Hochschild Mining plc
Annual Report & Accounts 2008
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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