecognition of financial instruments A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: > > the rights to receive cash flows from the asset have expired; or the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either: (a) the Company has transferred substantially all the risks and rewards of the asset; or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. A financial liability is generally derecognised when the contract that gives rise to it is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss. (o) Dividends distribution 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. 3 Profit and loss account The Company made a loss attributable to equity shareholders of US$977,844 (2007: gain of US$2,917). 116 Hochschild Mining plc Annual Report & Accounts 2008 4 Property, plant and equipment Year ended 31 December 2007 Cost At 1 January 2007 Additions At 31 December 2007 Accumulated depreciation At 1 January 2007 Depreciation At 31 December 2007 Net book amount at 31 December 2007 Year ended 31 December 2008 Cost At 1 January 2008 Additions At 31 December 2008 Accumulated depreciation At 1 January 2008 Depreciation At 31 December 2008 Net book amount at 31 December 2008 5 Investments in subsidiaries Beginning balance Additions Disposals Impairment loss Ending balance Office Building equipment US$000 US$000 Total US$000 – – – – – – – 277 277 – 18 18 259 4 105 109 – 24 24 85 109 153 262 24 71 95 167 4 105 109 – 24 24 85 109 430 539 24 89 113 426 As at 31 December 2008 US$000 2007 US$000 1,734,831 366,388 1,608,452 1,733,239 – (1,606,860) (967,630) – 1,133,589 1,734,831 The Company tested its investments in subsidiaries for impairment and recognised an impairment of the investment in Hochschild Mining Holdings Ltd. of US$967,629,582. This impairment reflects the reduction in value of these investments since recognition. The recoverable value of the investment in Hochschild Mining Holdings Ltd. using a fair value less cost to sell approach, has been determined by reference to the market capitalisation of the Group adjusted for the value of the Company. The breakdown of the investments in subsidiaries is as follows: Name As at 31 December 2008 | As at 31 December 2007 Country of incorporation Equity interest % Carrying value US$000 Country of incorporation Equity interest % Carrying value US$000 Hochschild Mining Holdings Limited England and Wales 100 1,133,589 England and Wales 100 1,734,831 Total 1,133,589 1,734,831 The list of subsidiaries of the Group is presented in note 1 (Corporate information) of the notes to the Consolidated Financial Statements. On May 2007, the Company purchased 433,246,926 issued shares of £1.00 each of Hochschild Mining Holdings Limited (‘HM Holdings’) and paid for such shares by transferring the 100% of the issued and outstanding shares of Hochschild Mining (Argentina) and Hochschild Mining (Mexico) to HM Holdings at a cost of US$261,276,000 and US$584,422,000, respectively. In December 2007, the Company purchased 100 issued shares of £1.00 each of HM Holdings and paid for such shares by transferring the 100% of the issued and outstanding shares of the Cayman Holding Companies (Ardsley, Garrison, Larchmont and Hochschild Mining (Peru)) to HM Holdings at a cost of US$761,162,000. During 2007, the Company subscribed for 33,315,351 shares of £1.00 each in HM Holdings through capital contributions paid in cash of US$82,353,000. 117 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the parent company financial statements continued For the year ended 31 December 2008 5 Investments in subsidiaries continued During 2008, the Company subscribed for 4,800 shares of £1.00 each in HM Holdings through capital contributions paid in cash of US$366,388,304. 6 Available-for-sale financial assets Beginning balance Additions Impairment recorded in the income statement Ending balance Year ended 31 December 2008 US$000 2007 US$000 380 – – (323) 57 451 (71) 380 On 4 May 2007, the Company purchased 500,000 shares in Mirasol Resources Ltd and paid CAD$500,000 (approximately US$451,000). The fair value of these listed shares is determined by reference to published price quotations in the active market. Together with the purchase of shares, the Company obtained 500,000 warrants with an expiry date of May 2009. Warrants are fair valued using the Black-Scholes option pricing method and the balance at 31 December 2007 was nil. At 31 December 2008, the investment in Mirasol Resources Ltd. was impaired. The impairment of US$323,000 was recorded under ‘Finance costs’ (2007: US$71,000). 7 Other receivables Amounts receivable from subsidiaries (note 14) Prepayments Accrued income Receivable from Kaupthing, Singer and Friedlander Other debtors Provision for impairment1 Total The fair values of other receivables approximate their book values. 1 Corresponds to the impairment of cash deposits with Kaupthing, Singer and Friedlander of US$758,000 recorded under ‘Other expenses’. Movements in the provision for impairment of receivables: As at 31 December 2008 US$000 2007 US$000 62 526 138 758 – – 1,484 (758) – 1,886 664 1,122 83 3,755 726 3,755 Individually Collectively impaired US$000 impaired US$000 Total US$000 – – – – 758 – 758 – – – – – – – Neither past due nor impaired US$000 Less than 30 days US$000 30 to 60 days US$000 Over 60 days US$000 726 3,755 – – – – 758 – – – – – 758 – 758 Total US$000 1,484 3,755 At 1 January 2007 Charge for the year Utilised At 31 December 2007 Charge for the year Utilised At 31 December 2008 As at 31 December, the ageing analysis of other receivables is as follows: Year 2008 2007 118 Hochschild Mining plc Annual Report & Accounts 2008 8 Cash and cash equivalents Bank current account Liquidity funds1 Cash and cash equivalents considered for the cash flow statement As at 31 December 2008 US$000 2007 US$000 285 83,661 352 284,684 83,946 285,036 1 The liquidity funds are mainly invested in certificate of deposit, commercial papers and floating rate notes with a weighted average annual effective interest rate of 3.98% and a weighted average maturity between 30 to 54 days as at 31 December 2008 (2007: 5.09% and 34 days) (refer to note 16(d)). The liquidity funds generated interest of US$4,867 (2007:US$16,860). 9 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 2008 and 2007 is as follows: Class of shares Ordinary Shares Authorised | Amount Number Issued Number Amount 500,000,000 £125,000,000 307,350,226 £76,837,557 At 31 December 2008 and 2007, all issued shares with a par value of 25p (weighted average of US$0.476 per share) each 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 and by proxy 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 they are the holder/proxy. The changes in share capital are as follows: Shares issued as at 1 January 2007 Transaction costs associated with issue of shares1 Shares issued as at 31 December 2007 Shares issued as at 31 December 2008 Number of shares 307,350,226 – 307,350,226 307,350,226 Equity share capital US$000 146,466 – 146,466 146,466 Share premium US$000 416,191 (37) 416,154 416,154 1 Corresponds to the underaccrual of transaction costs relating to the Company’s listing on the London Stock Exchange in 2006. (b) Other reserves Merger reserve The 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. 10 Trade and other payables Trade payables Loan from subsidiary (note 14) Professional fees Board members’ remuneration Remunerations payable Audit fees Accrued expenses Taxes and contributions Total As at 31 December 2008 US$000 2007 US$000 167 1,055 227 42 160 522 100 – 40 241 1,914 221 320 116 236 98 2,313 3,146 Trade payables mainly relate to the purchase of third-party services. These payables do not accrue interest and no guarantees have been granted. The fair value of trade and other payables approximate their book values. 119 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the parent company financial statements continued For the year ended 31 December 2008 10 Trade and other payables continued Trade payables are denominated in the following currencies: Pounds sterling US dollar Canadian dollar Australian dollar Total 11 Borrowings Secured bank loans Total 2008 US$000 2007 US$000 192 49 61 96 1 – 9 – 167 241 As at 31 December 2008 | 2007 Non-current US$000 Current Non-current US$000 US$000 Current US$000 197,592 4,260 197,592 4,260 – – – – As at 31 December 2008, the balance corresponds to: > Loan facility with a syndicate of lenders with JP Morgan Chase Bank N.A. acting as the Administrative Agent. Total secured term loan facility of US$200,000,000 that accrues an effective interest rate of LIBOR + 1% and is guaranteed by all the equity share capital, free and clear of any liens, of Compañía Minera Ares S.A.C. The balance as at 31 December 2008 is comprised of the secured term loan facility of US$200,000,000 plus accrued interest of US$4,260,000 and net of transaction costs of US$2,408,000. The Company has granted the following guarantees on its US$200,000,000 bank syndicated loan: > > Pledge of all shares in Compañía Minera Ares (wholly-owned subsidiary). Subsidiary guarantees by certain wholly-owned subsidiaries whereby these subsidiaries guarantee with their cash flows the repayment of the loan. The main administrative and financial covenants that the Company and Compañía Minera Ares must comply with during the term of the syndicated loan are as follows: > > Quarterly unaudited and annual audited financial statements for the Company and Compañía Minera Ares. Investments in restricted and unrestricted subsisiaries based on an agreed upon limit (unlimited within restricted subsidiaries). It is intended for every wholly-owned subsidiary to participate in the subsidiary guarantee. Maintain the following ratios (at a consolidated and Compañía Minera Ares level) beginning on the date of execution of the agreement and during the term of the loan: – Interest expense coverage ratio greater than 3:1. – Debt to EBITDA ratio lower than 2.5:1 from 2009 onwards (up to 3:1 in 2008). > Compliance with the restrictive covenants described in the preceding paragraph is overseen by Compañía Minera Ares’ management and the Administrative Agent. The Group and Compañía Minera Ares have complied with the commitments and financial covenants mentioned in the syndicated loan agreement. The maturity of non-current borrowings is as follows: Between 1 and 2 years Between 2 and 5 years As at 31 December 2008 US$000 2007 US$000 56,432 – 141,160 – 197,592 – 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: Bank loans Secured Total 120 Hochschild Mining plc Annual Report & Accounts 2008 Carrying amount As at 31 December | Fair values As at 31 December 2008 US$000 2007 US$000 2008 US$000 2007 US$000 197,592 197,592 – 208,429 – – 208,429 – 12 Provision for Executive Long-Term Incentive Plan The 2007 Executive Long-Term Incentive Plan was replaced by a new plan with different variables and therefore the provision recorded was reversed. The new plan reduces the number of variables and only considers Total Shareholder Return (‘TSR’). The plan comprises an amount to be paid in cash to participants depending on the achievement of the three-year performance measures during the performance period which ends on 31 December 2010. The cash award will be held for an additional period and delivered 50% on 31 December 2010 and the remaining 50% on 31 December 2011, accumulating notional interest at the prevailing inter-bank interest rate. Only employees who remain with the Company until this date will have right of the benefit, with some exemptions that have to be approved by the Remuneration Committee of the Board. The provision represents the discounted values of the estimated cost of the long-term employee benefit. There is no provision in 2008 because the TSR over the period did not reach the performance level required under the rules of the plan and the expected TSR over the remaining period until 31 December 2010 is currently expected not to reach the minimum performance measures. 13 Income tax The Income tax of the Company is as follows: Current tax charge Deferred tax credit Withholding taxes The changes in the net deferred income tax assets are as follows: Beginning of the year Income statement charge End of the year Year ended 31 December 2008 US$000 2007 US$000 – 21 – 21 1,351 (21) 42 1,372 As at 31 December 2008 US$000 2007 US$000 21 – (21) – 21 21 The charge relates to the reversal of a deferred income tax asset recognised for the impairment of available-for-sale financial assets. 14 Related-party balances and transactions (a) Related-party accounts receivable and payable The Company had the following related-party balances and transactions during the years ended 31 December 2008 and 31 December 2007. As at 31 December 2008 As at 31 December 2007 | Accounts Accounts payable US$000 receivable US$000 Accounts receivable US$000 Accounts payable US$000 Subsidiaries Compañía Minera Ares S.A.C. Minera Hochschild Chile, S.C.M. (formerly Minera MH Chile Ltda.) Larchmont S.A. (formerly Larchmont Corporation) Hochschild Mining (Argentina ) S.A. (formerly Hochschild Mining (Argentina ) Corporation) Hochschild Mining (Mexico), S.A. de C.V. (formerly Hochschild Mining (Mexico) Corporation) Ardsley S.A. (formerly Ardsley Corporation) Garrison S.A. (formerly Garrison Corporation) Hochschild Mining (Peru) S.A. (formerly Hochschild Mining (Peru) Corporation) 62 – – – – – – – 62 1,047 – – 3 1 – – 4 1,055 – 1,886 – – – – – – 1,886 1,908 – 1 1 1 1 1 1 1,914 The fair values of the receivables and payables approximate their book values. Transactions between the Company and these companies are on an arm’s length basis. (b) Compensation of key management personnel of the Company Key management personnel include the Directors who receive remuneration. The amount of this remuneration totals US$1,314,000 (2007: US$1,775,000). 121 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the parent company financial statements continued For the year ended 31 December 2008 15 Dividends paid and proposed Year ended 31 December 2007 Total dividends declared after year-end and not provided for1 Year ended 31 December 2008 Total dividends paid or provided for during the year Total dividends declared after year-end and not provided for Amount US$000 22,184 28,331 6,147 1 Corresponds to dividends declared after 31 December 2007 to Pelham Investment Corporation, Navajo Overseas Corporation and public shareholders (‘parent company’s shareholders’) Dividends per share The dividends declared in 2008 were US$6,147,005 (US$0.020 per share). A dividend in respect of the year ended 31 December 2008 of US$0.020 per share, amounting to total dividend of US$6,147,005 is to be proposed at the Annual General Meeting on 26 May 2009. These financial statements do not reflect this dividend payable. 16 Financial risk management The Company is exposed to a variety of risks and uncertainties which may have an impact on the achievement of financial and economic objectives. These risks include strategic, operational and financial risk and are further categorised into risks areas to facilitate risk assessment. (a) Foreign currency risk A proportion of the Company’s costs are incurred in pounds sterling and Canadian dollars. Accordingly, the Company’s financial results may be affected by exchange rate fluctuations between the US dollar, the pounds sterling and Canadian dollars. The Company does not use derivative instruments to manage its foreign currency risks. The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Company’s profit before tax and the Company’s equity. Year 2008 Pounds sterling Canadian dollars 2007 Pounds sterling Canadian dollars Increase/ decrease in US$/other currencies rate Effect on profit before tax US$000 Effect on equity US$000 +/–10% +/–10% +/–433 – – +/–6 +/–10% +/–10% +/–42 – – +/–38 (b) Credit risk Credit risk arises from debtors’ inability to meet their payment obligations to the Company as they become due (without taking into account the fair value of any guarantee or pledged assets). The Company is primarily exposed to credit risk in transactions in cash which are primarily limited to cash balances deposited in banks and accounts receivable at the balance sheet date. As a result of the recent and ongoing financial crisis, the Company has evaluated and introduced additional efforts to try to mitigate credit risk exposure. To manage credit risk associated with cash balances deposited in banks, the Company is using/implementing the following options: > Increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit and to diversify credit risk. Investing cash (to the extent possible) with counterparties with whom the Group has debt outstanding. Investing cash in short-term, highly liquid and low risk instruments (money market accounts). Maintaining excess cash abroad in hard currency. > > > Credit risk concentrations exist when changes in economic, industrial or geographic factors take place, affecting in the same manner the Company’s counterparties whose added risk exposure is significant to the Company’s total credit exposure. Receivable balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in notes 7 and 8. 122 Hochschild Mining plc Annual Report & Accounts 2008 16 Financial risk management continued (c) Liquidity risk Liquidity risk arises from the Company’s inability to obtain the funds it requires to comply with its commitments, including the inability to sell a financial asset quickly enough and at a price close to its fair value. Management constantly monitors the Company’s level of short- and medium-term liquidity and their access to credit lines on reasonable terms in order to ensure appropriate financing is available for its operations. The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date: Less than Between 1 Between 2 1 year and 2 years and 5 years Over 5 years US$000 US$000 US$000 US$000 Total US$000 At 31 December 2008 Trade and other payables (refer to note 10) Borrowings At 31 December 2007 Trade and other payables (refer to note 10) 2,313 4,260 – 71,000 – 151,523 – – 2,313 226,783 3,146 – – – 3,146 (d) Interest rate risk The Company has financial assets 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 Company 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 Company over the expected period until maturity. As at 31 December 2008 Fixed rate Bank current account (refer to note 8) Floating rate Liquidity funds (refer to note 8) Secured bank loans (refer to note 11) Fixed rate Bank current account (refer to note 8) Floating rate Liquidity funds (refer to note 8) Between 1 Within 1 year and 2 years and 5 years Over 5 years US$000 Between 2 US$000 US$000 US$000 285 83,661 – – – – 4,260 56,432 141,160 – – – Total US$000 285 83,661 201,852 As at 31 December 2007 Within 1 year US$000 Between 1 and 2 years US$000 Between 2 and 5 years Over 5 years US$000 US$000 Total US$000 352 284,684 – – – – – 352 – 284,684 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 Company that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. The table below demonstrates the sensitivity to a reasonably possible change in the interest rate, with all other variables held constant, of the financial instruments with a floating rate. This assumes that the amount remains unchanged from that in place at 31 December 2008 and 2007 and that the change in interest rates is effective from the beginning of the year. In reality, the floating rate will fluctuate over the year and interest rates will change accordingly: Year 2008 2007 Increase/ decrease in interest rate Effect on profit before tax US$000 +/–50bps –/+570 +/–50bps +/–1,430 123 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Notes to the parent company financial statements continued For the year ended 31 December 2008 16 Financial risk management continued (e) Capital risk management The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Management considers as part of its capital, the financial sources of funding from shareholders and third parties. In order to ensure an appropriate return for shareholders’ capital invested in the Company, management monitors capital thoroughly and evaluates all material projects and potential acquisitions and approves them at its Executive Committee before submission to the Board for ultimate approval, where applicable. 17 Subsequent events On 9 March 2009 the Company signed a binding letter agreement to acquire all the outstanding shares of Southwestern Resources Corp. (‘Southwestern’), a Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern Peru, for a total cash consideration of US$17,600,000 (US$0.39 per share). Southwestern is the strategic partner of the Group in the Liam and Pacapausa joint ventures. With the acquisition, the Group will own the remaining 50% of the Liam joint venture property and increase its interest in the Pacapausa joint venture from 30% to 80% (refer to notes 4(a) and 17(b)) of the Group financial statements). On 23 March 2009, a definitive Arrangement Agreement was signed between the Group and Southwestern pursuant to which the Group will acquire all the outstanding shares of Southwestern. The transaction is subject to the approval of Southwestern’s shareholders which is expected to occur by 8 May 2009. 124 Hochschild Mining plc Annual Report & Accounts 2008 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 126 to 128 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-term 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 2008, 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. The prices used for the reserves calculation were: Au Price: US $800 per ounce and Ag Price: US $12 per ounce. 125 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Reserves and resources continued Reserves and resources (audited by IMC Group Consulting Limited) Attributable metal reserves As at 31 December 2008 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 Au (g/t) Ag (moz) Au (koz) Ag Eq. (moz) Proved and probable (t) Proved (t) Probable (t) 929,683 681,241 1,610,924 Ag (g/t) 575 495 541 1.80 1.38 17.19 10.85 1.62 28.04 464,180 185,225 124 112 5.01 4.49 649,405 120 4.86 75,686 51,662 275 257 2.04 1.94 127,348 268 2.00 1.84 0.67 2.51 0.67 0.43 1.10 53.78 30.20 83.98 74.77 26.72 101.49 4.97 3.22 8.19 1,179,218 1,402,004 380 354 1.60 1.43 14.40 15.94 60.70 64.31 2,581,222 366 1.51 30.34 125.02 264,461 567,958 508 529 7.92 7.90 4.32 9.65 67.36 144.17 832,419 522 7.90 13.97 211.53 1,132,556 106,982 1,239,538 4.60 4.69 4.60 1.44 1.31 1.44 0.18 0.01 0.18 57.39 4.51 57.39 4,152,766 2,888,091 289 404 2.39 2.89 38.60 37.53 318.97 268.63 57.74 53.65 7,040,857 336 2.60 76.13 587.60 111.39 20.42 12.66 33.08 6.33 2.27 8.60 0.97 0.62 1.59 18.04 19.80 37.84 8.36 18.30 26.66 3.63 0.29 3.63 Note: Where reserves are attributable to joint venture partner, reserve figures reflect the Company’s ownership only. Includes discounts for ore loss and dilution. 2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades. 126 Hochschild Mining plc Annual Report & Accounts 2008 Attributable metal resources (audited by IMC Group Consulting Limited) As at 31 December 2008 Resource category Measured (t) Measured and indicated (t) Indicated (t) Inferred (t) Ag (g/t) Au (g/t) Zn (%) Pb (%) Cu (%) Ag Eq (g/t) Ag (moz) Au (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 Azuca Measured Indicated Total Inferred San Felipe Measured Indicated Total Inferred Total Measured Indicated Total Inferred 1,302,535 822,655 2,125,190 1,815,443 512,061 206,473 718,534 298,881 190,853 99,317 290,170 912,951 1,180,769 1,401,686 2,582,455 734,346 263,331 1,675,682 879,679 1,143,010 540,305 131,776 1,807,458 4.48 4.44 4.48 4.81 294,288 – – – 1,776,034 1,393,716 1,354,261 2,747,977 1,257,731 – – – 327 69 82 76 84 6,518,948 4,895,848 11,414,795 273 343 303 312 7,629,979 662 601 639 519 167 148 161 236 338 274 316 227 431 402 415 395 581 515 530 333 2.06 1.67 1.91 1.56 7.10 5.66 6.69 3.96 2.15 1.68 1.99 1.15 1.82 1.63 1.72 1.57 8.96 7.77 8.04 5.72 1.28 1.19 1.27 1.22 – – – 1.34 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0.02 7.12 0.06 6.14 0.04 6.64 0.05 6.18 2.06 1.52 2.46 1.70 2.23 1.60 1.59 1.02 3.10 2.73 2.92 2.26 0.66 0.76 0.70 0.37 0.39 0.31 0.35 0.19 0.08 0.09 0.09 0.03 27.73 86.17 786 701 15.90 44.23 753 43.63 130.40 90.97 613 30.29 593 488 563 473 467 375 435 296 2.74 116.90 0.98 37.60 3.73 154.51 2.26 38.06 2.07 0.88 2.95 6.66 13.18 5.35 18.53 33.76 16.36 69.03 540 500 18.12 73.54 518 34.48 142.57 36.97 9.31 488 1,119 981 1,013 676 4.92 75.89 14.57 219.66 19.49 295.55 99.33 5.78 0.24 68.80 0.02 5.06 0.26 73.86 11.50 0.05 – – – 18.69 – – – 76.41 81 76 81 78 – – – 408 315 295 305 283 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3.09 3.59 6.68 3.42 43.15 0.88 99.26 2.45 83.18 36.97 3.33 182.45 80.12 8.47 1.89 77.76 5.50 4.24 9.74 2.34 448 57.15 430.86 99.26 43.15 549 54.06 387.90 83.18 36.97 492 111.21 818.76 182.45 80.12 28.47 439 76.46 388.89 77.76 5.50 4.24 9.74 2.34 Note: Resources include undiscounted reserves, where resources are attributable to joint venture partner, resources figures reflect the Company’s ownership only. No ore loss or dilution has been included, and stockpiled ore excluded. 2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades. 127 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Reserves and resources continued Change in metal reserves and resources from December 2007 to December 2008 Change in total reserves and resources Ag equivalent content (million ounces) Peru Arcata Ares Selene Pallancata Peru total: Argentina San José Argentina total: Mexico Moris San Felipe Mexico total: Total: December 2007 Production1 Movements2 December 2008 Net difference % change Category Resource Reserve Resource Reserve Resource Reserve Resource Reserve 70.3 32.4 16.8 14.6 18.5 9.6 83.2 41.4 Resource Reserve 188.8 98.0 Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve 90.1 66.2 90.1 66.2 9.5 7.7 27.6 37.1 7.7 316.0 172.0 (12.0) (5.3) (2.9) (5.9) (26.2) (9.6) (9.6) (3.1) 0.0 (3.1) (38.9) 16.9 12.7 0.7 (0.7) (5.8) (5.1) 7.8 27.6 19.7 34.5 5.9 (4.3) 5.9 (4.3) (1.7) 0.5 10.8 0.0 9.1 0.5 34.7 30.7 87.2 33.1 17.5 8.6 12.7 1.6 90.9 63.1 208.4 106.3 96.0 52.3 96.0 52.3 7.8 5.2 38.5 46.2 5.2 350.6 163.8 16.9 0.7 0.7 (6.0) (5.8) (8.0) 7.8 21.6 19.7 8.3 5.9 (13.9) 5.9 (13.9) (1.7) (2.6) 10.8 0.0 9.1 (2.6) 34.7 (8.2) 24 2 4 (41) (31) (83) 9 52 10 8 7 (21) 7 (21) (18) (33) 39 0 25 (33) 11 (5) 1 Depletion: reduction in reserves based on ore delivered to the mine plant. 2 Increase in reserves and resources due mainly to mine site exploration but also to price increases. Change in attributable reserves and resources Ag equivalent content (million ounces) Peru Arcata Ares Selene Pallancata Peru total: Argentina San José Argentina total: Mexico Moris San Felipe Mexico total: Total: Category Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Percentage attributable December 2007 Att.1 December 2008 Att.1 Net difference % change 100% 100% 100% 60% 51% 70% 100% 70.3 32.4 16.8 14.6 18.5 9.6 49.9 24.9 87.2 33.1 17.5 8.6 12.7 1.6 54.6 37.8 155.5 81.5 172.1 81.1 45.9 33.7 45.9 33.7 6.6 5.4 27.6 0.0 34.3 5.4 235.7 120.6 49.0 26.7 49.0 26.7 5.4 3.6 38.5 0.0 43.9 3.6 264.9 111.4 16.9 0.7 0.7 (6.0) (5.8) (8.0) 4.7 13.0 16.6 (0.4) 3.0 (7.1) 3.0 (7.1) (1.2) (1.8) 10.8 0.0 9.6 (1.8) 29.2 (9.2) 24 2 4 (41) (31) (83) 9 52 11 0 7 (21) 7 (21) (18) (33) 39 0 28 (33) 12 (8) 1 Attributable reserves and resources based on the Group’s percentage ownership of its joint venture projects. 2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades 128 Hochschild Mining plc Annual Report & Accounts 2008 Production Total Group production1 Silver production (koz) Gold production (koz) Total silver equivalent (koz) Total gold equivalent (koz) Silver sold (koz) Gold sold (koz) Year ended Year ended 31 December 31 December 2007 2008 20,782 193.97 32,421 540.34 20,593 198.32 14,343 211.38 27,026 450.43 13,717 202.10 1 Total production includes 100% of all production, including production attributable to joint venture partners at Moris, San José and Pallancata. Attributable Group production1 Silver production (koz) Gold production (koz) Attrib. silver equivalent (koz) Attrib. gold equivalent (koz) Year ended Year ended 31 December 31 December 2007 2008 16,941 152.86 26,113 435.22 13,588 201.27 25,665 427.74 1 Attributable production includes 100% of all production from Arcata, Ares and Selene, 60% from Pallancata, 51% from San José and 70% from Moris. 2008 production by mine Arcata Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Concentrate produced (tonnes) Silver grade in concentrate (kg/t) Gold grade in concentrate (kg/t) Silver produced (koz) Gold produced (koz) Silver sold (koz) Gold sold (koz) Ares Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Doré total (koz) Silver produced (koz) Gold produced (koz) Silver sold (koz)1 Gold sold (koz)2 1 Total sale figures for Ares include the sale of 746 koz of silver precipitates from San José. 2 Total sale figures for Ares include the sale of 11.14 koz of gold precipitates from San José. Year ended Year ended 31 December 31 December 2007 2008 557,870 571.37 1.53 20,639 13.94 0.04 9,032 24.04 8,564 22.36 415,400 560.04 1.43 16,665 12.12 0.03 6,553 16.48 6,544 15.50 Year ended Year ended 31 December 31 December 2007 2008 347,910 156.95 6.06 1,608 1,538 64.16 2,398 77.44 333,800 279.25 14.57 2,593 2,701 149.98 2,880 157.77 % change 45 (8) 20 20 50 (2) % change 25 (24) 2 2 % change 34 2 7 24 15 33 38 46 31 44 % change 4 (44) (58) (38) (43) (57) (17) (51) 129 Hochschild Mining plc Annual Report & Accounts 2008 Production continued Overview Business review Governance Financial statements Further information Selene Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Concentrate produced (tonnes) Silver grade in concentrate (kg/t) Gold grade in concentrate (kg/t) Silver produced (koz) Gold produced (koz) Silver sold (koz) Gold sold (koz) Pallancata1 Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Concentrate produced (tonnes) Silver grade in concentrate (kg/t) Gold grade in concentrate (kg/t) Silver produced (koz) Gold produced (koz) Silver sold (koz) Gold sold (koz) 1 The Company has a 60% interest in Pallancata. San José1 Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Silver produced (koz) Gold produced (koz) Silver sold (koz) Gold sold (koz) 1 The Company has a 51% interest in San José. Moris1 Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Silver produced (koz) Gold produced (koz) Silver sold (koz) Gold sold (koz) 1 The Company has a 70% interest in Moris. 130 Hochschild Mining plc Annual Report & Accounts 2008 Year ended Year ended 31 December 31 December 2007 2008 269,150 209.52 1.21 3,201 15.04 0.08 1,579 8.50 1,929 9.93 413,622 295.79 2.01 4,010 26.83 0.17 3,414 21.62 3,644 22.03 Year ended Year ended 31 December 31 December 2007 2008 468,125 312.18 1.49 4,265 30.54 0.12 4,188 16.16 3,852 14.81 78,335 310.02 1.49 638 34.28 0.13 704 2.76 550 2.03 Year ended Year ended 31 December 31 December 2007 2008 295,963 559.11 6.69 4,381 54.26 4,588 57.70 92,974 538.38 7.08 958 14.96 92 1.49 Year ended Year ended 31 December 31 December 2007 2008 876,148 5.71 1.57 65.07 26.85 68.27 28.01 338,304 4.69 1.65 12.63 5.58 6.44 3.26 % change (35) (29) (40) (20) (44) (53) (54) (61) (47) (55) % change 498 1 0 568 (11) (8) 495 486 600 630 % change 218 4 (6) 357 263 4,887 3,772 % change 159 22 (5) 415 381 960 760 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 expenses other than personnel and other expenses 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 Company Hochschild Mining plc CSR Corporate social responsibility Cu Copper 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 $ United States dollars GAAP Generally Accepted Accounting Principles Group Hochschild Mining plc and subsidiary undertakings IAS International Accounting Standards IASB International Accounting Standards Board IFRS International Financial Reporting Standards JV Joint venture koz Thousand ounces kt Thousand metric tonnes ktpa Thousand metric tonnes per annum 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 LTI Lost Time Injury, meaning an occupational injury or illness that results in days away from work LTIFR Lost Time Injury Frequency Rate = LTI x 1,000,000/hours worked moz Million ounces Ordinary Shares Ordinary Shares of £0.25 each in the Company Effective Tax Rate Income tax expense as a percentage of profit from continuing operations before income tax Pb Lead EPS The per-share (using the weighted average number of shares outstanding for the period) profit available to equity shareholders of the Company from continuing operations before exceptional items eq equivalent 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 g/t Grammes per metric tonne 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 t tonne tpa tonnes per annum tpd tonnes per day Zn Zinc 131 Hochschild Mining plc Annual Report & Accounts 2008 Overview Business review Governance Financial statements Further information Shareholder information As at 31 December 2008 Number of shareholders: 615 (2007: 617) Number of shares in issue: 307,350,226 (2007: 307,350,226) 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 By category of shareholder: Description Private Shareholders Pension Funds Nominee Companies Limited Companies Bank & Bank Nominees Other Institutions Total % of shareholders % of capital 16.10 10.24 39.02 24.23 7.48 2.93 100.00 Shareholders Shares Number of shareholders % of shareholders Number of shares 192,673 1 20.50 0.16 73.33 290,184,664 2.11 2.44 1.46 829,396 15,909,729 233,763 100 307,350,226 126 1 451 13 15 9 615 0.01 0.02 0.26 1.70 4.80 93.21 100.00 % of capital 0.06 0.00 94.41 0.27 5.18 0.08 100 Annual General Meeting (‘AGM’) The AGM will be held at 10am on 26 May 2009 at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ. 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 The Registrars can be contacted as follows for information about the AGM, shareholdings, dividends and to report changes in personal details: By post Shareholder Services Department, Capita Registrars Limited, Northern House, Woodsome Park, Fenay Bridge, Huddersfield, HD8 0LA By telephone If calling from the UK: 0871 664 0300 (Calls cost 10p per minute plus network extras) If calling from overseas: +44 20 8639 3399 By fax +44 (0)1484 600 911 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 5 May 2009. The Company’s registrars can also arrange for the dividend to be paid directly into a shareholder’s UK bank account. 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 5 May 2009. 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. 132 Hochschild Mining plc Annual Report & Accounts 2008 Hochschild Mining is a leading underground precious metals producer operating in the Americas with a primary focus on silver and gold. Overview 01 How have we performed this year? 02 Why invest in Hochschild? 04 Chairman’s statement Business review 08 Q&A with the CEO 11 Strategy 12 Market and geographic overview 14 Operational review 22 Financial review 30 Corporate social responsibility 36 Risk management Governance 38 Board of directors 39 Senior management 40 Directors’ report 45 Corporate governance report 50 Directors’ remuneration report 55 Statement of directors’ responsibilities 56 Independent auditor’s report Financial statements 57 Consolidated accounts 62 Notes to the consolidated accounts 110 Parent company accounts 113 Notes to the parent company accounts Further information 125 Reserves and resources 129 Production 131 Glossary 132 Shareholder information Investor relations For investor enquiries please contact: Jane Flynn, Investor Relations Associate by writing to the London Office address (see below), by phone on 020 7907 2933 or by email at jane.flynn@hocplc.com. Financial calendar Dividend payments 29 April 2009 Ex-dividend date Record date 1 May 2009 Deadline for return of currency election form 5 May 2009 Final dividend payable 28 May 2009 Other dates Annual General Meeting Half-yearly results announced London Office (and Registered Office address) 46 Albemarle Street London W1S 4JL United Kingdom Company Secretary R D Bhasin 26 May 2009 August 2009 Auditors Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom Solicitors Linklaters LLP One Silk Street London EC2Y 8HQ United Kingdom Forward looking statements The constituent parts of this Annual Report, including those that make up the Directors’ Report, contain certain forward looking statements, including such statements within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, such forward looking statements may relate to matters such as 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. Forward-looking statements include, without limitation, statements typically containing words such as ‘intends’, ‘expects’, ‘anticipates’, ‘targets’, ‘plans’, ‘estimates’ and words of similar import. 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. Factors that could cause or contribute to differences between the actual results, performance or achievements of Hochschild Mining plc and current expectations include, but are not limited to, legislative, fiscal and regulatory developments, competitive conditions, technological developments, exchange rate fluctuations and general economic conditions. These factors, risks and uncertainties are further discussed elsewhere in this Annual Report in the section entitled Risk Management. 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. Certified as a FSC mixed sources product, 9lives 55 is produced with 55% recycled fibre from both pre and post-consumer sources, together with 45% FSC certified virgin fibre from well managed forest. 9lives 55 provides the same visual and mechanical performance as 100% virgin fibre papers and offers excellent environmental attributes. Hochschild Mining plc Annual Report & Accounts 2008 H o c h s c h i l i i d M n n g p c l A n n u a l R e p o r t & A c c o u n t s 2 0 0 8 Hochschild Mining plc 46 Albemarle Street London W1S 4JL United Kingdom +44 (0) 207 907 2930 +44 (0) 207 907 2931 info@hocplc.com www.hochschildmining.com 

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