Hochschild Mining PLC Annual Report 2010

Plain-text annual report

Hochschild Mining plc 46 Albemarle Street London W1S 4JL United Kingdom Tel: +44 (0) 207 907 2930 Fax: +44 (0) 207 907 2931 info@hocplc.com www.hochschildmining.com i H o c h s c h i l d M n n g p l c A n n u a l i R e p o r t & A c c o u n t s 2 0 1 0 Unlocking value through exploration Annual Report & Accounts 2010 Contents How we performed At a glance 02 Strong investment proposition 04 Chairman’s statement Chief Executive Ofﬁcer’s review 07 Growth strategy Operating & exploration review 11 Current operations Advanced projects 16 18 Exploration pipeline 24 Market & geographic overview Corporate responsibility 27 Our approach 29 Safety 30 Health & hygiene 31 People 32 Community relations 34 Environment Financial review & risk management 37 42 Risk management Financial review Governance 45 Board of Directors 46 Senior management 47 Directors’ report 52 Corporate governance report 57 Directors’ remuneration report 64 Statement of directors’ responsibilities 65 Independent auditor’s report Financial statements 67 Consolidated income statement 68 Consolidated statement of comprehensive income 69 Consolidated statement of ﬁnancial position 70 Consolidated statement of cash ﬂows 71 Consolidated statement of changes in equity 72 Notes to the consolidated ﬁnancial statements 132 Parent company statement of ﬁnancial position 133 Parent company statement of cash ﬂows 134 Parent company statement of changes in equity 135 Notes to the parent company ﬁnancial statements Further information 154 Proﬁt by operation 155 Reserves and resources 161 Production 163 Glossary 164 Shareholder information +39% Revenue $m 305 211 752 540 434 06 07 08 09 10 Cash ﬂow from operating activities $m +51% 304 201 94 79 21 06 07 08 09 10 Attributable net proﬁt $m 82 95 47 53 16 06 07 08 09 10 Earnings per share $ 0.27 0.28 0.19 0.17 0.05 06 07 08 09 10 Proposed total dividend $ 0.09 0.04 0.04 0.05 0.01 06 07 08 09 10 +79% +65% +25% Unlocking value through exploration Introduction Hochschild Mining plc Annual Report & Accounts 2010 01 “ I am pleased to report that Hochschild Mining has delivered a strong performance in 2010. We have met our operational expectations, strengthened our ﬁnancial position and undertaken some key strategic steps which I ﬁrmly believe will secure our future growth path and deliver further value for our shareholders.” Eduardo Hochschild Executive Chairman 02 Strong investment proposition Hochschild Mining plc Annual Report & Accounts 2010 Well positioned in the Americas. 5 Mexico SOLID ASSET BASE* Current operations: 1 Arcata Peru 2 Pallancata Peru 3 Ares Peru 4 San José Argentina 5 Moris Mexico Silver equivalent production Capacity 9.7 moz 1,750 tpd Silver equivalent production 12.3 moz 3,000 tpd Capacity Silver equivalent production Capacity 2.7 moz 940 tpd Silver equivalent production 10.4 moz 1,500 tpd Capacity Silver equivalent production Capacity 1.4 moz 3,000 tpd Advanced projects: 6 Inmaculada Peru 7 Azuca Peru 8 Crespo Peru Estimated silver equivalent production p.a. Estimated silver equivalent production p.a. Estimated silver equivalent production p.a. 6.6 moz 3.5 moz 2.3 moz EXTENSIVE PROJECT PIPELINE Greenﬁeld projects: Peru Ibel Huacullo Astana Farallón Josnitoro Sabina Pariguanas Argentina Mosquito Careli-Carmen San Martin Cerro Blanco Apacheta Pausi Huachoja Parihuana La Flora Cricket Mexico Chile Corazon de Tinieblas Mercurio Encrucijada Victoria Valeriano * Silver equivalent production equals total gold production multiplied by 60 (historical gold/silver ratio) added to the total silver production. Capacity is measured as tonnes per day (“tpd”). $70m 2011 exploration budget Peru 2 3 1 6 7 8 Chile 4 Argentina Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 03 Our strategy is to create value through efﬁcient operation, aggressive exploration and opportunistic acquisition of early stage projects. A t a g l a n c e STRATEGY MODEL q For further details see p07 Revenue by product 1. Silver 2. Gold 68% 32% 1 M&A x p loration E CORE ASSETS Project p i p e li n e M&A $752m 2 2011 exploration budget Greenﬁeld breakdown by country 2010 attributable production Silver equivalent moz 26.4 moz 1. Greenﬁeld 2. Brownﬁeld 3. Advanced projects 49% 36% 15% 1. Peru 2. Chile 3. Mexico 4. Argentina 52% 19% 17% 12% 26 26 28 26 23 1 3 $70m 1 4 3 2 2 75Number of geologists Brownﬁeld & greenﬁeld +40% Increase in exploration budget in 2011 +34% 06 07 08 09 10 Resource base Silver equivalent moz 459 342 250 208 185 06 07 08 09 10 04 A transformational year Chairman’s statement Hochschild Mining plc Annual Report & Accounts 2010 The Company’s consistent operational efﬁciency coupled with strong gold and silver prices delivered a robust ﬁnancial performance with EBITDA up 59% at $397.7 million and post- exceptional EPS also up strongly by some 48% to $0.46 per share. I am pleased to report that Hochschild Mining has delivered a strong performance in 2010. What was once again a turbulent year for the global economy was, however, one of the strongest years in history for precious metals, particularly for the silver price which rose 83%. In this environment, the Company met its operational expectations, strengthened its ﬁnancial position and undertook some key strategic steps which I ﬁrmly believe will secure our future growth path and deliver further value for our shareholders. The Company’s consistent operational efﬁciency coupled with strong gold and silver prices delivered a robust ﬁnancial performance with EBITDA up 59% at $397.7 million and post-exceptional EPS also up strongly by some 48% to $0.46 per share. Consequently, the Board is delighted to announce that we are proposing to increase the ﬁnal dividend by 50% to $0.03 per share which reﬂects our strong balance sheet position and the anticipated healthy future cash ﬂows of the Group. We believe the proposed increase is in accordance with capital availability and our desire to provide a yield to shareholders whilst continuing to respect the growth requirements of the business and the availability of capital. During 2010, the Board appointed a new management team led by Ignacio Bustamante as Chief Executive Ofﬁcer and Ramón Barúa as Chief Financial Ofﬁcer. I believe that the realigned Company focus on growth through exploration heralds the beginning of a new era for Hochschild in which our excellent asset base, combined with an immense talent pool, will unlock consistent and proﬁtable precious metal production growth. The 40% increase in our exploration budget to $70 million for 2011 is ﬁrm evidence of our commitment to this strategy and our conﬁdence in the potential of our current project pipeline. In addition, we now have over 70 geologists providing us with the technical experience and expertise required to deliver a steady stream of value accretive project opportunities. Our management team has great conﬁdence in the potential of the Company to develop this aggressive exploration strategy and, allied to this, they have promoted a disciplined approach to the assessment of acquisitions. In this regard, the key announcements in 2010 were the progression of our 100% owned Azuca and Crespo projects and the acquisition of a controlling stake in the Inmaculada project, all of which are located at the core of our Southern Peru cluster. +50% Final dividend of 3 cents per share Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 05 Also noteworthy was the sale of our stake in Lake Shore Gold Corp which represented a 34% gain on our original average purchase price. The decision was made in light of our stated commitment that acquisitions must not only deliver early stage assets, strong geological potential and high value accretion but also a clear path to control. The sale achieved a very proﬁtable return on our investment and has given us the ﬁnancial strength to reinvest in our near-term project pipeline. In addition, our 25% investment in Gold Resource Corp, in which we have invested a total of $67 million, is currently valued at approximately $349 million. The silver market rose over 70% in the second half of 2010 boosted by strong fundamentals, unprecedented investment demand and renewed focus on silver’s value as an alternative to gold. Whilst the corresponding rise in Hochschild’s share price can be explained partly by the buoyant precious metals market, I ﬁrmly believe that an increasingly widespread market acceptance of our shift in strategic focus as well as the positive results achieved to date have also been major factors and will continue to be so in the future. During 2011, we can look forward to further crucial steps in the development of our advanced projects at Inmaculada, Azuca and Crespo which in total have the potential to add a minimum of 12 million proﬁtable ounces per year to our current production base from the end of 2013. A t a g l a n c e Management is also conﬁdent that we are in a very strong position to continue the investment in brownﬁeld expansion at our existing mines and to take advantage of any value enhancing acquisitions and opportunities that arise which meet the strict investment criteria I have described above. We are committed to the safety of all our employees and have made good progress during the past year. In 2010, we reduced our accident frequency rate by 29% compared to 2009 and continue to move forward with the implementation of the safety management information system jointly developed with DNV. Nonetheless, it is with deep regret that I report two fatalities in 2010. We have addressed the underlying safety deﬁciencies that led to the occurrence of these tragic events and we continue to view any fatalities as unacceptable. On behalf of the Board, I would like to thank our entire team for their continued commitment in 2010 and I am conﬁdent that such impressive execution will remain the focus in 2011. Eduardo Hochschild Executive Chairman 28 March 2011 Above: Geologist at the Pallancata property. Right: Highlands of Peru. 06 Chief Executive Ofﬁcer’s review Hochschild Mining plc Annual Report & Accounts 2010 Chief Executive Ofﬁcer’s review 07 Growth strategy Unlocking value through exploration Looking to the future Chief Executive Ofﬁcer’s review Hochschild Mining plc Annual Report & Accounts 2010 07 STRATEGY MODEL M&A x p loration E CORE ASSETS 1 2 3 Project p i p e li n e M&A 1 2 3 3 Optimise resource life 3 Improve productivity Arcata Pallancata San José 3 Land package 3 People 3 Incentives 3 Budget 3 advanced projects 8 Company Makers Solid pipeline 3 Early stage 3 Strong geological potential 3 Highly accretive 3 Control Bolt-on M&A Questions to the CEO: What are the Company’s key goals for 2011? 2010 was extremely active and we expect 2011 to be another busy year. We are committed to achieving our production target of 22.5 million attributable silver equivalent ounces and on extending the resource life of our core operations. Completing feasibility studies at our advanced projects is a key objective for 2011 as well as the delivery of our extensive exploration programme – I am 100% dedicated to ensuring that the $70 million budget produces tangible results. We look forward to updating you on our progress next year... i C h e f E x e c u t i v e O f ﬁ c e r ’ s r e v i e w Having joined Hochschild Mining over 19 years ago, it gives me great pleasure to present my ﬁrst set of results as CEO. I am pleased to announce strong full year performance, reﬂecting the continuing operational and ﬁnancial strength of our business. 2010 has been a pivotal year for the Group. As a new management team, we agreed, with the full support of the Board, that focusing on an organic growth strategy, utilising our strong exploration and project development skills, would be the optimum strategy to continue generating value for all our shareholders. With our unrivalled knowledge of the Americas, premium land packages in many of the key geological areas and extensive existing infrastructure, we are strongly positioned to consolidate and grow our role as one of the leading mining operators in the Americas. Organic growth strategy Our strategy for growth is based on three distinct pillars. Firstly, we continue to optimise production and extend the life of our core producing assets, Arcata, Pallancata and San José, which are the bedrock of the Company. Last year, we committed to increasing resources and I am pleased to say that we achieved this, with resource life up 23% to 8.7 years in 2010. Particularly good progress was made at San José, where we discovered nine new veins and two extensions in the second half of 2010, thus increasing total resource life at the property by 36% to 11.4 years and at Arcata, where we have increased the resource life by 30% to 9.6 years. The second pillar is our exploration pipeline which currently contains highly promising targets at various stages of development across four key countries – Peru, Argentina, Mexico and Chile. In 2010, we delivered some excellent results particularly at our three advanced projects in our southern Peru cluster – Inmaculada, Azuca and Crespo, which all moved through scoping to pre-feasibility/feasibility stage. These three projects combined have the potential to add a minimum of 12 million attributable silver equivalent ounces per year to our production proﬁle starting from the end of 2013. Furthermore, we have increased the number of Company Maker prospects which have the potential to deliver 20–30 million silver equivalent ounces. To support our 2011 exploration programme, we have once again signiﬁcantly increased our budget by a further 40% to $70 million, more than double 2009 levels. This will deliver an extensive drill programme covering 335,000 metres at greenﬁeld and brownﬁeld sites in our four target countries. Finally, our corporate development team has a clear mandate to pursue early stage, value accretive opportunities which display signiﬁcant geological potential and a clear path to control. We saw this strategy in action in September 2010 with the acquisition of a controlling stake in the Inmaculada project, following the announcement of positive scoping results by our joint venture partner International Minerals Corp (“IMZ”). In Chile, we exercised our option to increase ownership in the Victoria project to a controlling 60% stake and we also signed an option agreement for a 100% stake in the Valeriano property which is located in an extremely prospective location, 27 kilometres north of Barrick Gold Corporation’s Pascua Lama project. 08 Looking to the future Chief Executive Ofﬁcer’s review Continued Hochschild Mining plc Annual Report & Accounts 2010 With Hochschild’s highly talented team, solid asset base and extensive project pipeline, I am conﬁdent that we are in a strong position to create further stakeholder value. We have a proven track record of identifying early stage, value accretive opportunities demonstrated by our investments in Lake Shore Gold and Gold Resource Corp. The divestment of the Lake Shore Gold stake at an attractive price allowed us to secure funding for the development of our advanced projects as well as for our exploration strategy. 2010 overview Our operations delivered a robust performance in 2010 with production of 26.4 million attributable silver equivalent ounces comprised of 17.8 million ounces of silver and 144.4 thousand ounces of gold. Pallancata and San José performed particularly well with silver equivalent production up 19% and 8% year-on- year respectively. The 6% year-on-year reduction in attributable silver equivalent production was mainly driven by a lower contribution from the Arcata operation where we made the ﬁrm decision of mining reserve grades in order to achieve a consistent and sustainable level of production. As a result of the signiﬁcant increase in precious metals prices in the second half of 2010, our Ares mine in southern Peru continued to operate for the full year, albeit at a declining rate. We are monitoring the grade and cost proﬁle of Ares and Moris, our ageing open pit mine in Mexico, to ensure that they are in line with our policy of producing proﬁtable ounces. We expect both operations to cease producing in 2011. For 2011, we are targeting production of 22.5 million ounces from current operations. We expect stable production at Pallancata and San José and lower production at Arcata as we move towards the reserve grade, as mentioned above. There continues to be enormous potential at Arcata with new high grade veins continuing to be found and resource life now at a very solid 9.6 years. 2010 was not only a year of high prices but also of high cost inﬂation. The management team has worked hard to contain controllable costs. Unit costs at our underground operations increased 16%, mainly due to local price inﬂation in Argentina, higher royalties and the longer than anticipated mine life at the high cost Ares operation. Looking ahead, we are forecasting overall 2011 unit cost per tonne performance in Peru to be broadly in line with industry cost inﬂation of around 10%, whilst in Argentina we expect the rate to continue rising as a result of ongoing local price inﬂation of around 25–30%. Questions to the CEO: When do you expect your three advanced projects to move to production? Our three advanced projects in Peru, Inmaculada, Azuca and Crespo, are scheduled to commence production from the end of 2013. Together, the three projects have the potential to contribute a minimum of 12 million attributable silver equivalent ounces to our annual production proﬁle. We believe that this is a base case estimate with drilling at the three properties already delivering impressive results. +23% Increase in resource life of mine to 8.7 years Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 09 The business is in sound ﬁnancial health reporting record revenue of $752.3 million in 2010 up 39% year-on-year, underpinned by higher realised silver and gold prices, which were up 83% and 30% year-on-year respectively. Attributable proﬁt after tax rose 79% to $94.9 million (2009: $52.9 million) with pre-exceptional EPS of $0.28 for the full year, up 65% on 2009. At San José, I am also pleased that during 2010 we resolved the lawsuit with our joint venture partner, Minera Andes Inc (“MAI”) and we are fully committed to working together with MAI to deliver the mine’s full potential. We closed the year with an extremely substantial cash balance of $525.5 million which enabled us to repay our entire existing syndicated loan facility of $114.3 million in January 2011 and announce a 50% increase in our ﬁnal dividend. This strong cash balance, together with healthy operating cash ﬂow which is up 52% to $304.2 million in 2010, gives us the ﬁnancial ﬂexibility to pursue our ambitious exploration programme in 2011 and beyond. It also supports a full capital expenditure programme (2010: $156.5 million) including investment in our existing producing assets, mine development, advanced exploration projects and equipment. Finally, our strong capital position enables us to make selective, value accretive acquisitions which are consistent with Group strategy. Outlook Mining is a long-term investment proposition and we have a clear strategy for delivering long-term growth and value for shareholders. 2011 is already proving to be another promising year in this important phase of Hochschild’s evolution: targeted production of 22.5 million attributable silver equivalent ounces, key stage development at all three of our advanced projects and an exploration programme which, with unprecedented investment, will aim to make tangible progress in 2011 and beyond. With Hochschild’s highly talented team, solid asset base and extensive project pipeline set to deliver long-term production growth, I am conﬁdent that we are in a strong position to create further stakeholder value. I look forward to updating you on our progress over the course of the year. i C h e f E x e c u t i v e O f ﬁ c e r ’ s r e v i e w Ignacio Bustamante Chief Executive Ofﬁcer 28 March 2011 Below: Selene processing plant. More details on our operations... 10 Operating & exploration review Hochschild Mining plc Annual Report & Accounts 2010 Operating & exploration review 11 Current operations 16 Advanced projects 18 Exploration pipeline 24 Market & geographic overview Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 11 Meeting production targets KEY PERFORMANCE INDICATORS Attributable silver production* moz 17.8 moz 18.8 17.8 16.9 13.6 11.6 06 07 08 09 10 Attributable gold production* koz 144 koz 196 201 153 157 144 06 07 08 09 10 Resource life of mine† Years 8.7 years 8.7 7.1 5.5 5.8 3.6 06 07 08 09 10 CURRENT OPERATIONS Production Hochschild delivered another solid performance in 2010, in line with its stated target, achieving attributable production of 26.4 million silver equivalent ounces comprised of 17.8 million ounces of silver and 144,403 ounces of gold (2009: 28.2 million attributable silver equivalent ounces). Production was particularly strong at the Company’s two newest mines, Pallancata and San José, which now contribute approximately half of the Company’s total attributable production, offset by lower production at Arcata where the Company is moving towards mining reserve grades in order to achieve a consistent and sustainable level of production. The Company has announced a production target of 22.5 million attributable silver equivalent ounces for 2011, in line with its mid-term forecast of 20–23 million attributable silver equivalent ounces from current operations. Management expects stable production at San José and Pallancata, offset by lower production at Arcata, as the Company moves towards its long- term goal of mining close to the average reserve grade at each of its core operations as anticipated in 2009. Costs The Company reported an increase in unit cost per tonne at its underground operations of 16% in 2010 to $82.3 (2009: $70.7) primarily due to signiﬁcant price inﬂation in Argentina, higher royalties and longer than anticipated mine life at the high cost Ares operation. Please see page 38 of the ﬁnancial review for further details on costs. O p e r a t i n g & e x p l o r a t i o n r e v i e w * Attributable production is measured as the number of ounces produced multiplied by our ownership interest at each mine and summed together for all operations. † Resource life of mine is based on resources of Hochschild’s core operations and calculated by dividing the number of resource tonnes by the amount of ore forecast to be processed during the following 12 month period. Below: Employees at Pallancata. Our core operations delivered another solid performance in 2010. 12 Solid asset base Operating & exploration review continued Hochschild Mining plc Annual Report & Accounts 2010 MAIN OPERATIONS Arcata: Peru Arcata Production and sales Arcata, which commenced production in 1964, is a 100% owned underground operation located in the Department of Arequipa in southern Peru. During 2010, Arcata’s production was impacted by lower silver grades due to changing geotechnical conditions at the accessible mine areas. In order to ensure a consistent and sustainable level of production, Arcata extraction grades were reduced during the year, moving towards reserve grade level as anticipated in 2009. Consequently, 2010 silver production decreased by 15% to 8.1 million ounces (2009: 9.5 million ounces). Gold production was 10% lower at 25,834 ounces (2009: 28,639 ounces). As at 31 December 2010, the silver equivalent reserve grade at Arcata was 431 g/t and the Company expects to mine around this level in 2011, notwithstanding the 10–15% variability that is typical with these types of deposits. The Company remains positive about the geological potential at the Arcata property and has made excellent progress with the extension of its resource life which increased 30% in 2010 to 9.6 years. Costs The Arcata operation reported a 15% increase in unit cost per tonne in 2010, mainly as a result of higher metals prices increasing the royalties paid by the Company and also due to higher infrastructure costs relating to mine tunnels and stopes. This was partly offset by efﬁciency measures leading to cost reductions in contractors, explosives and maintenance. A number of initiatives are planned for 2011 including the construction of eight new stopes in order to optimise extraction capacity as well as a programme to reduce energy consumption through the replacement of existing energy pumps. Resource life The resource life of Arcata currently stands at 9.6 years, up from 7.4 years in 2009 following an intensive drill campaign focused on the Socorro, Sorpresa, Luz, Rita and Barbara veins. A total of 76,506 metres of diamond drilling was completed during the year (2009: 59,582 metres) with signiﬁcant intercepts including: • Sorpresa DDH-831 0.8m at 5.3 g/t Au and 621 g/t Ag DDH 823 0.9m at 1.9 g/t Au and 1,201 g/t Ag • Socorro DDH-169 0.8m at 13.5 g/t Au and 130 g/t Ag • Luz DDH- 780 0.8m at 3.77 g/t Au and 846 g/t Ag DDH- 734 0.8m at 0.94 g/t Au and 784 g/t Ag. The 2011 programme will employ geophysical methods in those areas of the property with thick post-mineral cover and will also drill for further potential in the Mariana and Socorro veins. In addition, the Company will develop new resources in the Socorro, Luz, and Sorpresa veins. SOUTHERN PERU CLUSTER Peru Current operations Advanced projects APURIMAC CUSCO Azuca Pallancata Crespo Inmaculada Arcata AYACUCHO AREQUIPA Ares Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 13 Pallancata: Peru Pallancata Production and sales The Pallancata silver/gold property is located in the Department of Ayacucho in southern Peru, approximately 160 kilometres from the Arcata operation. Pallancata commenced production in 2007 and is a joint venture with International Minerals Corporation (“IMZ”). Hochschild controls 60% of the joint venture and is the mine operator. Ore from Pallancata is transported 22 kilometres to the Selene plant for processing. Pallancata continues to deliver strong results with record silver equivalent production in 2010, up 19% to 12.3 million silver equivalent ounces. Production was positively impacted by increased treated tonnage which rose 16% year-on-year, due to the Selene plant exclusively processing Pallancata’s ore. As a result of these effects and a higher extracted silver grade of 344 g/t (2009: 327 g/t) silver production increased 20% to 10.1 million ounces (2009: 8.4 million ounces). Gold production also increased in 2010, up 12% to 35,848 ounces (2009: 31,975 ounces). Following positive results from the ongoing drill programme at Pallancata, the Company completed mine development in two new areas in November 2010, Ranichico and Virgen del Carmen, both of which have strong future potential. In 2011, the Company will develop two further areas, San Javier and Pallancata East. Costs Pallancata’s production cost is reported on a consolidated basis with the Selene processing plant. The Pallancata operation reported a 9% increase in unit cost per tonne year-on-year mainly due to higher royalties paid by the Company as a result of higher production and higher prices in 2010. Costs were also impacted by investment in infrastructure including mine tunnels and stopes and also in mine support facility upgrades. These effects were partly offset by cost efﬁciencies resulting from the wide vein structure of the deposit and higher production volume. Cost initiatives undertaken during 2010 include the optimisation of drilling and blasting procedures thus reducing the volume of explosives used and the introduction of a new paste ﬁll plant. Plans for 2011 include the completion of a new tailings dam and the implementation of a new washing circuit stage in the treatment process which will help maintain the plant’s target of 3,000 tpd capacity throughout the year. Resource life The resource life of the Pallancata operation currently stands at 6.9 years, up 11% compared to 2009. During 2010, the Company continued to advance underground development at the Mariana and Virgen del Carmen veins. A total of 46,547 metres of diamond drilling was executed over the course of the year (2009: 26,573 metres), mainly focused on the Cimoide, Soﬁa; Pallancata West and East veins with intercepts including: • Cimoide DLPL-A605 1.3m at 1.5 g/t Au and 404 g/t Ag • Pallancata West DLPL-A606 7.0m at 1.3 g/t Au and 446 g/t Ag • Pallancata East DLPE- A47 2.75m at 0.75 g/t Au and 317 g/t Ag • Soﬁa DLPL- 606 0.9m at 0.97 g/t Au and 274 g/t Ag. The focus for the 2011 brownﬁeld programme will be drilling at the Huararani, Santa Angela, Pacapausa and Bolsa targets and the development of new resources at the Rina, Paralela and Pallancata West and South East veins. O p e r a t i n g & e x p l o r a t i o n r e v i e w Leveraging our southern Peru cluster to drive near-term growth. Above: Employee at the Arcata plant. 14 Extending the life of our mines Operating & exploration review continued Hochschild Mining plc Annual Report & Accounts 2010 San José: Argentina Production and sales The San José silver/gold mine is located in Argentina, in the province of Santa Cruz, 1,750 kilometres southwest of Buenos Aires. San José commenced production in 2007 and is a joint venture with Minera Andes Inc (“MAI”) in which Hochschild controls 51% and is the mine operator. San José San José reported strong results in 2010, with silver production up 7% to 5.3 million ounces (2009: 5.0 million ounces) and gold production up 9% to 84,303 ounces (2009: 77,075 ounces). This was mainly due to higher volumes from new mining areas, including the high grade Kospi vein and also due to the successful installation of a Merrill Crowe circuit in the mill to process residual tailings recoveries. This project has exceeded the Company’s initial recovery estimate of 500,000 silver equivalent ounces with a one-off 665,280 silver equivalent ounces recovered in 2010. As expected, the grade proﬁle of San José increased over the course of the year following lower production in the ﬁrst quarter of 2010. As is common in the early stages of operation, grades were lower as a result of the mix of material with lower grade development mineral surrounding the high grade Kospi vein which increased steadily as mining progressed. The Kospi vein contributed over 188,803 tonnes of ore to the mine’s production in 2010 and, as expected, has positively impacted results with full year silver equivalent production up 8% to 10.4 million silver equivalent ounces. Additionally, in September 2010, the Company agreed to settle the lawsuit with MAI, regarding the $65 million project ﬁnancing loan provided by Hochschild to the San José project. The companies committed to a new repayment schedule for both the project ﬁnance loan and the 2004 shareholder loan of $50 million, over a maximum period of eight years with a ﬁxed interest rate of 7% per annum. Future payments on both loans may be accelerated based on mine performance and metal prices. Argentina continues to be a challenging economic and operating environment although the Company remains positive about the high grade potential of the San José mine and surrounding property. Costs Local cost inﬂation in Argentina remains high and consequently San José reported an increase in unit cost per tonne of 29% in 2010. This was mainly due to higher personnel expenses relating to an increase in the number of employees at the operation and the associated transportation, catering and maintenance costs, as well as a 25% increase in salaries. The mine’s management team continues to introduce initiatives and technology which improve productivity and reduce costs. Resource life Following an intensive drill campaign in 2010 which resulted in the discovery of nine new high-grade gold/ silver veins and two extensions, the Company materially increased the resource life of the San José property by 36% to 11.4 years (2009: 8.4 years). A signiﬁcant portion of the San José property continues to be open at depth and laterally. During 2010, 53,692 metres of diamond drilling was completed focusing on the Ayelen, Micaela, Kospi and Ramal Kospi veins with signiﬁcant intercepts including: • Ayelen SJD-816 1.9m at 2.3 g/t Au and 251 g/t Ag SJD-799 3.5m at 3.0 g/t Au and 268.5 g/t Ag • Micaela SJD-806 0.7m at 12.3 g/t Au and 2,389 g/t Ag SJD-797 0.3m at 8.4 g/t Au and 485 g/t Ag • Kospi SJD 594 0.9m at 4.8 g/t Au and 296 g/t Ag • Ramal Kospi SJD 582 1.6m at 60.9 g/t Au and 1,376 g/t Ag. The 2011 exploration programme at San José includes developing resources at the newly discovered Susana vein and the Saavedra West breccia. The Company is planning to expand geophysical coverage (induced polarisation and ground magnetics) to an additional 10,000 hectares south of the mine area. Questions to the CEO: You have signiﬁcantly increased your resource life of mine in 2010, do you expect this trend to continue and do you have a target? This was one of the key priorities for the new management team and I am pleased to say that we have made real progress with resource life up 23% in 2010, including an impressive 36% increase at San José where we made some signiﬁcant new discoveries during 2010. We are extremely conﬁdent about the longevity of our three main operations and, though we do not have a speciﬁc target in terms of resource life, we would feel very comfortable with 10–12 years of resources ahead of us. Resource life of San José Years +36% 11.4 8.4 5.9 6.2 4.0 2006 2007 2008 2009 2010 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 15 OTHER OPERATIONS Ares: Peru Ares Production and sales The Ares mine, which commenced production in 1998, is a 100% owned operation located approximately 275 kilometres from the city of Arequipa in southern Peru. Following the signiﬁcant increase in prices in the second half of 2010, the mine continued to operate for the full year, albeit at a lower level, producing 2.7 million silver equivalent ounces (2009: 3.5 million silver equivalent ounces). As previously announced, Ares is expected to close in the second half of 2011. Management is monitoring the grade and cost proﬁle of the operation to ensure that it is in line with the Company’s policy of producing proﬁtable ounces. Moris: Mexico Moris Production and sales The 100% owned Moris mine, is the Group’s only open pit mine and is located in the district of Chihuahua, Mexico. Moris provided a key stepping stone into Mexico, which is of key strategic importance to the Group. As previously disclosed, Moris is an ageing deposit with a declining production proﬁle. The operation produced 86,408 ounces (2009: 96,583 ounces) of silver and 21,532 ounces (2009: 28,344 ounces) of gold in 2010 or 1.4 million silver equivalent ounces (2009: 1.8 million silver equivalent ounces). Moris is scheduled for closure in 2011. Management is monitoring the grade and cost proﬁle of the operation to ensure that it is in line with the Company’s policy of producing proﬁtable ounces. O p e r a t i n g & e x p l o r a t i o n r e v i e w Above: Doré bar. Left: Employees at the Arcata plant. 16 Delivering growth Operating & exploration review continued Hochschild Mining plc Annual Report & Accounts 2010 ADVANCED PROJECTS Inmaculada Azuca Crespo The Company now has three advanced projects, Inmaculada, Azuca and Crespo, which have the combined potential to add a minimum of 12 million attributable silver equivalent ounces per annum to the Company’s proﬁle with production due to commence at the end of 2013. Approximately 15% of the total 2011 exploration budget of $70 million will be focused on resource development at these three projects to ensure a stable mine life prior to commencing production. Inmaculada: Peru Inmaculada, a 20,000 hectare gold-silver project located in the Company’s existing operational cluster in southern Peru, is 60% owned and controlled by Hochschild, following the acquisition of a controlling stake in October 2010. The remaining 40% is held by the Company’s joint venture partner at Pallancata, IMZ. Hochschild has progressed the project to feasibility which it aims to complete by the end of 2011 with production planned to commence by December 2013. The scoping study published by IMZ in September 2010 estimated average annual total silver equivalent production of 11 million ounces from the project’s Angela vein and total resources of 115 million silver equivalent ounces (1.9 million gold equivalent ounces). In February 2011, Hochschild published a 12% increase in total resources to 128.3 million silver equivalent ounces and a 29% increase in the silver equivalent grade to 498 g/t, based on the 180 g/t cut-off used by IMZ in the scoping study. When assuming the 98 g/t silver equivalent cut-off grade which reﬂects the anticipated marginal cost of production, KEY STAGES AND ESTIMATED PRODUCTION resources increase further to 137.3 million silver equivalent ounces, an increase of 20%. Summary results (on a 100% basis, applying a 180 g/t silver equivalent cut-off grade and a silver to gold ratio of 60:1) are as follows: • Measured and indicated resources: 4.7mt at an average grade of 5.2 g/t gold and 186 g/t silver containing approximately 795,000 ounces of gold and 28.3 million ounces of silver • Inferred resources of 2.7mt at an average grade of 6.1 g/t gold and 247 g/t silver containing approximately 521,000 ounces of gold and 21.0 million ounces of silver. Hochschild expects the results to signiﬁcantly improve the economics of the project detailed in the above mentioned 2010 scoping study. Furthermore, after applying the Company’s marginal silver equivalent cut-off grade of 98 g/t, the resource ﬁgures increase further. Updated project economics will be published with the completion of the feasibility study. The Company is moving forward with an exploration programme at the property which consists of 40 mining concessions. The main Angela vein remains open with signiﬁcant additional upside potential in several other structures and the joint venture has committed to undertake a 20,000 metre drilling programme annually for the ﬁrst three years to further develop resources. In 2011, the Company will undertake geophysical work at the Jimena vein and at the north eastern extension of the Angela vein in preparation for drilling later in the year. Results from the scoping study indicated that at base case gold and silver prices of $1,000/oz and $17/oz respectively, the project could return a cumulative total pre-tax cash ﬂow (undiscounted) of approximately $660 million and a pre-tax internal rate of return (“IRR”) of 41%. Using prices for gold and silver of $1,400/oz and $34/oz respectively, the project could return a cumulative total pre-tax cash ﬂow (undiscounted) of approximately $1,417 million and 74% IRR. Project Scoping Feasibility Construction Production Attributable annual silver equivalent production Inmaculada (cid:22) Q4 2011 2012/2013 Q4 2013 6.6 million ounces Azuca Crespo (cid:22) (cid:22) Q1 2012 2012/2013 Q4 2013 3.5 million ounces Q4 2011 2012/2013 Q4 2013 2.3 million ounces Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 17 Azuca: Peru Crespo: Peru In September 2010, the Company announced positive results from the scoping study undertaken at its 100% owned Azuca property, estimating initial average annual silver equivalent production of 3.5 million ounces, which represents around 16% of Hochschild’s 2011 attributable production. At base case gold and silver prices of $1,000/oz and $17/oz respectively, the scoping study indicates that the project could return a cumulative total pre-tax cash ﬂow (undiscounted) of approximately $107 million and 21% IRR. Using prices for gold and silver of $1,400/oz and $34/oz respectively, the project could return a cumulative total pre-tax cash ﬂow (undiscounted) of approximately $533.7 million and 95% IRR. The study, which was completed by an independent third party, assumes plant throughput of 750 tonnes per day with engineering designed to easily accommodate future capacity increases. Azuca has reached resources of 70.3 million silver equivalent ounces as at 31 December 2010 and is now at pre-feasibility stage with targeted completion in Q1 2012. The Company is currently undertaking an intensive exploration programme at the property with the aim of expanding the scale and proﬁtability of the project. In 2010, 59,811 metres of drilling was undertaken (2009: 38,600 metres) with positive results at the Karla, Vivian, Prometida and Prometida Ramal Techo veins including: • Karla DAKA-A1007 0.9m at 1.3 g/t Au and 1,318 g/t Ag DAKA-A1008 1.0m at 2.3 g/t Au and 946 g/t Ag • Vivian DAVI-A1026 0.8m at 25.6 g/t Au and 2,567 g/t Ag; 0.5m at 1.2 g/t Au and 651 g/t Ag; 0.6m at 0.7 g/t Au and 632 g/t Ag • Prometida DAAW-A1007 2.1m at 2.6 g/t Au and 686 g/t Ag • Prometida Ramal Techo DAAW-A1007 1.1m at 2.0 g/t Au and 1,050 g/t Ag. In January 2011, Hochschild reported positive results from a scoping study completed by an independent company, Ausenco, at the Company’s 100% owned Crespo project, located in the Company’s existing operating cluster in southern Peru. The scoping study is based on resources of 31.3 million silver equivalent ounces (measured and indicated) and estimates annual silver equivalent production of 2.3 million ounces starting from 2014 and a mine life of 7.5 years. Crespo, which is expected to be an open pit deposit, is one of a number of properties acquired by the Company in 2008 as part of the Liam JV/Southwestern Resources land package and is the ﬁrst of these to progress to pre-feasibility. At base case gold and silver price assumptions of $1,000/oz and $17/oz respectively, the project could return a cumulative total pre-tax cash ﬂow (undiscounted) of $53.5 million, with an IRR of 19%. Using prices of $1,400/oz and $34/oz for gold and silver respectively, the project could return a cumulative total pre-tax cash ﬂow (undiscounted) of approximately $230.8 million, with an IRR for the project of approximately 60%. During 2010, the Company completed 1,740 metres of drilling as well as a 537 metre underground audit to conﬁrm the resource model. The 2011 drill programme is focused on converting inferred resources to the indicated resource category and to explore the Queshca target located a few kilometres away from the main target. O p e r a t i n g & e x p l o r a t i o n r e v i e w Below: Tunnel at the San José operation. Our three advanced projects have the potential to add at least 12 million attributable silver equivalent ounces per annum to the Company’s production proﬁle. 18 Focused on exploration Operating & exploration review continued Hochschild Mining plc Annual Report & Accounts 2010 We have an extensive greenﬁeld pipeline with numerous highly promising projects across four target countries. EXPLORATION PIPELINE Exploration is a key part of Hochschild’s growth strategy, demonstrated by the signiﬁcant increase in budget which has more than doubled since 2009 to $70 million in 2011. A total of 300,086 metres of drilling was undertaken by the Company’s local exploration teams in 2010 (2009: 149,99 metres), at both existing sites and at new, greenﬁeld projects in Peru, Argentina, Mexico and Chile. The Company now has over 70 geologists providing the technical experience and expertise required to deliver a steady stream of value accretive opportunities. The Company has achieved positive results particularly with regards to its key objective of increasing the resource life of its main operations and on expanding its project pipeline which now includes three advanced projects and eight Company Makers (projects with the potential to achieve 20–30 million silver equivalent ounces per year). The signiﬁcant investment in 2011 will support the delivery of an extensive and targeted drill programme covering 335,000 metres across the four target countries mentioned above. The budget will be split between exploration work at the Company’s existing operations and on identifying and developing high-quality, early stage projects which have the potential to move through the pipeline to production. GROWTH PYRAMID CURRENT OPERATIONS 3 3 3 3 3 ADVANCED PROJECTS 7 7 7 7 7 NY S PA R E M K O A C M DRILL TARGETS M S E C D I A U L M E 3 3 3 3 3 PROSPECTS 7 7 7 7 7 GENERATIVE >1 MILLION HECTARES Arcata: Peru • Pallancata: Peru • San José: Argentina • Ares: Peru • Moris: Mexico • Inmaculada: Peru • Azuca: Peru • Crespo: Peru • KEY TARGETS Encrucijada: Chile • Mosquito: Argentina • La Flora: Argentina • Cerro Blanco: Peru • KEY PROSPECTS Cricket: Argentina • Astana: Peru • Ibel: Peru • San Martin: Peru • KEY TARGETS • Victoria: Chile • Valeriano: Chile • Parihuana: Peru • Mercurio: Mexico KEY PROSPECTS • Josnitoro: Peru • Apacheta: Peru • Corazon de Tinieblas: Mexico Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 19 2011 exploration budget 1. Greenﬁeld 2. Brownﬁeld 1 3. Advanced projects 49% 36% 15% 3 $70m 2 335,000 Metres of drilling planned for 2011 Brownﬁeld exploration Approximately 49% of the 2010 budget was invested in brownﬁeld drilling in the areas immediately surrounding Hochschild’s three main operations and resulted in a signiﬁcant 23% increase in resource life to 8.7 years as at 31 December 2010 (2009: 7.1 years in 2009). The Company takes a very conservative approach to resource delineation and is one of the few companies that applies the same cut off grades to reserves and resources. For full reserve and resource tables, please see pages 156–160. Greenﬁeld exploration The Company continues to identify and develop early stage opportunities in its four target countries, Peru, Argentina, Mexico and Chile. Hochschild’s extensive greenﬁeld pipeline is focused on medium scale projects which have the potential to deliver 5–10 million silver equivalent ounces and Company Makers which have the potential to deliver 20–30 million silver equivalent ounces to its production proﬁle. O p e r a t i n g & e x p l o r a t i o n r e v i e w Above: Laboratory work at San José. Left: Geologist at San José. 20 Drilling in key geological regions Operating & exploration review continued Hochschild Mining plc Annual Report & Accounts 2010 COMPANY MAKERS The Company continues to focus on Company Makers which are projects with the potential to achieve 20–30 million silver equivalent ounces per year. These are typically high sulphidation, disseminated or gold/copper porphyry deposits and are generally open pit operations. In 2010, $11.2 million was invested in ﬁnding and developing such deposits and this has increased to $13.1 million in 2011. The Company currently has eight potential Company Makers in the pipeline: Victoria: Chile In November 2010, the Company exercised its option to increase its holding in the Victoria project in northern Chile to 60% by incurring $6.0 million in exploration expenditure (Iron Creek Capital hold the remaining 40%). Although still at an early stage, exploration work is delivering positive results at the property which covers 37 kilometres of continuous strike length at the highly productive Domeyko Fault Zone. Drilling indicates signiﬁcant mineralisation with recent results including: • VVQDD-10-035 78.5m at 0.9 g/t Au & 16.0 g/t Ag, including 1.2m at 18.8 g/t Au and 392 g/t Ag • VVQDD-10-034 15.1m at 0.80 g/t Au and 6.5 g/t Ag • VVQDD-10-036 21.0m at 0.6 g/t Au and 4.8 g/t Ag • VVQDD-10-039 1.8m at 6.0 g/t Au and 12.7 g/t Ag • VVQDD-10-032 101.9m at 0.91g/t Au and 57g/t Ag. Drilling has extended the overall strike length of the mineralised trend to approximately 1 kilometre. A large area of hydrothermal alteration, including extensive local siliciﬁcation and alunite at Leña, in the southeast area of the property, was also discovered. The programme included mapping of a quartz-vein stockwork over an area of approximately 800 metres by 400 metres associated with porphyry copper style alteration and supergene turquoise mineralisation at the Picaron prospect on the west side of Victoria. The Company has also undertaken drilling at the Vida target which appears to display many of the characteristics of a maﬁc porphyry Au (+/-Cu) system, cross-cut by later, northwest trending structures that are the focus of higher-grade gold mineralisation. Three new RC holes covering a total of 946 metres have been drilled to date and revealed high-grade, cross-cutting, sulphide-rich breccia/fault structures that are oxidised near surface. Results include: • VCNRC-10-004 8m at 10.5 g/t Au and 29 g/t Ag • VCNRC-10-021 4m at 8.9 g/t Au and 38.8 g/t Ag from 240m Total drilling of 10,000 metres is planned for the Victoria property in 2011. KEY GREENFIELD PROJECTS Mercurio Mexico Corazon de Tinieblas Peru Chile Josnitoro Apacheta Parihuana Sabina Victoria Valeriano Argentina +40% Increase in exploration budget in 2011 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 21 Valeriano: Chile Josnitoro: Peru In November 2010, Hochschild entered into an option agreement with Sociedad Contractual Minera Valleno for the Valeriano property which is located 27 kilometres north of Barrick Gold Corporation’s Pascua Lama project. Valeriano covers an area of 3,750 hectares in close proximity to the Argentinian border and hosts both high-sulphidation as well as porphyry style, disseminated gold mineralisation. The property has been explored in the past by Phelps Dodge (1989–1991) and Barrick (1995–1997), both of which completed drill campaigns totalling 12,575 metres. No signiﬁcant exploration has been undertaken at the property since 1997. A number of highly mineralised intercepts have been reported from this drilling including: Josnitoro is a 100% owned project located in Peru. The project was acquired as part of the Southwestern Resources acquisition, with visible gold mineralisation starting at surface. The Company is working towards completing the necessary permits and approval process. Corazon de Tinieblas: Mexico The Corazon de Tinieblas property in Mexico was acquired in H1 2010 by the Company and is currently completing the permit process. A number of areas have been deﬁned for drill testing and more detailed mapping is scheduled to better deﬁne the controls to mineralisation and the overall lithologic stratigraphy of the area which will reveal the structural setting. • 100 metres at 1.37 g/t Au in typical shallow high sulphidation style mineralisation starting at 19 metres depth Apacheta: Peru • 41 metres at 0.61 g/t Au, 12 g/t Ag and 0.30% Cu, porphyry type mineralisation starting at 70 metres depth. Exploration work commenced in January 2011 with a review of the existing data set and re-interpretation of geophysical data and drilling to test the deep porphyry-style target as well as the near surface high-sulphidation system. Field work is also underway including sampling and mapping surface exposures and acquisition of deep IP and resistivity surveys. A 2,500 metre drill campaign is scheduled to commence in H2 2011 to test targets deﬁned by this exploration campaign. Mercurio: Mexico Mercurio is a 100% owned, 36,388 hectare property in Mexico, located between two high grade mines, approximately 43 kilometres from Sombrerete and 68 kilometres from Fresnillo. During the year, 6,945 metres of drilling was undertaken at the project with results including 86 metres at 20 g/t Ag (0.2% Cu, 0.5% Pb, 1.4% Zn) and 3.5 metres at 300 g/t Ag (4.4% Cu, 1.2% Pb, 7.5% Zn). Drilling focused on a system of low sulphidation veins which have reported anomalous silver and base metal results. Deeper drilling is planned for the ﬁrst half of 2011. At the 100% owned Apacheta project in Peru, the Company is in the process of completing the permit process and is also undertaking mapping, geochemical sampling and geophysics to deﬁne drill targets within this extensive land package. Parihuana: Peru The Parihuana project is 100% owned by Hochschild and is located in Peru. The project entered the pipeline in 2010 and drill targets have been selected for testing in the ﬁrst half of 2011. Alteration mineralogical studies indicate typical high- sulphidation afﬁliation and clay mineralogy also indicates a central zone of higher temperature and acid conditions. Sabina: Peru At the 100% owned Sabina project in Peru, drilling to date has not reported signiﬁcant mineralisation. However, a vertical anomalous feeder system has been identiﬁed at the Chaquella target with the intensity of the alteration system indicating a powerful hydrothermal system and the Company therefore plans to complete the current drill programme in 2011. Below: Geologists in Mexico. O p e r a t i n g & e x p l o r a t i o n r e v i e w Questions to the CEO: You refer to ‘Company Makers’, what are these? Company Makers are projects which have the potential to achieve production of 20–30 million silver equivalent ounces per year. These projects are likely to be high sulphidation disseminated type deposits, typically mined as open pit. To increase the potential for growth, we are increasing the number of projects in this category and now have eight Company Makers in the pipeline. 22 Extensive project pipeline Operating & exploration review continued Hochschild Mining plc Annual Report & Accounts 2010 MEDIUM SCALE PROJECTS The Company’s pipeline currently contains various medium scale properties in the prospects and drill target categories which each have the potential to deliver 5–10 million silver equivalent ounces of production per year. These tend to be low sulphidation epithermal gold/silver type deposits with varying base metal content and are typically mined underground. In 2010, $6.9 million was dedicated to ﬁnding and developing medium scale projects and the Company plans to increase this investment to $8.6 million in 2011. Positive results have been reported at a number of these projects, particularly at La Flora which has moved up the pipeline from prospect to drill target. Two new properties also entering the pipeline in 2010 were the Cricket prospect in Argentina as well as the more advanced Pausi project in Peru which is now at ‘drill target’ stage. La Flora: Argentina At the La Flora project in Argentina, two large vein systems have been identiﬁed since drilling commenced in H2 2010. The project has progressed to “drill targets” and a detailed exploration programme is underway. Logging of the drill holes indicated that the anomalous gold mineralisation is associated with the upper reaches of a hydrothermal system. In 2011, geophysical work and deeper drilling will be undertaken to test the potential of higher grade mineralisation. Encrucijada: Chile Three drill holes were completed at the Encrucijada property (a joint venture with Andina Minerals) in 2010 focusing on the San Bernardo Dome target with associated advanced argillic alteration and tourmaline breccias. Alteration and mineralisation indicates a possible copper porphyry system with anomalous gold and molybdenum also reported from these intercepts: • ENCRC10_23 From 65m depth – 43m at 3,556 ppm Cu 108 to 258m; 150m at 813 ppm Zn • ENCRC10_24 From 90m depth – 211m at 828 ppm Cu From 144m depth – 157m at 578 ppm Zn • ENCRC10_25 From 94m depth – 106m at 739 ppm Cu From 111m depth – 89m at 539 ppm Zn. Mosquito: Argentina The Company is making progress at the Mosquito project in Argentina, where seven new vein targets have been identiﬁed. A total of 9,984 metres was drilled in 2010 with results pending. All targets have cut vein structures associated with surface mapping. Below: Exploration work in Mexico. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 23 Astana Farallón: Peru Astana Farallón is a 100% owned gold/silver epithermal vein project in the Company’s southern Peru cluster. A 5,600 metre drill programme is planned for H2 2011 which is designed to test a known productive horizon at depth. Historic drilling at shallow levels reported anomalous results reported in Au, Ag, Pb, and Zn. Pariguanas: Peru In June 2010, the Company signed an agreement with Compañía de Minas Buenaventura (“Buenaventura”) to create the Pariguanas joint venture through the combination of neighbouring properties of similar size owned by the two companies. Hochschild holds 40% of the property which covers 4,437 hectares of land located approximately 18 kilometres from the Company’s existing Ares operation. Buenaventura currently holds the remaining 60% of the joint venture with the obligation to achieve production by 2018. Pariguanas is a low sulphidation, predominantly underground vein system where up to ﬁve prospective areas have been outlined. A total of 7,290 metres in 31 holes has been drilled by Buenaventura to date, mainly focused on the San Pedro vein. Positive results include: • 2.7 metres at 0.7 g/t Au and 1,194 g/t Ag including 0.9 metres at 1.6 g/t Au and 3,016 g/t Ag • 4.4 metres at 3.1 g/t Au and 2,376 g/t Ag including 1.6 metres at 7.4 g/t Au and 6,288 g/t Ag. Questions to the CEO: What is the most promising prospect in your pipeline? We currently have a number of exciting projects in the pipeline including both Company Maker and medium scale projects. We are reporting some positive results at the Victoria project in Chile and, as a result, we exercised our option to increase our ownership to a controlling 60% in 2010. We are also optimistic about the Valeriano property in Chile which is located in an extremely prospective location, 27 kilometres north of Barrick Gold Corporation’s Pascua Lama project. In the event that Buenaventura does not commence production by 2018, Hochschild will have the option to assume control of the project by committing to certain payments linked to Buenaventura’s investment. COPPER PROJECTS Following the acquisition of Southwestern Resources in 2008, the Company currently holds a number of copper projects located in the southern Andes within a highly prospective area for copper deposits. The Company has committed approximately 4% of the total 2011 budget and a dedicated exploration team to drilling at the properties in order to establish potential value. GENERATIVE The Company holds over 1 million hectares of prime land in key geological regions across four countries and has committed around 6% of the total 2011 budget to further expand its land package in premium areas. O p e r a t i n g & e x p l o r a t i o n r e v i e w Exploration budget $m +40% 70 50 35 28 29 2007 2008 2009 2010 2011 1. Peru 2. Chile 3. Mexico 4. Argentina 52% 19% 17% 12% Greenﬁeld breakdown by country 1 4 3 2 24 Market & geographic overview Hochschild Mining plc Annual Report & Accounts 2010 2010 MARKET OVERVIEW Precious metals prices increased signiﬁcantly in 2010, mainly due to ongoing global economic uncertainty including sovereign debt issues, inﬂationary concerns and weakness in the US dollar. Gold and silver once again proved their safe haven status, with price increases of 30% and 83% respectively, mainly driven by investment demand. Possible drivers for gold in 2011 • Further ﬁscal and monetary loosening by major governments potentially creating inﬂationary pressure • Further diversiﬁcation of investment demand with continuing portfolio asset allocation towards commodities • Further ofﬁcial sector purchases. GOLD SUMMARY 2010 was another strong year for gold prices which reached a record high of $1,424/oz in December with a closing price of $1,421/oz, up 30% year-on-year. This was mainly driven by investment demand which, though down 15% on 2009 in volume terms, was up 9% in value terms to a record $63.7 billion. Sovereign debt issues, low interest rates, inﬂationary concerns and rising geopolitical tensions towards the end of the year continued to support safe haven buying. Investors increased exposure to gold ETFs with holdings up 18% over the course of the year, 90% of which occurred in the second quarter at the height of the Greek debt crisis and resulting uncertainty in the entire Euro area. Although it was certainly the key driver of prices, investment demand was also supported by solid underlying fundamentals, including the ofﬁcial sector’s signiﬁcant shift from net seller to net purchaser for the ﬁrst time since 1988. Jewellery demand also stabilised, compared to the previous year, increasing 16% to 2,037 tonnes (2009: 1,758 tonnes) with India accounting for 87% of this gain. Bar hoarding also increased, particularly in Europe, rising to a 21 year high of 144 tonnes. On the supply side, demand was partly offset by the 3% increase in mine production to 2,652 tonnes as new operations and expansions came online during the year. Despite the signiﬁcant increase in prices, scrap supply fell 1.1% to 1,654 tonnes. Going into 2011, macro conditions remain supportive for gold due to continued economic uncertainty and inﬂationary concerns allied to ongoing high levels of investment demand. SILVER SUMMARY Silver achieved an average annual price of $20/oz, up 38% on 2009, closing the year up 83% to $31/oz. This signiﬁcant increase was supported by robust investment demand which reached a record of over 210 million ounces (including coins & medals). With its close correlation and greater volatility, silver provides investors a leveraged alternative to gold. Strong fundamentals have also supported the demand for silver with total fabrication demand projected to have recovered from the fall in 2009 to a 10% increase in 2010. This was mainly due to the estimated 18% rise in demand for industrial uses which accounts for 46% of total silver demand. Other areas of fabrication were also supportive with jewellery demand up 3% as a result of the substitution effect and demand for coins, which is estimated to have risen 23% in 2010 to a record all time high. These effects were partly counteracted by the continued decline in photographic demand, which is expected to have fallen by around 11% as a result of the ongoing rise of digital photography. Additionally, total supply is forecast to have increased by 5% year-on-year partly due to increases in mine production, up 3% to 24 million ounces, scrap supply, up 10%, as well as government sales. Silver’s unique industrial properties and its role as a store of value mean that it is impacted by the drivers for both precious and base metals. Continued investor appetite is expected in the context of low interest rates, a weak dollar and a healthy gold market. GFMS have forecasted a ‘likely’ rise in the silver price above $30/oz resulting from increasing investment demand coupled with strengthening industrial demand with an annual average of $28 a more likely scenario. 2010 silver and gold performance – Silver US$/Troy oz (+83%) – Gold Bullion US/$ Troy oz (+30%) 200 180 160 140 120 100 80 JAN 10 MAR 10 MAY 10 JUL 10 SEP 10 NOV 10 DEC 10 25 46% 23% 13% 10% 8% Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 2010 forecast gold demand 1. Jewellery 4 3 5 1 6 2 2010 forecast gold supply 1 2 2. Other fabrication 3. Identiﬁable investment 4. Bar hoarding 5. Producer de-hedging 6. Ofﬁcial sector purchases 47% 16% 20% 11% 3% 2% 2010 forecast silver demand 1. Industrial 2. Jewellery and silverware 3. Investment 4. Coins 5. Photography 4 3 1 5 2 1. Mine production 2. Scrap supply 62% 38% 2010 forecast silver supply 1 3 2 1. Mine production 2. Scrap supply 3. Ofﬁcial sector sales 78% 20% 2% O p e r a t i n g & e x p l o r a t i o n r e v i e w Possible drivers for silver in 2011 • Continued macro economic uncertainty providing further support to investment demand Geographic overview Our strategy is focused in the Americas, a region with enormous mineral potential and a long and supportive history of mining. • Silver’s link with gold as a safe haven asset • Consumer substitution of gold for silver providing support to jewellery demand • Robust demand for coins from retail investors. Hochschild operates three of the 12 largest primary silver mines globally and has projects and investments in four of the top 20 precious metal producing countries, including Peru and Mexico which are the world’s two largest producers of silver. Source: GFMS 2010 was another strong year for precious metals prices which increased by 83% and 30% for silver and gold respectively. COUNTRY PRODUCTION RANKINGS 2009 silver ranking 2010 gold ranking* Peru Argentina Mexico Chile * Forecast. 1 12 2 7 6 13 14 18 Source: GFMS Sources: GFMS, Silver Institute, Bloomberg 26 Corporate responsibility Hochschild Mining plc Annual Report & Accounts 2010 Corporate responsibility 27 Our approach 29 Safety 30 Health & hygiene 31 People 32 Community relations 34 Environment Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 27 Committed to safe & sustainable mining OUR APPROACH Since our listing in London in 2006, we have endeavoured to maintain and reinforce our corporate values of respecting the wellbeing of our employees, the environment and the communities in which we operate. By actively interacting with our people and the communities in which we operate, using natural resources efﬁciently and putting safety ﬁrst, we can build our reputation as a trusted and responsible mining company, factors that we believe will help us to grow. What we mean by corporate responsibility To ensure that our values are adhered to, we have adopted a number of policies which demonstrate our commitment to: • A safe and healthy workplace • Managing and minimising the environmental impact of our operations • Encouraging sustainability by respecting the communities in which we operate. We prioritise these three areas in terms of resource allocation, with respect to governance, policy development, and measurement. In its efforts to achieve the above objectives, we seek to: – comply with all relevant legislation and leading international standards – promote continuous improvement of our management systems with the aim of incorporating best practice – adopt a proactive approach to preventing and managing, the risks that may limit the achievement of our corporate responsibility objectives – encourage employees to adopt the Group’s values through the use of training and internal communications. Governance The Board has ultimate responsibility for establishing Group policies relating to Corporate Social Responsibility (“CSR”) and ensuring that national and international standards are met. The CSR Committee has been established 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. The CSR Committee was chaired during the year under review by Roberto Dañino who had Board-level responsibility for CSR issues. Following Roberto Dañino’s change in role to that of a Non-Executive Director with effect from 1 January 2011, Eduardo Hochschild has taken on the chair of the Committee from that date. C o r p o r a t e r e s p o n s b i l i t y i Above: Children from the local communities attending the mobile medical unit donated by the Group. CR GOVERNANCE BOARD OF DIRECTORS CSR Committee CSR Working Group Community Relations Environment Health and Hygiene Human Resources Safety 28 Committed to safe & sustainable mining Corporate responsibility continued Hochschild Mining plc Annual Report & Accounts 2010 A working group of relevant personnel meets on a monthly basis to support the work of the CSR Committee and is tasked to consider, at an operational level, local health and safety policies, environmental programmes, community relations’ and employee matters. These meetings are chaired by the Group’s Head of CSR and are attended by the VP of Operations, Legal and HR. Despite our on-going target of zero fatalities, the Committee is saddened to report two incidents leading to loss of life during 2010. The Board is committed to preventing accidents at the Group’s operations and has overseen thorough investigations into the cause of the fatalities as well as the implementation of the associated recommendations. The CSR Committee’s work in 2010 During the year, the CSR Committee: • approved the 2009 CSR Report • oversaw the investigations into the two fatalities that occurred during the year and considered the action plans to implement the associated recommendations • monitored the execution of the yearly plan in each of the four key areas of focus • considered the on-going progress of the implementation of the safety management information system designed in conjunction with Det Norske Veritas (“DNV”) • monitored the status of the Group-wide initiatives undertaken by management to raise the proﬁle of safe working practice to assist with accident prevention and • considered updates from the work done across the Group to manage community and labour relations. Engaging with the outside world We recognise the potential to affect the people that work in, and live near, our operations. Within this report, we highlight the initiatives we have in place to understand these stakeholders, and use this insight to inform our approach to many of the issues discussed in this part of our report, from safety to community engagement. We also recognise that the mix of in-house tools, such as our Organisational Climate Survey, and working in partnership with trade bodies such as the Sociedad Nacional de Mineria (both of which are referred to on pages 30–31), various governmental authorities, charities and NGOs, provide invaluable insight for our business and the best results for our stakeholders. Performance indicators We continue to make progress in measuring our performance against our corporate responsibility objectives. Where Group- wide information is not available, the Report gives performance indicators in respect of the Peruvian operations, which represent approximately 75% of the Group’s attributable production. Below: Members of the community close to Arcata with a Hochschild sponsored doctor. $6.7m2010 community investment Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 29 Assuring the safety of our employees SAFETY Our Approach Our people and their safety remain of paramount importance for the Group and this is reﬂected in everything that we do. Ensuring the safety of the Group’s employees is considered a vital element in measuring the successful achievement of corporate strategy to which the Board and management are committed. During 2010 the Group has continued to invest in operating controls and processes to ensure that the highest standards of safety are met. It is with sadness that the Group reports two fatalities during the year. In the ﬁrst incident, a worker was fatally injured during the cleaning of a tank. The second fatality, which also occurred at the Ares mine, resulted from the injuries sustained by a loader operator after the vehicle he was driving collided with a section of the wall of a stope. Circumstances leading to these tragic events have been investigated by management with the resulting recommendations implemented. After each accident, the Group suspends operations at the mine to conduct an internal review of the relevant safety procedures and to provide training. Whilst management continually strives to achieve the corporate goal of zero fatalities, it is encouraged to report that steps taken to embed a safety-ﬁrst culture across the Group are yielding results with the accident frequency rate in 2010 reduced to less than half of 2007 levels. Safety indicators Fatalities Accidents leading to an absence of one day or more LTIFR1 Accident Severity Index2 Accidentability Index3 2010 2 66 3.70 777 2.88 2009 3 79 5.22 1,485 7.76 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 Accident Severity divided by 1,000. Developments during 2010 • Progress made at Arcata, Pallancata and San José on the implementation of the integrated risk management system developed jointly with DNV • In light of its ongoing success, the Group continued to offer monthly awards at each mining unit for the best worker and best group of workers demonstrating high safety standards • Implementation of selected safety suggestions submitted by employees for the Luis Hochschild Safety Innovation Award • In conjunction with EXPECTRA, a leading South African consultancy specialising in Occupational Health & Safety, the Group designed and ran a safety training programme enabling mine personnel to provide safety training to others. C o r p o r a t e r e s p o n s b i l i t y i 2010 performance TARGET STATUS 2011 targets • 8% reduction in LTIFR Index. A 10% reduction in LTIFR Severity index of less than 200 Accidentability index of less than 1 Achieving Level 5 of the DNV Management Information System at: – the Peruvian operations (cid:22) (cid:26) (cid:26) (cid:22) – the Argentinian operations The second launch of the Luis Hochschild Safety Innovation Award ON-GOING TARGET Zero fatalities in process (cid:22) (cid:22) (cid:26) 29% reduction in LTIFR achieved These targets were not achieved due to the two fatalities during the year Pallancata and Arcata achieved Level 6 Ares expected to achieve Level 5 in 2011 • In relation to the DNV Management Information System, to achieve: – Level 5 at Ares – Level 6 at San José – Level 7 at Arcata and Pallancata • To continue offering the monthly safety awards • To achieve OHSAS 18001 accreditation at Pallancata and San José and recertify Ares, Arcata and the Selene plant as OHSAS 18001 compliant • To provide Stage 2 training to emergency crews. Read more about how we mitigate social and environmental risks to our business on pages 42 to 43. 30 Assuring the health of our employees Corporate responsibility continued Hochschild Mining plc Annual Report & Accounts 2010 HEALTH AND HYGIENE Our Approach We believe that providing a safe working environment to our employees is a basic right, and we therefore invest in reducing the inherent risks associated with mining activities. In the ﬁrst instance, the Group strives to avoid occupational illnesses by taking all necessary steps to provide a working environment that minimises any risk to the health of its workers. This area has been given increased focus during the year, hence the renaming of the Health team to the Health & Hygiene team. The Group also employs dedicated personnel who are charged with the provision of medical and occupational health services to assure the wellbeing of those employed by the Group on an on-going basis. The Health & Hygiene team at Hochschild look to incorporate best practices adopted throughout the industry and, to support this endeavour, the Group beneﬁts from its membership of the Sociedad Nacional de Minería, Petroleo y Energía (Sociedad Nacional de Mineria) a trade association comprising approximately 60 mining companies with operations in Peru. As part of its mission, the Sociedad seeks to contribute to the development of leading thinking in health management. The Head of the Group’s Health & Hygiene team is a qualiﬁed Doctor who also acts as Head of the Occupational Health Group at the Sociedad Nacional de Mineria. 2010 performance TARGET Implement the Occupational Health & Hygiene module of SAP in Peru and Argentina Scheduled for H2 2011 2010 2009 2008 2007 2,961 2,690 2,851 2,505 25.75 24.5 n/a n/a 237 406 238* 224 Health indicators Average number of medical attendances at Peruvian operations and at San José per month Average number of work-related incidences requiring medical attention at Peruvian operations and at San José per month Average number of occupational health examinations at the Group’s wholly-owned Peruvian operations and Moris, per month * Figure has been restated. Developments during 2010 • In the area of promoting hygienic working practices to prevent the incidence of occupational diseases: – Continued progress was made in compiling a thorough audit programme to assess occupational health risks – Personnel were recruited and equipment procured to improve the quality of incident reporting STATUS • X-ray equipment was acquired and personnel trained in its use at the Group’s Mexican operations • In conjunction with external consultants, the implementation of the Health & Hygiene SAP module was commenced. In process 2011 targets • Complete implementation of the Health & Hygiene SAP (cid:22) module in Peru and Argentina • Progress further with the incorporation of Hygiene-related initiatives within the existing Health team • Build upon the promising start made by the Wellbeing Programme in 2009 and to consider the implementation of the programme in Argentina. Implement the Hygiene Programme in Argentina and Mexico Establish a blueprint for the Wellbeing Programme (to support the psychological wellbeing of workers) for roll-out to other parts of the Group Below: Health team using X-ray equipment purchased during the year. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 31 Training and developing our people PEOPLE Our Approach We recognise that the quality of our employees contributes the long-term success of our business, and we therefore seek to recruit, develop and retain the high quality people we need to deliver our corporate goals. The Group’s HR team supports this corporate mission through personnel management driven by innovation and best practice. 2010 performance TARGET Implementation of the Hochschild Mining Leadership Programme 5% improvement in the measurement of the working environment as gauged by the “Organisational Climate” survey STATUS (cid:22) (cid:26) Developments during 2010 • Implementation of the Hochschild Mining Leadership Programme, for senior and mid-management; During the year the ﬁrst leadership workshop for senior management took place in Lima in conjunction with the Centre for Creative Leadership (“CCL”). Members of senior management participated in a one-week programme entitled “Leadership at the peak” delivered by the CCL in Colorado, USA. For mid-management, the “Developing leaders” programme was designed and launched in Peru in January 2011 with a planned launch in Argentina later in the year. • Organisational Climate Survey; Every year the Group carries out an organisational climate survey which in 2010 took place in August. The number of employees giving a satisfaction rating to the Group’s employment conditions increased by three percentage points. Despite not achieving the stretching target of a 5% improvement this is considered to be a commendable result which reﬂects well on the initiatives implemented during the year to improve the overall working environment at Hochschild which include: the development of the leadership programmes, the provision of recreational activities for mining personnel and various programmes to enhance work-life balance. 2011 targets • Implement development plans for all critical positions • Continue with the Hochschild Mining Leadership programme for senior management • Complete the ﬁrst stage of the “Developing Leaders” programme for mid-management in Peru • Launch the “Developing Leaders” programme for mid- management in Argentina. People indicators General Average number of Group Employees Training Average number of hours of training undertaken by each employee1 Percentage of workforce trained during the year1 Labour Relations Number of production days lost as a result of industrial unrest 1 In respect of Peruvian operations only. 2010 2009 2008 2007 5,776 4,969 5,012 4,132 17.83 14.03 19.62 13.59 92% 94% 83% 68% C o r p o r a t e r e s p o n s b i l i t y i 1 40.5 0 1 Below: Participants from one of the mid-management leadership programmes run by the Group during 2010. 92%Percentage of Peruvian workforce trained during the year 32 Working together with local communities Corporate responsibility continued Hochschild Mining plc Annual Report & Accounts 2010 COMMUNITY RELATIONS Our Approach We aim to work together with our local communities in order to provide them with more positive living conditions, in terms of economic development, health and education. To do this, the Group’s primary objective is to maintain a constructive relationship with communities and promote development, guided by the following principles: 1. Encourage mutual respect and co-existence with local communities 2. Achieving mutually beneﬁcial agreements 3. Improving the quality of life of community residents 4. Improving the health, nutrition and education of members of the local communities and 5. Fostering good relations and co-ordinating activities with third party stakeholders to promote sustainable development. 2010 performance TARGET Zero “Loss of Production days” arising as a result of community conﬂicts To achieve tangible improvements in the level of education, health and nutrition of local communities as assessed by NGO partners STATUS (cid:22) (cid:22) Community Relations Operacion Sonrisa Peru (Operation Smile) The Group is a committed supporter of Operacion Sonrisa. This charity was founded in 1999 to provide free medical services to children with facial deformities such as cleft lip and cleft palate. Through the Group’s involvement, Operacion Sonrisa has treated a number of children in the localities of its operations and projects in Peru. Developments during 2010 1. Encourage mutual respect and co-existence with local communities This is an overarching principle of the Group which has been achieved through greater interaction and communication with our local communities. This has enabled us not only to improve our relationships but to foster trust and manage conﬂicts as well as facilitate good relations with regional and municipal authorities. The Group has participated in community fairs and celebrations, and has also provided support in times of need. Such support has included the provision of clothing and supplies after a ﬁre engulfed several houses in the town of Perito Moreno located near the San José operation. In addition, the Group provided materials to assist with the repair of the structural damage that had been caused. 2. Achieving mutually beneﬁcial agreements During the year we concluded numerous agreements and negotiations with diverse communities in respect of both operating units and areas of exploration. Through our efforts we have focused on establishing arrangements that are satisfactory to both parties. Examples of such arrangements include a Co-operation Agreement entered into by the Group with the communities close to Selene and the Regional Government of Apurimac to collaborate on issues relating to health, education and initiatives to beneﬁt the farming community. 3. Improving the quality of life of community residents We believe that we can make a signiﬁcant impact on quality of life around our mines by providing work to local people and we actively explore sourcing goods and services locally, and sponsoring community projects which provide employment opportunities. In addition to directly employing community members within the mining operations, the Group seeks to provide opportunities with other local employers including a road maintenance company close to Selene and a building company based near Pallancata. We can report that at the end of 2010, our Peruvian operations employed over 34% of the economically active population residing in local communities. In addition, 25% of our Argentinian workforce and 66% of our Mexican workforce came from neighbouring communities. Below: A mobile medical unit donated by the Group being used by the local community. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 33 In Peru, the main economic activity in the highland regions is the breeding of alpacas and, on a smaller scale, of vicuna and llamas. The Group provides ﬁnancial and technical support for these activities as well as for small-scale agricultural activities in lowland areas and to co-operatives formed by local women which produce hand-woven garments made from Alpaca wool. 4. Improving the health, nutrition and education of members of the local communities The Group has expended much effort during the year in these three crucial areas. Education During the year we have worked to improve literacy and numeracy as well as promoting lessons in natural and social sciences. In addition to providing direct support to preschools, primary and secondary schools, the Group has joined with governmental institutions to build learning centres and fund campaigns to promote adult education. We have continued to develop our ties with various non-governmental organisations, notably Caritas del Peru in providing free training to school teachers and supplying computer equipment. Health & Nutrition The Group has sponsored workshops which have been organised in collaboration with local hospitals and educational institutions to address issues of local concern. The Group has also supported health campaigns aimed at children, the elderly and expectant mothers. The Group has continued to provide resources to combat child malnutrition for example, by establishing allotments which are designed to grow fresh produce even at very high altitude and which signiﬁcantly improve the nutritional intake of children and expectant mothers. The Group has also organised health campaigns to raise awareness of the dangers of the cold climate and has also provided treatment for children suffering from facial deformities such as cleft lip. In addition, during 2010 the Group donated an ambulance and medical equipment to the Santo Tomas hospital close to the Group’s Azuca and Crespo projects. 5. Fostering good relations and co-ordinating activities with third party stakeholders to promote sustainable development The Group has sought to promote the participation of regional and local authorities by facilitating agreements with local communities and businesses. These arrangements have resulted in resources being committed in the areas of education, health, nutrition, culture and tourism. Examples of such work undertaken at Perito Moreno, a town located close to the San José mine, include funding of the construction of a School of Arts and Crafts and ﬁnancial support for an archeology museum. The Group continues to work closely with local authorities to identify and develop sustainable projects and is exploring a potential partnership between the public sector and various mining companies which operate in the region. 2011 targets • On-going target: Zero loss of production days resulting from community conﬂicts • Continue identifying community and economic development initiatives that promote sustainability • Work with government agencies in health and education, and implement meaningful measures of quantitative and qualitative achievements • Facilitate further collaborative projects involving the state and private mining companies for the beneﬁt of local communities • To make further progress in providing adult education. Community relations indicators Community investment $6.7m $6.0m $4.6m $4.3m 2010 2009 2008 2007 Production days lost as a result of community conﬂict 0 1.5 0 0 C o r p o r a t e r e s p o n s b i l i t y i Community Relations Alpaca Breeding Programme Most of our exploration and production units are located at very high altitude, in some cases higher than 4.500 metres. This limits the potential of local people to generate their own income. However, the breeding of Alpacas is one of the few economic activities that local communities at altitude are able to pursue which can result in signiﬁcant sustainable economic and social beneﬁts. The Group’s alpaca breeding project provides support in four key areas, namely: – exploring breeding techniques to raise the quality of the wool produced – developing the technical skills of participants by providing training in various areas including livestock and pasture management – Supporting sales in order to maximise the revenue of the breeders and – Promoting sustainability by forging on-going collaborative ventures. 34 Managing our environmental impact Corporate responsibility continued Hochschild Mining plc Annual Report & Accounts 2010 ENVIRONMENT Our 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. We recognise that doing this brings beneﬁts both in environmental terms, and also enables us to increase the efﬁciency of our own operations. In order to support its efforts, the Group is committed to complying with the highest local and international standards. These standards include ISO 14001, which we use as a benchmark for environmental management, and for which we are currently seeking accreditation across our sites. 6. Undertake periodic audits and inspections of environmental systems 7. Plan for, and implement, the rehabilitation and closure of mine structures and disturbed areas following mine closure. The Environmental department works together with the operational teams, community relations and the Legal Department in the application for, and on-going compliance with, mining permits, thereby assuring the continuity of operations. Environmental management is facilitated through a reporting structure at mine level with accountability to the Corporate Environmental Manager who reports to the VP of Operations. The Group’s environmental team seeks to: The Group’s environmental teams focus on the following areas: 1. Assure the efﬁcient management, treatment and discharge • Water management (mine, industrial, domestic water) of water in conjunction with the operations team 2. Supervise the chemical and physical stability of the Group’s mining structures 3. Implement efﬁcient waste management 4. Identify and adhere to relevant legal requirements and other environmental standards 5. Encourage the adoption of the Group’s environmental mission by all third party stake-holders • Tailings management • Waste rock management • Safe disposal of domestic and industrial waste • Storage and handling of hazardous materials, principally cyanide • Hydrocarbons management • Rehabilitation works in respect of disused structures • Management of new projects • Permitting. Left: Community members near the Ares mine participating in water sampling. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 35 2010 performance TARGET Group Compliance Performance Indicator of at least 70% Zero material environmental incidents across entire operations San José and Pallancata to achieve formal ISO 14001 certiﬁcation 2011 targets • Group Compliance Performance Indicators above 80% • Obtain ISO 14001 certiﬁcation for Arcata, Selene, Pallancata, Ares and San José • Submit Azuca, Crespo and Inmaculada Environmental Impact Assessments • Update mine closure plans for Ares, Arcata, Selene and Pallancata. Environmental indicators STATUS (cid:22) (cid:22) (cid:22) Stage One Achieved Developments during 2010 • On-going reimplementation of environmental management systems at the Group’s operations at Ares, Arcata and Selene as ISO 14001 compliant Average monthly fresh water consumption per metric tonne of treated ore (cubic metres) 20101 0.21 20091 0.63 20082 0.55 20072 2.72 57.75 53.32 90.3 102.01 0.97 1.23 3.14 1.62 12.47 10.31 18.33 17.13 0 0 0 0 30,628 29,668 Not available 32% 27% Not available 37,538 35,606 Not available C o r p o r a t e r e s p o n s b i l i t y i 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 Estimated volume of water withdrawn per day (cubic metres) Estimated proportion of recycled water used (cubic metres) Estimated volume of water discharged per day (cubic metres) 1 Figures relate to the Group’s mines in Ares, Arcata, Selene (until its closure in June 2009), Pallancata and San José unless otherwise stated. 2 Figures relate to the Group’s mines in Ares, Arcata and Selene only, unless otherwise stated. • Stage 1 implementation of environmental management systems at Pallancata and San José mines • Environmental impact studies performed in connection with proposed expansion programmes and in the planning of new infrastructure projects, such as mine capacity increases and a new tailings dam • Group-wide initiatives to raise the general awareness of environmental issues amongst employees • To promote transparency, the Group arranges for discharge levels to be monitored jointly with members of the local communities. During these sessions, water samples are taken from ofﬁcial monitoring points for analysis at laboratories selected by community members and results shared with all participants. Environmental Management Responsible mine closure All operations are required to rehabilitate, and where possible, enhance the land disturbed when extraction activities cease. To ensure this happens, every operation maintains a closure provision that is reviewed annually. Further progress was made in this area during the year. Sipan The Group’s Sipan mine was an open-pit mine which was in operation for seven years until its closure in 2004. The process of preparing for the end of operations began in 2001 and since that time, a number of measures have been implemented to reduce the environmental impact of closure, including: – the construction of Acid Water Treatment Plants which use lime and limestone to treat acid water in disused structures and waste rock deposits and pits – the engagement of a hydrology expert to evaluate alternative courses of action in respect of speciﬁc deposits and – extensive works to rehabilitate the land to support the growth of indigenous species. 36 Financial review & risk management Hochschild Mining plc Annual Report & Accounts 2010 Financial review & risk management 37 Financial review 42 Risk management Unlocking value through exploration Financial review Hochschild Mining plc Annual Report & Accounts 2010 37 The reporting currency of Hochschild Mining plc is US dollars. In discussions of ﬁnancial performance the Group removes the effect of exceptional items, unless otherwise indicated, and in the income statement results are shown 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 Gross revenue: Gross revenue from continuing operations increased 36% to $802.7 million in 2010 (2009: $589.9 million) driven by higher metal prices during the year. Silver: Gross revenue from silver increased 44% in 2010 to $549.7 million (2009: $382.4 million) as a result of higher prices. The total amount of silver ounces sold in 2010 decreased to 24,283 koz (2009 restated: 24,330 koz) mainly due to lower year-on-year production. Gold: Gross revenue from gold increased 22% in 2010 to $253.0 million (2009: $207.5 million) also as a result of higher prices. The total amount of gold ounces sold in 2010 decreased to 199.9 koz (2009 restated: 207.8 koz) mainly due to lower year-on-year production. Gross average realised sales prices As of December 2010, the Company discloses average realised prices calculated as gross revenue divided by gross ounces sold. Previously, the Company disclosed average realised prices calculated as net revenue divided by net ounces sold. Net revenue is calculated as gross revenue minus commercial discounts. The following table provides restated ﬁgures for average realised prices and ounces sold for 2009 and 2010: Average realised prices Silver ounces sold (koz) Avg. realised silver price ($/oz) Gold ounces sold (koz) Avg. realised gold price ($/oz) Year ended 31 Dec 2010 (restated) Year ended 31 Dec 2009 (restated) Year ended 31 Dec 2010 Year ended 31 Dec 2009 24,283 24,330 23,506 23,563 22.6 15.7 21.6 14.5 199.9 207.8 196.2 204.1 1,266 999 1,244 970 KEY PERFORMANCE INDICATORS Revenue1 $m Adjusted EBITDA3 $m 752 540 434 398 250 305 211 148 142 108 06 07 08 09 10 06 07 08 09 10 Silver cash costs2 $/oz Ag co-product Cash ﬂow from operating activities4 $m 8.7 7.0 7.1 4.4 3.6 06 07 08 09 10 304 201 94 06 21 07 79 08 09 10 Gold cash costs2 $/oz Au co-product Earnings per share $ 469 480 504 212 156 0.27 0.28 0.19 0.17 0.05 06 07 08 09 10 06 07 08 09 10 1 Revenue presented in the ﬁnancial statements is disclosed as net revenue (in this Financial Review it is calculated as gross revenue less commercial discounts). 2 Includes Hochschild’s main operations: Arcata, Pallancata and San José. Cash costs are calculated to include cost of sales, treatment charges, and selling expenses before exceptional items less depreciation included in cost of sales. 3 Adjusted EBITDA is calculated as proﬁt from continuing operations before exceptional items, net ﬁnance costs and income tax plus depreciation and exploration expenses other than personnel and other exploration related ﬁxed expenses. 4 Cash ﬂow from operations is calculated as proﬁt for the year from continuing operations after exceptional items, plus the add-back of non-cash items within proﬁt for the year (such as depreciation and amortisation, impairments and write-off of assets, gains/losses on sale of assets, amongst others) plus/minus changes in liabilities/assets such as trade and other payables, trade and other receivables, inventories, net tax assets, net deferred income tax liabilities, amongst others. i i F n a n c a l r e v i e w & r i s k m a n a g e m e n t 38 Financial review continued Hochschild Mining plc Annual Report & Accounts 2010 Commercial discounts: Commercial discounts refer to reﬁnery treatment charges, reﬁning fees and payable deductions for processing concentrates, and are discounted from gross revenue on a per tonne basis (treatment charge), per ounce basis (reﬁning fees) or as a percentage of gross revenue (payable deductions). In 2010, the Group recorded commercial discounts of $50.5 million (2009: $50.4 million). The ratio of commercial discounts to gross revenue in 2010 decreased to 6% (2009: 9%). Net revenue: Increased by 39% to $752.3 million, comprising silver revenue of $508.3 million and gold revenue of $243.9 million. In 2010, silver accounted for 68% and gold 32% of the Company’s consolidated net revenue compared to 63% and 37% respectively in 2009. Unit cost per tonne The Company reported an overall increase in unit cost per tonne at its underground operations of 16% in 2010 to $82.3 (2009: $70.7). This increase is mainly explained by higher royalties as well as price inﬂation in Argentina. In order to further increase transparency, the Company is restating its unit cost per tonne ﬁgures to include certain indirect operating expenses including health, safety and environmental accreditations. In addition, Pallancata’s 2009 unit cost per tonne has been restated to exclude the depreciation component of the Selene plant processing fee. With these restatements, the unit cost per tonne of the Company’s underground operations in 2009 reduces from $71.2 to $70.7. NET REVENUE BY MINE US$(000) unless otherwise indicated Net silver revenue Year ended 31 Dec 2010 Year ended 31 Dec 2009 % change Arcata Ares Selene Pallancata San José Moris 173,942 141,816 16,586 13 13,038 8,805 233,789 139,124 123,393 1,946 78,352 1,245 Commercial discounts (41,392) (40,904) Net silver revenue Net gold revenue Arcata Ares Selene Pallancata San José Moris 508,277 341,476 31,264 40,239 2 43,712 108,849 28,953 27,364 40,278 2,819 32,443 79,430 25,195 Commercial discounts (9,079) (9,492) Net gold revenue Other revenue1 Net revenue 243,940 198,037 105 228 752,322 539,741 23 27 (100) 68 57 56 1 49 14 0 (100) 35 37 15 (4) 23 (54) 39 1 Other revenue includes revenue from sale of energy in Peru, revenue from administrative services in Mexico and revenue from base metal components in the concentrate sold from the Arcata mine net of commercial discounts in 2009 only. Costs Total pre-exceptional cost of sales increased 24% to $345.7 million in 2010 (2009: $279.3 million) mainly as a result of the increase in direct production cost of 21% to $225.2 million (2009: $186.3 million). Direct production costs increased mainly due to inﬂation in personnel, supplies and energy expenses, particularly in Argentina. In addition, mining royalties increased as a result of higher metal prices. Depreciation and amortisation, which increased 23% to $102.7 million (2009: $83.4 million), also contributed to higher cost of sales. Unit cost per tonne by operation*: Operating unit ($/tonne) Peru Arcata Pallancata Ares Selene Argentina San José Total underground Mexico Moris Total Company Unit cost per tonne 2010 (restated) Unit cost per tonne 2009 (restated) % change Unit cost per tonne 2010 Unit cost per tonne 2009 % change 66.2 71.1 51.8 107.5 n/a 59.9 10.6 62.0 47.3 82.7 95.1 14.7 9.3 29.9 n/a 64.0 68.3 50.5 103.3 n/a 60.8 59.6 53.0 81.0 92.1 5.2 14.6 (4.8) 27.5 n/a 152.3 118.5 28.5 152.3 118.5 28.5 152.3 118.5 28.5 152.3 118.5 28.5 82.3 16.3 16.3 61.3 70.7 16.4 13.8 18.1 13.8 18.1 50.7 21.0 80.5 16.3 16.3 60.1 71.2 13.0 13.5 20.7 13.5 20.7 51.1 17.5 * Unit cost per tonne is calculated by dividing mine and geology costs by extracted tonnage and plant and other costs by treated tonnage. Dividing total production cost disclosed in the segmental report on page 154 by treated tonnage reported in the production report provides a good approximation for unit cost per tonne. Cash costs Cash costs include cost of sales, commercial deductions and selling expenses before exceptional items, less depreciation included in cost of sales. Co-product 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. Silver and gold cash costs increased from $7.1 to $9.3 per ounce and from $476 to $535 per ounce, respectively. Silver and gold cash costs from main operations (Arcata, Pallancata and San José) increased from $7.1 to $8.7 per ounce and from $480 to $504 per ounce, respectively. The increase was mainly explained by higher production costs and the lower average grades, mainly at Arcata and Ares. By-product 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 $3.0 per silver ounce (2009: $2.4 per silver ounce) and ($1,153) per gold ounce (2009: ($576) per gold ounce). Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 39 US$(000) unless otherwise indicated Proﬁt from continuing operations before exceptional items, net ﬁnance cost, foreign exchange loss and income tax 12 months ended 31 Dec 2010 12 months ended 31 Dec 2009 % change 266,626 153,600 74% Operating margin 35% 28% Depreciation and amortisation in cost of sales 99,498 85,789 16% Depreciation and amortisation in administrative expenses Exploration expenses Personnel and other exploration related ﬁxed expenses Adjusted EBITDA 2,048 41,537 796 19,941 (157%) (108%) (11,978) (10,257) 397,731 249,869 (17%) 59% Adjusted EBITDA margin 53% 46% Impact of the Group’s investments in joint ventures and associates An associate is an entity in which Hochschild has signiﬁcant inﬂuence but not control and is accounted for using the equity method. Hochschild’s pre-exceptional share of the proﬁt/(loss) after tax of associates totalled $(4.6) million in 2010 (2009: $7.6 million). In 2010, the Company’s share in associates was mainly explained by losses relating to its holdings in Gold Resource Corp and Lake Shore Gold of $3.2 million and $1.4 million, respectively. In 2009, the Company’s share in associates was mainly explained by a gain of $9.2 million from Lake Shore Gold; partially offset by a loss of $1.0 million in Gold Resource Corp. Hochschild reduced its stake in Lake Shore Gold from 35% to 6% in November 2010. The divestment of the remaining 6% stake in Lake Shore Gold, which took place in February 2011, will be recorded in the Company’s 2011 accounts. Hochschild also divested its holdings in Cabo Sur (89%) and Zincore Metals Inc (37%) during the year. The Company continues to hold a 25% stake in Gold Resource Corp. Finance income Finance income before exceptional items decreased by 36% to $4.1 million (2009: $6.4 million) mainly driven by accounting non-cash adjustments in Argentina ($2.5 million) in respect of the discounting of San José’s VAT receivables. Administrative expenses Administrative expenses before exceptional items increased by 30% to $66.2 million (2009: $51.1 million) mainly as a result of: a 35% increase in personnel expenses to $34.3 million (2009: $25.4 million) and a 45% increase in professional fees to $9.6 million (2009: $6.6 million). Personnel expenses increased primarily due to the provision for a management long-term incentive plan, termination beneﬁts due to changes in management and higher salaries. Professional fees increased mainly due to higher legal fees mainly related to the Minera Andes dispute. Exploration expenses As a result of the Group’s decision to focus on organic growth through exploration, exploration expenses, which primarily relate to greenﬁeld exploration, increased by 109% to $41.5 million in 2010 (2009: $19.9 million). Further detail on this programme can be found in the exploration section on page 18. In addition, the Group capitalises part of its brownﬁeld exploration, which mostly relates to costs incurred converting potential resource to the inferred or measured and indicated category. In 2010, the Group capitalised $12.0 million relating to brownﬁeld exploration compared to $8.6 million in 2009 bringing the total investment in exploration for the full year 2010 to $53.5 million. In addition, $10.2 million was invested in the Company’s advanced projects. Selling expenses Selling expenses increased to $26.9 million (2009: $21.0 million) mainly due to higher export duties at San José, driven by the increase in gold and silver prices (export duties in Argentina are levied at 10% of revenue for concentrate and 5% of revenue for doré). Other income/expenses Other income before exceptional items was $5.6 million (2009: $4.5 million). Other income post exceptional items was $82.8 million (2009: $13.3 million), mainly as a result of the divestment in the Company’s stake in Lake Shore Gold from 35% to 6%, which generated a gain of $63.7 million. Other expenses before exceptional items reached $11.0 million (2009: $19.3 million). There were no exceptional items related to other expenses in 2010. Proﬁt from continuing operations Proﬁt from continuing operations before exceptional items, net ﬁnance costs and income tax increased to $266.6 million (2009: $153.6 million) as a result of the effects detailed above. Adjusted EBITDA Adjusted EBITDA increased by 59% over the period to $397.7 million (2009: $249.9 million) driven primarily by higher silver and gold prices. Adjusted EBITDA is calculated as proﬁt from continuing operations before exceptional items, net ﬁnance costs and income tax plus depreciation and exploration expenses other than personnel and other exploration related ﬁxed expenses. i i F n a n c a l r e v i e w & r i s k m a n a g e m e n t 40 Financial review continued Hochschild Mining plc Annual Report & Accounts 2010 Finance costs Finance costs decreased 36% to $29.5 million in 2010 (2009: $46.0 million). Interest costs increased to $17.3 million in 2010 (2009: $15.6 million) mainly due to the reﬁnancing of upcoming syndicated bank loan maturities in November 2009 with a longer-dated convertible bond at a higher interest rate. Nonetheless, the reduction in recognised losses from the use of derivatives in 2010 to $(9.1) million (2009: $28.4 million) resulted in a decrease in ﬁnance costs. Hochschild repaid, in full, its syndicated bank loan facility in January 2011. In addition, the Company has no outstanding currency or commodity hedge positions. Foreign exchange losses The Group recognised a foreign exchange gain of $0.3 million (2009: $0.3 million loss) as a result of transactions in currencies other than the functional currency. Income tax The Company’s pre-exceptional effective tax rate decreased to 32.5% in 2010 (2009: 36.8%) mainly as a result of the reversal in 2010 of a provision for tax credits of $4.8 million, which was recognised at the end of 2009. In addition, the post-exceptional effective tax rate increased to 24.7% (2009: 21.6%) primarily driven by a lower proportion of non-taxable, exceptional gains to proﬁt before income tax in 2010 compared to 2009, which represented a decrease in the effective income tax rate of 8% in 2010 compared to 12% in 2009. Exceptional items Exceptional items in 2010 totaled $57.8 million after tax (2009: ($44.7 million). This mainly includes: Positive exceptional items: Main items Other income $000 Description of main items 77,197 Gain of $63.7 million related to the reduction of the Company’s stake in Lake Shore Gold from 35% to 6%. A gain of $7.5 million related to the sale of Zincore Metals which the Company received as part of the acquisition of Southwestern Resources Inc. in 2008. A gain of $6.0 million related to the exchange of El Quevar property in Mexico for Golden Minerals shares Finance income 9,204 A gain of $5.8 million related to the sale of Golden Minerals. A gain of $3.0 million related to the change in fair value of the Golden Minerals warrants held by the Company. Negative exceptional items: Main items $000 Description of main items Cost of sales 8,861 Negotiated compensation paid in Impairment and write-off of assets 2010 to workers at the Peruvian mines for 2009 exercise period 24,018 Mainly explained by: i) impairment of the San Felipe property by $14.7 million, triggered by the conclusion of the marketing process conducted during H1 2010 (the new value of San Felipe reﬂects the Company’s estimate of the fair value less cost to sell) and ii) impairment of $6.7 million related to the 100% doré project in San José following a decision to suspend the project indeﬁnitely Cash ﬂow and balance sheet review Cash ﬂow $000 Net cash generated from operating activities Net cash used in investing activities Cash ﬂows generated/(used) in ﬁnancing activities Net (decrease)/increase in cash and cash equivalents during the period 12 months ended 31 Dec 2010 12 months ended 31 Dec 2009 Change 304,232 200,524 103,708 198,963 (373,021) 571,984 (55,010) 134,443 (189,453) 448,185 (38,054) 486,239 Total cash generated increased from $(38.1) million in 2009 to $448.2 million in 2010 ($486.3 million difference). Operating cash ﬂow increased 51% to $304.2 million from $200.5 million in 2009 ($103.7 million difference), mainly due to higher metal prices. Net cash from investing activities increased to $199.0 million in 2010 from $(373.0) million in 2009, primarily due to the reduction in the Company’s holding in Lake Shore Gold. Finally, cash from ﬁnancing activities decreased to $(55.0) million from $134.4 million, primarily as a result of the higher dividend paid to International Minerals Inc of $26 million in 2010, compared to an equity issuance of $145 million in 2009. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 41 Working capital Capital expenditure1 US$(000) Trade and other receivables Inventories Net other ﬁnancial assets Net Income tax payable 12 months ended 31 Dec 2010 12 months ended 31 Dec 2009 182,752 168,014 55,130 18,732 45,813 (1,945) (10,977) (10,751) Trade and other payables incl. provisions (246,781) (135,163) Working capital (1,144) 65,968 The Company’s working capital position decreased to $(1.1) million in 2010 from $66.0 million in 2009 as a result of higher trade and other payables and provisions. This was primarily explained by; payments to International Minerals Inc relating to the Inmaculada acquisition ($54.8 million), workers proﬁt sharing ($21.3 million), higher commercial payables ($20.4 million) and a provision for the management long-term incentive plan ($7.0 million). Net debt US$(000) unless otherwise indicated Cash and cash equivalents Long-term borrowings Short-term borrowings* Net debt/(net cash) As at 31 Dec 2010 As at 31 Dec 2009 (525,482) (77,844) 248,380 219,681 69,272 112,908 (207,830) 254,745 * Includes pre-shipment loans which were previously reported under working capital (2009 ﬁgures have been restated to reﬂect this change). The Company reported net cash of $207.8 million as at 31 December 2010 (2009: $254.7 million). This was primarily driven by the signiﬁcant increase in cash and cash equivalents from $77.8 million to $525.5 million during the year. In January 2011, the Company paid down its full syndicated loan facility of $114.3 million, which will be recorded in its 2011 accounts. The Convertible bond currently outstanding has a conversion price of £3.98 and allows the Company to force conversion of the bonds at anytime after 20 October 2012 if, during a 20 day period, the Company’s stock price exceeds 130% of the conversion price (£5.17). US$(000) unless otherwise indicated Arcata Ares Selene Pallancata San José Moris Other2 Total 12 months ended 31 Dec 2010 12 months ended 31 Dec 2009 30,230 5,422 5,839 38,116 55,183 2,728 18,965 29,688 3,484 16,579 24,117 26,113 480 8,074 156,4833 108,535 1 Includes additions in property, plant and equipment and evaluation and exploration assets and excludes increases in closure of mine assets. 2 Other capex includes mainly Azuca ($13.8 million), Crespo ($2.7 million) and administrative capex of ($1.5 million). 3 Capex does not include the $90.6 million additions in respect of the acquisition of Inmaculada. 2010 capital expenditure of $156.5 million (2009: $108.5 million) includes mine development of $71.5 million, equipment of $53.8 million, capitalised exploration costs of $12.0 million in respect of the Group’s operating mines and $16 million capitalized in respect of advanced projects (Azuca and Crespo). Dividends The directors recommend a ﬁnal dividend of $0.03 per ordinary share which, subject to shareholder approval at the 2011 AGM, will be paid on 7 June 2011 to those shareholders appearing on the register on 13 May 2011. If approved, this will result in a total dividend for the year of $0.05 per share. 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. Dividend dates Ex-dividend date Record date Deadline for return of currency election forms Payment date 2011 11 May 13 May 17 May 7 June i i F n a n c a l r e v i e w & r i s k m a n a g e m e n t 42 Risk management Hochschild Mining plc Annual Report & Accounts 2010 OVERVIEW As with all businesses, management of the Group’s operations and execution of its growth strategies are subject to a number of risks. The occurrence of any of these risks may adversely affect the execution of growth strategies and hence the performance of the Group. The Group’s risk management framework is premised on continued monitoring of the prevailing environment and the risks posed by it as well as the management of risks which, in light of either likelihood and/or impact on the business, are categorised as signiﬁcant risks. A Risk Committee is responsible for implementing the Group’s policy on risk management and monitoring the effectiveness of controls in support of the Company’s business objectives. It meets four times a year and more frequently if required. The Risk Committee comprises the CEO, the Vice Presidents, the Country General Managers and the head of the internal audit function. A ‘live’ risk matrix is compiled and updated at each Risk Committee meeting and the most signiﬁcant risks are reported to the Group’s Audit Committee which has oversight of risk management on behalf of the Board. Further details on the Audit Committee’s activities are provided in the Corporate Governance Report on pages 52 to 56. The key business risks affecting the Group are set out in the table below. The steps taken by the Group to mitigate these risks, when they are within its control, are also described. TYPE OF RISK DESCRIPTION OF RISK MITIGATING STEPS FINANCIAL RISKS Commodity price Adverse movements in precious metals’ prices could have a material impact on the Group’s results of operations Credit Loss of revenue resulting from defaulting customers Liquidity The Group may be unable to raise funds to meet its ﬁnancial commitments as they fall due Silver and gold prices are continually monitored and a Hedging Committee has been speciﬁcally established which comprises Directors and members of senior management to recommend to the Board the appropriate course of action. The Group has incorporated a number of measures to protect against customer default including (i) the provision in sales contracts for advance payment or delaying transfer of title to goods sold, (ii) requiring the provision of parent company guarantees where possible (iii) implementing risk proﬁling of key and new customers. In addition, the Group beneﬁts from a diversiﬁed customer base which further mitigates the risk of default Whilst the impact of this risk is mitigated by the strength of the Company’s year-end balance sheet, the Board and senior management continually monitor the Group’s requirements for short and medium-term liquidity, and the Company maintains access to credit lines to ensure an appropriate level of ﬁnancing Foreign currency The combination of US dollar denominated sales and some costs denominated in local currencies may impact the Group’s results in the event of adverse currency movements against the US dollar Management periodically reviews the relationship between the US dollar and local currencies to ensure the Company is properly protected. The Group’s operations are located in different countries which also mitigates the extent of foreign exchange risk Interest rate Movements in interest rates could impact the Group’s results from ﬁnancings Given the low interest rate environment, during the year, management ﬁxed the interest rate exposure of the Group stemming from its ﬂoating debt balance. The impact of this risk has been further reduced following the repayment of the entire outstanding balance of the JPM-led syndicated loan subsequent to the year-end OPERATIONAL RISKS Costs Increase in production costs could impact on the Group’s proﬁtability The Group seeks to enter into long-term supply contracts where possible. Costs are monitored by management on a monthly basis Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 43 TYPE OF RISK Business interruption Reserve and resource replacement Personnel DESCRIPTION OF RISK MITIGATING STEPS Assets used in operations may break down and insurance policies may not cover against all forms of risks due to certain exclusions and limitations The Group has combined property damage and business interruption insurance policies for all operations, and adequacy of coverage is regularly reviewed with advisers. With the assistance of the SAP Maintenance module, stock of critical parts are maintained and monitored for ongoing replenishment. During 2010 all operating units beneﬁted from access to contingent power supplies 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 The Group allocated $50m in 2010 to fund its exploration and geology activities. The Group has an annual drilling plan which is revised on a quarterly basis with exploration targets continually deﬁned and new targets incorporated (i) Loss of key senior management and personnel in particular, highly skilled engineers and geologists; (ii) the lack of availability of individuals with relevant mining experience in the vicinity of the Group’s operations; and (iii) failure to maintain good labour relations with workers and/or unions may result in work slowdown, stoppage or strike In respect of (i) the Group seeks to provide competitive compensation arrangements and well-deﬁned career plans for positions of strategic importance. In respect of (ii) and (iii) a labour relations strategy has been developed to ensure that employees’ needs are identiﬁed and met, and to facilitate open dialogue between key stakeholders including workers’ unions MACRO ECONOMIC RISKS Political, legal and regulatory Costs associated with ensuring compliance with all relevant laws and regulations are substantial. Future changes which may include increases in taxes and/or royalties may result in additional expense, restrictions on or suspensions of, operations and may lead to delays in the development of current operations and early stage projects CORPORATE SOCIAL RESPONSIBILITY 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 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 Communities living in the areas close to Hochschild’s operations may oppose the activities carried out by the Group at existing mines or development projects and prospects which may also impact the Group’s ability to obtain concessions for current or future projects Further information on ﬁnancial risks can be found in note 37 to the Consolidated Financial Statements. Local teams in each country of operation monitor and react, as necessary, to policy changes impacting on the business. Regional risk assessments are performed when investments in new countries are considered. These incorporate reviews of political environments and likelihood of changes in policy that are likely to impact the Group’s results from operations Attainment of Level 6 of the DNV safety management information system at Arcata and Pallancata and Level 5 at San José. An action plan to achieve Level 5 at Ares during 2011 has been agreed. Numerous initiatives were adopted during 2010 further reinforcing the Group’s commitment in this area. Additional details on the Group’s approach to Health and Safety are provided in the Corporate Responsibility Report on page 29 The Group has a dedicated team of professionals with an allocated budget for environmental management purposes. Monthly audits are carried out to monitor the implementation of third-party environmental recommendations and achievement of targets. Air and water quality are monitored on a quarterly and weekly basis respectively The Group’s Community Relations department maintains ongoing dialogue with local communities. Action plans have been budgeted and are being developed and progress is monitored on a monthly basis i i F n a n c a l r e v i e w & r i s k m a n a g e m e n t 44 Governance Hochschild Mining plc Annual Report & Accounts 2010 Governance 45 Board of Directors 46 Senior management 47 Directors’ report 52 Corporate governance report 57 Directors’ remuneration report 64 Statement of directors’ responsibilities 65 Independent auditor’s report Unlocking value through exploration Board of Directors Hochschild Mining plc Annual Report & Accounts 2010 45 EXECUTIVE DIRECTORS Eduardo Hochschild 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. Eduardo has numerous directorships, amongst them, Cementos Pacasmayo S.A.A., COMEX Peru, Banco de Crédito del Perú and a number of positions with non-proﬁt entities such as the Sociedad Nacional de Minería y Petróleo and the Conferencia Episcopal Peruana. Jorge Born Jr. Non-Executive Director Jorge Born Jr. joined the Board in 2006. He is the President and Chief Executive Ofﬁcer of Bomagra S.A. and a Director of Caldenes S.A., a Bomagra group company. Previously, Jorge served as Head of Bunge’s European operations from 1992 to 1997 and as Head of Bunge’s UK operations from 1989 to 1992. He acts as a Director of Bunge Limited having previously served as Deputy Chairman for 15 years. Jorge is a Director of Dufry A.G. following its merger with Dufry South America S.A. of Rio de Janeiro in May 2010. In addition, Mr Born is President of the Bunge and Born Charitable Foundation. Nigel Moore Non-Executive Director Nigel Moore joined the Board in 2006. He is a Chartered Accountant and currently serves as Chairman of TEG Environmental plc and as a Non-Executive Director of The Vitec Group plc, JKX Oil & Gas plc, Ascent Resources plc and Production Services Network Ltd. Nigel was a Partner at Ernst & Young from 1973 to 2003 during which time he served as Managing Partner of the ﬁrm’s London ofﬁce from 1985 to 1987, as Senior Partner attached to the Chairman’s Ofﬁce (Europe) from 1987 to 1989, and as Regional Managing Partner for Eastern Europe and Russia from 1989 to 1996. Dionisio Romero Non-Executive Director Dionisio Romero joined the Board in 2006. He was formerly the Chairman and Chief Executive Ofﬁcer of the ﬁnancial services holding company, Credicorp Ltd, positions he retired from in April 2009 after more than 13 years. Dionisio currently serves as President of TECSUP Trujillo, a higher education institution. Fred Vinton Non-Executive Director Fred was appointed to the Board on 1 August 2009. He holds directorships of a number of companies including European Goldﬁelds plc, Unipart Group of Companies UK, GP Investments Ltd and Dinamia SCR S.A. Between 1995 and 2006 Fred served as Chairman/Chief Executive Ofﬁcer of Electra Partners Limited and prior to that he was Chief Executive of Quilvest Ltd between 1992 and 1995. Over the course of Fred’s 25 year career with J.P. Morgan, Fred was responsible for the bank’s business in Latin America, the UK and Scandinavia before he joined N M Rothschild & Sons Ltd in 1988 as Chief Operating Ofﬁcer. G o v e r n a n c e Ignacio Bustamante Chief Executive Ofﬁcer Ignacio Bustamante joined the Board as CEO on 1 April 2010. Prior to his appointment he has served as the General Manager of the Peruvian operations and as Chief Operating Ofﬁcer from January 2008. Since joining Hochschild in 1992, Ignacio served as Chief Financial Ofﬁcer of Cementos Pacasmayo S.A.A between 1998 and 2003, a company he subsequently became a director of in 2003 until 2007. Subsequently, Ignacio served as Chief Financial Ofﬁcer and Vice President of Business Development and later as President of Zemex Corporation, a Cementos group company. Ignacio is a graduate of Business and Accounting having studied at the Universidad del Pacíﬁco in Peru and holds an MBA from Stanford University. NON-EXECUTIVE DIRECTORS Roberto Dañino Deputy Chairman Roberto Dañino joined the Board in 2006. He has been a Board member with the Hochschild Group since 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 and founding General Counsel of the Inter- American Investment Corporation. Roberto is also a Non-Executive Director of a number of companies including Gold Fields Limited. Roberto served as an Executive Director of the Company from 2006 until the end of 2010. Roberto currently serves as Chairman of the Board of Fosfatos del Paciﬁco S.A, part of the Cementos Pacasmayo S.A.A. group of companies. Sir Malcolm Field Senior Non-Executive Director Sir Malcolm Field joined the Board in 2006. He serves as a Non-Executive Director of Petropavlovsk plc and Ray Berndtson. Between 2002 and 2006 Sir Malcolm served as Chairman of Tube Lines Limited, one of the London Underground consortia, and from 2001 to 2006, as an external policy adviser to the UK’s Department of Transport. Sir Malcolm was Group Managing Director of WH Smith plc between 1982 and 1993 and served as Chief Executive from 1993 to 1996. From 1996 to 2001 Sir Malcolm chaired the Civil Aviation Authority. Sir Malcolm has held non- executive directorships with numerous companies, including Scottish and Newcastle plc and Evolution Beeson Gregory. 46 Senior management Hochschild Mining plc Annual Report & Accounts 2010 Ramón Barúa Chief Financial Ofﬁcer Ramón Barúa was appointed CFO of Hochschild Mining on 1 June 2010. He has most recently served as CEO of Fosfatos del Paciﬁco, a mining project in nothern Peru owned by Cementos Pacasmayo, an associate company of the Hochschild Group. During 2008, Ramón was the General Manager for Hochschild Mining’s Mexican operations, having previously worked as Deputy CEO and CFO of Cementos Pacasmayo. Prior to joining Hochschild he was a Vice President of Debt Capital Markets with Deutsche Bank in New York for four years and a sales analyst with Banco Santander in Peru. Ramón is an economics graduate from Universidad de Lima and holds an MBA from Columbia Business School. Ernesto Balarezo Vice President, Operations Ernesto Balarezo joined the Hochschild Group in 1997. Prior to his appointment as Vice President of Operations in April 2010, he served as General Manager of Hochschild’s Peruvian operations from March 2008 and as General Manager of the Company’s Mexican operations from January 2007. From 2003 to 2006, he worked in Cementos Pacasmayo, an associate company of the Hochschild Group, initially as CFO and later as Deputy CEO. Prior to joining the Group, he worked at Productos Favel from 1994 to 1997. He also worked in the United States for three years, ﬁrst at the Texas A&M University and then at Nadisco Inc. Ernesto holds an MSc in Industrial Management and a BSc in Industrial Engineering from Texas A&M University. Isac Burstein Vice President, Business Development 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. Isac is on the Board of Gold Resource Corp. Raymond Jannas 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’ 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 Vice President and 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 subsequently, at 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 practise as a lawyer in Mexico, New York and the District of Columbia. Prior to his current role José served as Senior Adviser to the Executive Committee. Eduardo Villar 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. Unlocking value through exploration Directors’ report Hochschild Mining plc Annual Report & Accounts 2010 47 The Directors have pleasure in presenting their report for the year ended 31 December 2010. DIRECTORS’ INTERESTS PRINCIPAL ACTIVITIES AND BUSINESS REVIEW Details of the interests of those Directors serving at 31 December 2010 in the Company’s shares are shown below: 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 four underground mines in production supported by fully developed infrastructure, three of which are located in southern Peru and the fourth in Argentina. The Group also has one open pit mine in Mexico and numerous projects and 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 Gold Resource Corporation. The “At a glance”,“Chief Executive Officer’s review” and “Operating and exploration review” sections of this Annual Report give an indication of the likely future developments of the Company, and the “Operating and exploration review”, “Corporate responsibility” and “Financial review and risk management” sections of this Annual Report on pages 11 to 43 contain the information required to be disclosed in this report under section 417 of the Companies Act 2006. These sections, together with the Corporate Governance Report, are incorporated into this report by reference. RESULTS AND DIVIDEND The Group’s adjusted EBITDA1 for the year amounted to $397.7 million (2009: $249.9 million). Revenue for the year was $752.3 million (2009: $539.7 million) and attributable profit to equity shareholders after tax (before exceptional items) was $94.9 million (2009: $52.9million). An interim dividend of $0.02 per share was paid to shareholders of the Company on 22 September 2010. The Directors recommend the payment of a final dividend of $0.03 per share (2009: $0.02 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 7 June 2011 to shareholders on the register at the close of business on 13 May 2011. 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 45. All directors were in office for the duration of the year under review except for Ignacio Bustamante who was appointed by the Board on 1 April 2010. Miguel Aramburú and Ignacio Rosado resigned as Directors of the Company on 31 March 2010 and 31 May 2010 respectively. Ignacio Bustamante, together with all other directors on the Board, will be seeking re-election at the forthcoming AGM in line with the recommendation of the UK Corporate Governance Code. 1 Calculated as profit from continuing operations before exceptional items, net finance costs and income tax plus depreciation and exploration expenses other than personnel and other exploration related fixed expenses. No of ordinary shares as at 31 December 2010 No of ordinary shares as at 1 January 2010 or date of appointment, if later 182,415,206 182,415,206 500,000 1,725,000 0 14,285 0 14,285 100,000 0 0 14,285 0 14,285 100,000 0 Eduardo Hochschild1 Roberto Dañino2 Ignacio Bustamante3 Sir Malcolm Field Jorge Born Jr. Nigel Moore Dionisio Romero Fred Vinton 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 interest is held by Navajo International Holdings Ltd. 3 Ignacio Bustamante was appointed a Director of the Company on 1 April 2010. In addition, during the year, Fred Vinton acquired an interest in Convertible Bonds of the Company with a nominal value of $500,000. There have been no changes in the above interests in the period from 31 December 2010 to 28 March 2011. RELATIONSHIP AGREEMENT Prior to the Company’s IPO, Pelham Investment Corporation, Eduardo Hochschild and the Company (amongst others) 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 page 53. G o v e r n a n c e 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: –(cid:3)monitoring the Group’s performance against agreed policy on all CSR-related issues, particularly on safety and occupational health, community relations, and the environment; –(cid:3)reviewing management’s investigation of incidents or accidents that occur, in order to assess whether policy improvements are required; and 48 Directors’ report Continued Hochschild Mining plc Annual Report & Accounts 2010 –(cid:3)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 responsibility report on pages 26 to 35. REHABILITATION OF LAND be sought on similar terms at this year’s AGM when the 2010 Authority expires. SUBSTANTIAL SHAREHOLDINGS As at 28 March 2011 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: 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 $62 million, which includes amounts estimated for ongoing maintenance of sites. A provision for this amount was made as at 31 December 2010 (2009: $61.3 million) which was calculated following a review of the mines’ estimated closure costs by external consultants and which has been updated by management. EMPLOYEES Employees of Minera Santa Cruz, S.A. are voluntarily affiliated to the Asociación Obrera Minera Argentina (the Argentine Mineworkers Union). The Group’s employees at the Peruvian operations became members of unions which were formed during 2008. Details of how the Group engages with its employees are provided in the corporate responsibility report on pages 26 to 35. SUPPLIER PAYMENT POLICY It is the Company’s policy that, subject to compliance with trading terms by the supplier, payments to suppliers are made in accordance with terms and conditions agreed in advance. At 31 December 2010, the Company had an average of 24 days’ purchases owed to trade creditors (2009: 42 days). POLITICAL AND CHARITABLE DONATIONS The Company does not make political donations. During the year, the Group expended $6.7 million (2009: $6 million) on social and community welfare activities surrounding its mining units. EVENTS SINCE THE BALANCE SHEET DATE Details of events occurring since 31 December 2010 are set out in note 38 to the Consolidated financial statements on page 131. SHARE CAPITAL The issued share capital of the Company as at 1 January 2010 was 338,085,226 Ordinary Shares of 25p each. No shares were issued by the Company during the year to 31 December 2010. SHARE REPURCHASE AUTHORITY The Company obtained shareholder approval at the AGM held in May 2010 for the repurchase of up to 33,808,522 Ordinary Shares which represents 9.99% of the Company’s current issued share capital (“the 2010 Authority”). Whilst no purchases were made by the Company pursuant to the 2010 Authority, it is intended that shareholder consent will Eduardo Hochschild Vanguard Group Inc. Prudential plc Group of Companies Blackrock Global Funds Altima Global Special Situations Master Fund Limited Number of Ordinary Shares Percentage of issued share capital 182,415,206 37,291,964 19,695,592 17,021,418 53.96 11.03 5.82 5.03 12,003,175 3.55 RELATED PARTY TRANSACTIONS Details of related party transactions undertaken during the year under review are given in note 30 to the Consolidated financial statements on pages 119 and 120. ADDITIONAL STATUTORY INFORMATION This section provides information as at 31 December 2010 which is required to be disclosed in the Directors’ report. 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 2006. (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. Further information on the Company’s share capital is provided in note 27 to the Consolidated financial statements. (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 and on a poll at a general meeting or class meeting, every member present in person or, subject to the below, by proxy, has one vote for every Ordinary Share held. However, in the case of a vote on a show of hands, where a proxy has been appointed by more than one member the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution. 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 49 (c) Transfer of shares The relevant provisions of the Articles state that: –(cid:3)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; –(cid:3)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 –(cid:3)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, amongst others, the Major Shareholder (as defined in the Relationship Agreement) and Eduardo Hochschild (collectively “the Controlling Shareholders”) and the Company: –(cid:3)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 –(cid:3) contains an undertaking by the Controlling Shareholders that they will, and will 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 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. 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 subject to periodic re-election by shareholders at intervals of no more than every three years. 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. Under law, the Company is entitled to adopt such practices which are no less stringent than those set out in the Articles. Accordingly, notwithstanding the above, the Board has decided to adopt early the recommendation of the UK Corporate Governance Code that all directors should seek annual re-election by shareholders. 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: –(cid:3)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 –(cid:3)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. G o v e r n a n c e 50 Directors’ report Continued Hochschild Mining plc Annual Report & Accounts 2010 (i) Powers of the Directors Subject to 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. (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 33,808,522 Ordinary Shares and which will expire at the 2011 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, to take effect, alter or terminate. Such agreements include commercial trading contracts, joint venture agreements and financing arrangements. Further details are given below of those arrangements where the impact may be considered to be significant in the context of the Group. –(cid:3)Under the terms and conditions of the $115,000,000 5.75% Convertible Bonds due 2014, condition 5(a) sets out the conversion rights of the holders of the bonds and the calculation of the conversion price payable. The conversion price will decrease if a “Change of Control” occurs. “Change of Control” is defined in Condition 3 and Condition 5(b)(x) sets out the consequential adjustment to the conversion price. In summary, a Change of Control occurs if (i) an offer is made to all (or as nearly as may be practicable all) shareholders other than the offeror and/or any of its associate to acquire all or a majority of the issued ordinary shares of the Company or if any person proposes a scheme with regard to such acquisition (other than an Exempt Newco Scheme (as defined)) and (such offer or scheme having become unconditional in all respects or having become effective) the right to cast more than 50% of the votes which may ordinarily be cast on a poll at a general meeting of the Company (“Voting Rights”) has or will become unconditionally vested in the offeror and/or an associate (as defined) of the offeror; or (ii) the right to cast more than 60% of the Voting Rights has or will become unconditionally vested in the ultimate controlling shareholder of the Company at the time of issue and/or an associate (as defined); or (iii) the right to cast more than 50% of the Voting Rights has or will become unconditionally vested in any person or persons acting together by reason of the acquisition of the Company’s ordinary shares or Voting Rights from the ultimate controlling shareholder of the Company at the time of issue. Condition 6(d) of the terms and conditions of the bonds gives bondholders an early redemption option (early repayment at face value plus accrued interest) upon a Change of Control occurring. –(cid:3)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 prorated 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. –(cid:3)Certain arrangements in respect of derivative instruments entered into by the Group would terminate on the occurrence of a change of control thereby triggering an event of default vis a vis the counterparty. 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: –(cid:3)the mining concessions and operating permits granted by the governmental authorities in the jurisdictions of the Group’s operations; and –(cid:3)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 38 to the Consolidated 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 51 DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE AUDITORS 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. In keeping with the approach agreed by the Board, Directors’ conflicts were reviewed during the year under review. 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 In light of cash flow forecasts prepared for the Board and the year-end cash balance, 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. A resolution to reappoint Ernst & Young LLP as auditors will be put to shareholders at the forthcoming AGM. AGM The fifth AGM of the Company will be held at 10am on 2 June 2011 at the offices of Linklaters LLP. The shareholder circular incorporating the Notice of AGM will be available at www.hochschildmining.com The shareholder circular contains details on, amongst other things, the business to be considered at the meeting. 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 418(2) of the Companies Act 2006. STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors confirm that to the best of their knowledge: –(cid:3)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 –(cid:3)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. G o v e r n a n c e 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 45 of this Annual Report. On behalf of the Board Raj Bhasin Company Secretary 28 March 2011 52 Corporate governance report Hochschild Mining plc Annual Report & Accounts 2010 INTRODUCTION & STATEMENT OF COMPLIANCE The Board of Hochschild Mining plc 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 2008 Edition (“the Code”) a copy of which is available on the website of the Financial Reporting Council. This report sets out how the Company has applied the Main Principles set out in the Code in respect of the year under review. The information required to be included in the Corporate Governance Report in relation to share structure pursuant to the Disclosure and Transparency Rules is provided in the section of the Directors’ Report entitled “Additional Statutory Information”. The Board confirms that in respect of the year ended 31 December 2010, the Group has complied with the provisions contained in Section 1 of the Code with the exception that a significant part of the Executive Chairman’s remuneration is not performance-related. As disclosed in the 2009 Annual Report, the remuneration arrangements for the Executive Chairman were reviewed in early 2010. In agreeing the structure, the Board agreed that the arrangements should reflect the importance of his contribution to the long-term strategic development of the Group, and his current significant shareholding. For this reason, a package comprising fixed elements only was considered to be the most appropriate. 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 senior 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 two Executive Directors: Eduardo Hochschild (Chairman) and Ignacio Bustamante (Chief Executive Officer), and six Non-Executive Directors: Roberto Dañino (Deputy Chairman), Sir Malcolm Field (Senior Independent Non-Executive Director), Jorge Born Jr., Nigel Moore, Dionisio Romero and Fred Vinton. 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. As a result, Eduardo Hochschild’s membership of the Board and participation in the management of the Company is considered by the Board to be vital to its continued success and growth. Prior to the Company’s Listing, the Major Shareholder, its Controlling Shareholders at the 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 47. There is an agreed schedule of matters reserved for the Board which includes the approval of annual and half-yearly results, the Group’s strategy, the annual budget and major items of capital expenditure. During the year under review, there were four scheduled meetings of the Board and three ad hoc meetings which were convened at short notice to deal with matters relating to Corporate Development. Attendance of the Directors serving during the year at scheduled Board meetings is summarised in the following table: Eduardo Hochschild Roberto Dañino Ignacio Bustamante¹ Sir Malcolm Field Nigel Moore Jorge Born Jr. Dionisio Romero Fred Vinton Miguel Aramburú² Ignacio Rosado³ Maximum possible attendance Actual attendance 4 4 3 4 4 4 4 4 1 2 4 4 3 4 4 4 4 4 1 1 1 Ignacio Bustamante was appointed a Director of the Company on 1 April 2010 2 Miguel Aramburú resigned as a Director of the Company on 31 March 2010 3 Ignacio Rosado resigned as a Director of the Company on 31 May 2010 The principal matters considered by the Board during the year include: –(cid:3)the appointments of Ignacio Bustamante and Ramon Barua to the positions of CEO and CFO respectively; –(cid:3)the Group’s strategic plan and annual budget. –(cid:3)matters relating to corporate development including divestment of the Group’s holdings in Zincore Metals Inc. and Lake Shore Gold Corporation. –(cid:3)Presentations on and regular updates with respect to, progress of the Group’s exploration projects. –(cid:3)a review of directors’ conflicts of interest. –(cid:3)various matters relating to health & safety, environmental management and community relations. 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 53 CHAIRMAN AND CHIEF EXECUTIVE Consistent with the Code, consideration of the remuneration of the Non-Executive Directors is a matter reserved for the Board. The Company is jointly led by the Executive Chairman, Eduardo Hochschild, and the Chief Executive Officer. Miguel Aramburú served as Chief Executive Officer until 31 March 2010 and was succeeded by Ignacio Bustamante. A document setting out the division of responsibilities between the Chairman and the CEO is set out in writing and has been approved by the Board. Eduardo Hochschild, as Chairman, is responsible for the running and leadership of the Board and, in conjunction with the Chief Executive Officer, for 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. SENIOR INDEPENDENT DIRECTOR Sir Malcolm Field acts as 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 During 2010 the composition of the Board complied with the provision of the Code in that a majority of the Board (excluding the Chairman) comprised Non-Executive Directors who are considered by the Board to be independent. The Board believes that its membership during the year was, and continues to be, 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. This sentiment continues to be reiterated by the views expressed by directors during the annual board evaluation process. The Board considers 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 in office in 2010 were, and continue to be, independent of the Company as defined by the Code. It is acknowledged that given his previous role as an Executive Director, Roberto Dañino is not regarded as an independent Non-Executive Director. The Board is of the opinion that each of its Non-Executive Directors enhances the Board’s capacity to oversee and grow the Company’s operations. This notwithstanding, the membership of each main Board committee is 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. 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 appointment of Ignacio Bustamante as Chief Executive Officer and a Director of the Company. The UK Corporate Governance Code (“the CG Code”) recommends that directors of FTSE350 companies seek re-election by shareholders on an annual basis. Whilst the Company is required to report against the CG Code from 2011, the Board has decided to adopt annual Board re-election early. Biographical details of the Directors are given on page 45. G o v e r n a n c e BOARD DEVELOPMENT The Directors receive regular briefings on their responsibilities as Directors of a UK listed company 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 has been designed to facilitate introductory 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. 54 Corporate governance report Continued Hochschild Mining plc Annual Report & Accounts 2010 During the year under review, there were four meetings of the Audit Committee which were attended by all members. The following matters featured among those considered by the Committee during the year: –(cid:3)Financial reporting – The Audit Committee reviewed the 2009 Annual Report and Accounts and the 2010 Half-yearly Report before recommending their adoption to the Board. As part of its review, the Audit Committee reviewed accounting policies, estimates and judgements applied in preparing the relevant report and accounts and the transparency and clarity of disclosures contained within them. –(cid:3)Risk management – Risk matrices detailing the significant risks facing the Group together with an accompanying evaluation and action plan to manage the particularly high risk areas. –(cid:3)Internal audit – The Audit Committee has continued to oversee the Group’s adoption of a risk-based approach to internal audit. –(cid:3)Internal control – The Audit Committee has continued to review, amongst other things, the adequacy of the Group’s internal control environment. Furthermore, during the year, the Committee reviewed the adequacy of the arrangements in place by which staff may raise, in confidence, concerns about possible improprieties in matters of financial reporting or other matters and which enable proportionate and independent investigation of any such improprieties with suitable follow-up action. –(cid:3)External audit – The Audit Committee considered the reappointment 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 and as part of this responsibility, the Audit Committee reviewed the findings of the external auditors and management representation letters, approved audit plans, reviewed and agreed audit fees and evaluated the auditors’ performance. The Audit Committee continues to oversee the implementation of specific policies designed to safeguard the independence and objectivity of the auditors including the 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 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 31 to the Consolidated financial statements. BOARD EVALUATION The Board is committed to the process of self evaluation as a means of achieving continual improvement in fulfilling its responsibilities. Given the success of the prior year’s evaluation, the 2010 Board Evaluation process was undertaken through one-to-one interviews conducted by the Senior Independent Director and the Company Secretary. The interviews sought to elicit the Directors’ views on, amongst other things, the workings of the Board and Committees as well as board composition and process. In addition, Directors provided feedback on the performance of their peers. The findings of both elements of the evaluation were considered collectively by the Chairman and the Senior Independent Director, and the resulting recommendations were discussed and, where appropriate, approved by the Board. The recommendations principally relate to Board composition, suggested areas for Board discussion and succession planning. A section of the Board interviews was dedicated to evaluating the Chairman’s performance, the outcome of which was collated by the Senior Independent Director and collectively considered by the Non-Executive Directors before the recommendations were conveyed. THE BOARD’S COMMITTEES The Board has delegated authority to the following standing committees which report regularly to the Board: –(cid:3)the Audit Committee. –(cid:3)the Remuneration Committee. –(cid:3)the Nominations Committee. –(cid:3)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: –(cid:3)monitor the integrity of the Company’s financial statements; –(cid:3)monitor the effectiveness of the Company’s internal controls and risk management systems; –(cid:3)oversee the relationship with the Company’s external auditors; and –(cid:3)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 and acts as Audit Committee Chairman for a number of other listed companies. Further details are given in the biography on page 45. The other members of the Audit Committee are Sir Malcolm Field and Fred Vinton who was appointed to the Committee on 26 May 2010. Both Sir Malcolm and Fred Vinton are considered to be independent Directors. Jorge Born Jr stepped down as a member of the Audit Committee on 25 May 2010. The lead partner of the external auditors, the Executive Directors and the Head of Internal Audit attend each Audit Committee meeting by invitation. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 55 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 Remuneration Committee comprises the following independent Non-Executive Directors: Sir Malcolm Field (Committee Chairman), Jorge Born Jr. and Nigel Moore. The Committee held three meetings during the year under review at which all members were in attendance. Further details concerning the activities of the Remuneration Committee are set out in the Directors’ remuneration report on page 57. 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. In addition, the Nominations Committee has been authorised by the Board to review Directors’ external interests with regards to any actual, perceived or potential conflicts of interests. 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 four meetings held during the year under review except that Dionisio Romero was unable to attend one meeting. The matters considered by the Nominations Committee during the year were: –(cid:3)the consideration of any potential conflicts of interests arising in respect of a Director’s appointment to the Board of another listed company; –(cid:3)the consideration of any potential conflicts of interests relating to, and the subsequent appointment of, Ignacio Bustamante as Chief Executive Officer; –(cid:3)the relevant recommendations arising from the Board evaluation process; and –(cid:3)matters relating to the change in Roberto Dañino’s role from Executive Director to Non-Executive Director as his appointment as Special Adviser to the Chairman and Senior Management team. 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. During the year under review, the CSR Committee met four times and was chaired by Roberto Dañino and counts Sir Malcolm Field and Eduardo Hochschild as its other members. Following Roberto Dañino’s appointment as a Non-Executive Director on 1 January 2011, Eduardo Hochschild assumed the chair of the Committee from that date. The CEO and VP of Operations attend each CSR Committee meeting by invitation. Further details relating to the CSR Committee and the Group’s activities in this area are set out in the corporate responsibility report on pages 26 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: –(cid:3)Monitoring the risks faced by the Group’s operations through reports from the Head of the Internal Audit function. –(cid:3)Review of accounting and financial reporting processes together with the internal control environment at Group level. This involves the monitoring of performance and the taking of relevant action through the monthly review of key performance indicators and, where required, the production of revised forecasts. The Group has adopted a standard accounting manual to be followed by all finance teams which is continually updated to ensure the consistent recognition and treatment of transactions and production of the consolidated financial statements. –(cid:3)Review of budgets and reporting against budgets. –(cid:3)Consideration of progress against strategic objectives. 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, continues to monitor the internal control environment of the Group alongside the development of risk management processes further details of which are given in the risk management section of this Annual Report. Overall, the Board acknowledges that the steps taken to initiate a risk management framework are appropriate to the Group’s circumstances. G o v e r n a n c e 56 Corporate governance report Continued Hochschild Mining plc Annual Report & Accounts 2010 GOING CONCERN A statement on the Directors’ position regarding the Company as a going concern is contained in the Directors’ report on page 51. 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 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 Chairman, Deputy Chairman, 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 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 2010 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 2011 AGM with results of the voting at the AGM 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 164 and on the Company’s website at www.hochschildmining.com Unlocking value through exploration Directors’ remuneration report Hochschild Mining plc Annual Report & Accounts 2010 57 INTRODUCTION This Directors’ remuneration report sets out information on the remuneration of the Directors of Hochschild Mining plc for the year ended 31 December 2010. This report has been prepared in accordance with the relevant regulations made under the Companies Act 2006 and the requirements of the Financial Services Authority’s Listing Rules. As required by law, 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 Sir Malcolm Field and its other members are Jorge Born Jr. and Nigel Moore. All of 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 senior management 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 Members of senior management attend meetings at the invitation of the Committee. During the year, such members included the Executive Chairman, the Chief Executive Officer and the Vice President of Human Resources. No Director or senior executive is present at meetings when their own remuneration arrangements are considered by the Committee. The Remuneration Committee was advised during the year on remuneration matters generally by Kepler Associates who did not provide any other services to the Group during the year. REMUNERATION POLICY The Remuneration Policy of the Group as applied by the Remuneration Committee did not change in the year under review. 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. The Group seeks to achieve this alignment over both the short and long term through the use of annual performance-related bonuses which reward the achievement of a balanced mix of financial and operational performance measures, and Total Shareholder Return (“TSR”) which determines the vesting of awards granted under the Long-Term Incentive Plan (“LTIP”). This policy will continue to be applied by the Remuneration Committee in respect of the current financial year. Furthermore, as at the date of this report, the Committee is consulting major shareholders on a proposal for an enhancement to the CEO’s LTIP award, as described in the following “CEO LTIP Plan” section. FIXED AND VARIABLE PAY The following chart illustrates the split between fixed and variable pay of the Executive Directors at both target and maximum performance. The maximum bonus percentages are set out in each Executive Director’s service contract and/or as subsequently determined by the Remuneration Committee and, except in relation to the Executive Chairman whose remuneration arrangements were revised in early 2010 as detailed in the 2009 Directors’ Remuneration Report, have been set to ensure that the majority of remuneration is performance-based. Executive Director Pay Mix (% of total remuneration) DATA TO BE SUPPLIED Target LTIP Bonus Maximum Pension Salary G o v e r n a n c e 100 90 80 70 60 50 40 30 20 10 0 Variable proportion: Eduardo Hochschild Ignacio Bustamante Eduardo Hochschild Ignacio Bustamante 0% 59% 0% 76% 58 Directors’ remuneration report Continued Hochschild Mining plc Annual Report & Accounts 2010 Components of fixed pay for the Executive Directors in office as at 31 December 2010: Director Eduardo Hochschild1 Roberto Dañino2 Ignacio Bustamante3 For the year ended 31 December 2010 For the year ending 31 December 2011 Base Salary US$000 Pension Supplement US$000 Total US$000 Base Salary/Fees US$000 1,100 600 370 200 200 0 1,300 800 370 1,100 155 450 Pension Supplement US$000 200 0 0 Total US$000 1,300 155 450 1 For the year ended 31 December 2010, Eduardo Hochschild and Roberto Dañino each had service contracts with Hochschild Mining plc and Compañía Minera Ares S.A.C. (“Ares”), a Group subsidiary. Salary paid by Ares included all legal labour benefits and compensation such as, but not restricted to vacation salaries and compensation for time services (ruled by Peruvian Legislative Decree 6500) but excludes legal profit sharing. 2 As announced by the Company in December 2010, Roberto Dañino assumed the role of Non-executive director and Special Adviser to the Chairman and senior management team with effect from 1 January 2011. As a Non-executive director Mr Dañino receives the fee disclosed above of £100,000. In addition to this amount, Mr Dañino receives an annual fee of £150,000 in respect of his role as Special Advisor to the Chairman and senior management team. 3 Ignacio Bustamante has a service contract with Ares. Base salary includes all legal labour benefits and compensation such as, but not restricted to, vacation salaries but excludes legal profit sharing and compensation for time services (ruled by Peruvian Legislative Decree 6500). Further details on the increase in Ignacio Bustamante’s base salary from 1 January 2011 are given in the “Base Salaries” section below. BASE SALARIES – Contractual Arrangements In respect of the year under review, both Eduardo Hochschild and Roberto Dañino had service contracts with Hochschild Mining plc and Compañía Minera Ares S.A.C. (“Ares”), a Group subsidiary. Under these arrangements, one-fifth of their base salaries was paid by the Company and fourfifths was paid by Ares. Ignacio Bustamante has a service contract with Ares only, and as a result, his base salary is paid entirely by that company. – 2010 Review of Executive Chairman’s Remuneration As mentioned in the 2009 Directors’ Remuneration Report, the Remuneration Committee agreed revised arrangements in respect of Eduardo Hochschild with effect from 1 January 2010. Under these arrangements, a higher base salary was agreed and Mr Hochschild’s participation in bonus and long-term incentive plans were waived. – 2011 Review of CEO’s Remuneration Mindful of the competition amongst international mining companies to secure the employment of talented senior executives, the Remuneration Committee is keen to ensure that Ignacio Bustamante’s remuneration is structured and set appropriately to motivate and retain. With this objective in mind, the Committee increased Mr Bustamante’s base salary from $370,000 to $450,000 to take effect from 1 January 2011. Even at this revised level, the Committee considers Mr Bustamante’s salary to be significantly below median for comparable roles at other mining companies of similar size. The Committee takes into consideration the remuneration arrangements for the wider employee population in making its decisions on remuneration for senior executives. SHORT-TERM INCENTIVES Each year the Remuneration Committee approves objectives for each of the Executive Directors based on individual roles and responsibilities which include 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 is subject to the discretion of the Remuneration Committee. The maximum bonus opportunities of the directors in executive office as at 31 December 2010 (expressed as a percentage of their respective base salaries) are as follows: Roberto Dañino – 100% Ignacio Bustamante – 125% 2010 BONUS AWARDS A summary of the objectives set in respect of 2010 and performance against them is given below: –(cid:3)Achieving a level of production within the range set for the year; –(cid:3)Generating a level of cashflow which exceeded the highest target; –(cid:3)Achieving Earnings Per Share (on a pre-exceptional basis) which exceeded the highest target; –(cid:3)Assuring the growth of the business through increasing Life of Mine and developing greenfield projects, in respect of which the highest targets had been exceeded; –(cid:3)Managing the progress of the Group’s corporate development strategy, the results of which met the Board’s objectives; and Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 59 –(cid:3)Improving safety across the Group as measured by the Accident Frequency Index, the result of which was a significant improvement on the previous year, In light of the Executives’ performance against their objectives, the Remuneration Committee has approved the levels of annual bonuses as detailed in the table on page 63. Pensions, statutory profit sharing and benefits-in-kind The Group does not provide pension benefits to the Directors but in respect of the year under review it did pay Eduardo Hochschild and Roberto Dañino a cash supplement of $200,000 each per year in lieu of pension (“Pension Supplement”). Of this supplement, $160,000 was paid by Ares and $40,000 was paid by the Company. In addition, under Peruvian law, mining companies with more than 20 employees must pay to employees an annual share of profits, in an amount equal to 8% of the company’s taxable income for the year. The amount receivable under this entitlement is determined with reference to seniority of the individual and length of service during the year. The Group provided all of the Executive Directors serving during 2010 with medical insurance and, in the case of Eduardo Hochschild and Roberto Dañino, allowances in respect of cars and personal security. 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 of which the Company is a constituent. Total shareholder return – value of hypothetical £100 holding FTSE 350 Index Hochschild Mining plc £ 200 180 160 140 120 100 80 60 40 20 0 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Source: Bloomberg LONG-TERM INCENTIVE PLAN (“LTIP”) G o v e r n a n c e In order to achieve its policy objective to motivate Executive Directors and senior employees over the long-term, the Company has adopted a cash-based LTIP which helps align selected executives’ and senior employees’ long-term interests with those of shareholders. For Executive Directors the maximum cash payment on vesting in any three-year period may not be more than six times salary or eight times salary in exceptional circumstances (excluding interest on the deferred proportion of the Initial Awards (defined below)). – Initial Awards Initial awards under the plan were granted in 2008 and will vest in May 2011 (“the Initial Awards”). Further awards were granted during 2010 (“the 2010 Awards”) and, as signalled in last year’s report, the Company intends to make annual LTIP awards going forward in keeping with established market practice. The vesting of the Initial Awards 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 2008 Comparator Index”). At the start of the plan, the 2008 Comparator Index comprised the following companies: 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, Petropavlovsk Plc, Polymetal and Silver Standard Resources Inc. During 2009, one of these companies, Apex Silver Mines was de-listed and was therefore removed from the comparator index. 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. The Initial Awards vest in two equal tranches, on the third and fourth anniversaries of grant. Payment of the amount due on the fourth anniversary will attract notional interest at the inter-bank lending rate from the end of the Performance Period until the date of payment. 60 Directors’ remuneration report Continued Hochschild Mining plc Annual Report & Accounts 2010 LTIP 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. – Calculation of Relative TSR Performance of Initial Awards When calculated on a Common Currency basis, the Company’s TSR over the 2008 LTIP Performance Period was below the median of the Comparator Index which results in nil vesting of the Initial Awards. However, the Committee does not consider this to be a true reflection of the performance of the Group particularly in light of adverse foreign currency movements, and the significant appreciation in the Company’s share price over the last two years of the Performance Period. Accordingly, subsequent to the year-end, the Committee consulted with major shareholders on using domestic currency as the basis of calculating the Company’s relative TSR performance. A number of the Company’s major shareholders expressed their support for this proposal. Accordingly, the Committee has concluded that use of the domestic currency approach is fully justified and which results in the vesting of 47% of the value of participants’ Initial Awards. Participants will receive 50% of their entitlement in May 2011 and the balance, together with accrued notional interest, will be received in May 2012 subject to participants’ continued service with the Group or otherwise in accordance with the rules of the plan. – Subsequent LTIP Awards The 2010 Awards are subject to principally the same terms as the Initial Awards, with the notable difference being that vesting is not phased and, accordingly, the 2010 Awards will vest on the third anniversary of the date of grant, to the extent that the performance conditions have been met. In 2011, the Remuneration Committee intends to grant LTIP awards on broadly the same terms as the 2010 Awards. The comparator index in respect of these awards will comprise the constituents of the 2008 Comparator Index (as subsequently amended) supplemented by the addition of Fresnillo plc, Centamin Egypt Limited, African Barrick Gold plc and Randgold Resources Ltd. Given the situation arising from the use of the common currency approach with respect to the Initial Awards, the Committee intends to calculate the Company’s relative TSR performance using a combination of domestic and common currencies. At the time of printing, shareholder consultation is ongoing and the Company therefore reserves the right to change the policy in respect of the 2011 awards based on feedback from the consultation. Details of the LTIP awards held by the Executive Directors serving during the year are given in the table below. Eduardo Hochschild Ignacio Bustamante Miguel Aramburú3 Ignacio Rosado4 Value of maximum award held at 31 December 2009 or date of appointment, if later¹ Value of maximum award granted during the year Value of awards vested during the year Awards surrendered or lapsed during the year Value of maximum award held at 31 December 2010 $4m $1.6m $1.8m $1.5m – $0.74m – – – – – – $4m2 – $1.8m $1.5m – $2.34m – – 1 The vesting of LTIP awards held as at 31 December 2009 (or date of appointment if later) is subject to, amongst other things, the Company’s relative TSR performance against a comparator index over the period from 1 January 2008 to 31 December 2010 (“the Performance Condition”). After consultation with the Company’s major shareholders, the Remuneration Committee has applied its discretion to calculate the Company’s relative TSR performance on a domestic currency basis rather than with reference to a common currency, principally in light of the Company’s share price appreciation in 2009 and 2010. Further details are given in the paragraph headed “Calculation of Relative TSR Performance of Initial Awards” in the section of this report entitled “Long-Term Incentive Plan”. 2 As part of a review of the Executive Chairman’s remuneration arrangements undertaken in early 2010, Mr Hochschild agreed to surrender his Initial Award under the LTIP. 3 The LTIP Award held by Miguel Aramburú lapsed on his resignation from the Group on 30 June 2010. 4 The LTIP Award held by Ignacio Rosado lapsed on his resignation from the Group on 31 May 2010. CEO LTIP PLAN As part of the CEO’s remuneration review referred to above, the Committee proposes in 2011 to grant enhanced LTIP awards to Mr Bustamante that would vest over an extended performance period of six years. These awards will be subject to shareholder approval at the forthcoming Annual General Meeting, further details of which can be found in the Notice of the 2011 AGM. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 61 DIRECTORS’ SERVICE CONTRACTS As previously described, the contractual arrangements for those Executive Directors in office as at 31 December 2010 and who were appointed prior to the IPO in 2006 differ to those for the Executive Directors appointed subsequently. In respect of the year under review, Eduardo Hochschild and Roberto Dañino were employed under contracts of employment with the Company and Compañía Minera Ares S.A.C. (“Ares”), 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 reduced the likelihood of having to pay excessive compensation in the event of termination at the Company’s behest 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. As announced by the Company in December 2010, Roberto Dañino stepped down from his role as an Executive Director of the Company and became a Non-Executive Director with effect from 1 January 2011. Ignacio Bustamante was appointed a Director of the Company with effect from 1 April 2010 and is employed under a contract of employment with Ares dated 1 April 2007. The contract is subject to Peruvian law and, as such, has no fixed term and may be terminated (i) by the executive on 30 days’ notice and (ii) by Ares without notice. Under Peruvian law, termination by Ares other than termination for certain prescribed reasons (such as gross negligence) gives rise to an entitlement to compensation of no less than 1.5 times the monthly base salary for each year of service completed, up to a maximum of twelve months’ base salary. EXTERNAL APPOINTMENTS The Board recognises that certain Executive Directors are, in addition, directors of other companies and that such appointments can bring benefits to the Group. Fees received from external appointments are retained by the Directors. Details of the directorships of those Executive Directors in office as at 31 December 2010 are given in the table below, together with the amounts received by them during the year under review. Name of Director Company Eduardo Hochschild Banco Crédito del Perú Cementos Pacasmayo S.A.A.1 Cementos Selva Inversiones Pacasmayo SA Fees received PEN 282,334 (US$99,906) PEN 5,588,534 (US$1,977,542) PEN 588,152 (US$208,122) PEN 1,991,285 (US$704,630) Pacifico Peruano Suiza Cia. De Seguros PEN 94,083 (US$33,292) Roberto Dañino AFP Integra Cementos Pacasmayo S.A.A Grupo RPP Mibanco Lake Shore Gold Corporation² Gold Fields Limited Gold Fields La Cima PEN 44,336 (US$15,689) PEN 433,981 (US$153,567) PEN 30,496 (US$10,791) PEN 245,678 (US$86,935) CAD 37,100 (US$36,815 ) ZAR 226,085 (US$30,968) PEN 56,480 (US$19,986) G o v e r n a n c e Ignacio Bustamante Lake Shore Gold Corporation2 CAD 39,900 (US$39,593) 1 The amount disclosed includes salary received by Eduardo Hochschild in his capacity as Executive Director of Cementos Pacasmayo S.A.A., a company of which he is the controlling shareholder 2 Roberto Dañino and Ignacio Bustamante resigned from the Board of Lake Shore Gold Corporation on 3 November 2010 following termination of the Strategic Alliance Agreement between the Group and that company 62 Directors’ remuneration report Continued Hochschild Mining plc Annual Report & Accounts 2010 NON-EXECUTIVE DIRECTORS The Group’s Non-Executive Directors serve under Letters of Appointment as detailed in the table below. In accordance with their terms, the 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 have been 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. As disclosed in the Directors’ Report, the Board has decided to adopt, with respect to the 2011 AGM, the recommendation of the UK Corporate Governance Code that all directors should seek annual re-election by shareholders. 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. The fees payable to the Non-Executive Directors of the Company as at the date of this report are set out in the table below. Each of the Non-Executive Directors was in office for the entire year under review with the exception of Roberto Dañino who assumed a Non-Executive position on the Company’s board from 1 January 2011. Director Sir Malcolm Field1 Jorge Born Jr. Nigel Moore1 Dionisio Romero Fred Vinton Roberto Dañino2 Letter of Appointment dated Director’s fee 16 October 2006 16 October 2006 16 October 2006 16 October 2006 9 July 2009 11 January 2011 £120,000 ($186,000) £100,000 ($155,000) £120,000 ($186,000) £100,000 ($155,000) £100,000 ($155,000) £100,000 ($155,000) 1 The fees payable to Sir Malcolm Field and Nigel Moore reflect the additional time commitment in their positions as Chairman of the Remuneration Committee and the Audit Committee respectively 2 Roberto Dañino was appointed a Non-Executive Director of the Company with effect from 1 January 2011 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 63 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 2010 and 31 December 2009. Director Base salary/fees US$000 Pension supplement US$000 Statutory profit share US$000 Benefits in kind¹ US$000 Performance related bonus US$000 Other payments US$000 Eduardo Hochschild2,3,4 1,104 Roberto Dañino2,3,4 Ignacio Bustamante9 Sir Malcolm Field Jorge Born Jr. Nigel Moore Dionisio Romero Fred Vinton Former Directors Miguel Aramburú11 Ignacio Rosado12 Total 6386 340 170 155 186 155 155 242 192 200 200 0 0 0 0 0 0 0 0 3,337 400 74 18 18 0 0 0 0 0 40 16 166 435 53 1 0 0 0 0 0 2 2 493 05 6007 463 0 0 0 0 0 300 240 1,603 0 0 0 0 0 0 0 0 435 195 630 Total remuneration from 1 January 2010 (or date of appointment if later) to 31 December 2010 (or date of resignation, if earlier) US$000 1,813 1,509 822 170 155 186 155 155 1,019 645 6,629 Total remuneration from 1 January 2009 (or date of appointment if later) to 31 December 2009 US$000 2,660 8688 – 156 156 187 156 6510 1,228 644 6,120 1 Amounts disclosed include sums paid by way of expense allowances. 2 In respect of the year under review, Eduardo Hochschild and Roberto Dañino each had a service contract with both Hochschild Mining plc and Compañía Minera Ares S.A.C., a Group subsidiary. 3 One-fifth of the base salaries of Eduardo Hochschild and Roberto Dañino were paid by the Company with the balance paid by Compañía Minera Ares S.A.C. In addition, $40,000 of each of their total annual pension supplements was paid by the Company with the balance paid by Compañía Minera Ares S.A.C. 4 Salaries paid by Compañía Minera Ares S.A.C. include all legal labour benefits and compensation such as, but not restricted to, family allowance, vacation salaries and compensation for time services (ruled by Peruvian Legislative Decree 6500) but exclude legal profit sharing. 5 Following a review of Mr Hochschild’s remuneration conducted during the year, it was agreed that in consideration for an increase in base salary, Mr Hochschild would not be entitled to participate in any Long Term Incentive Plan or Bonus Plans in respect of 2010 and subsequent years. 6 The amount disclosed includes the amount of CAD 37,100 (US$36,815) received by Mr Dañino during the year in his capacity as a Hochschild-nominated director of Lake Shore Gold Corporation. 7 Roberto Dañino’s performance-related bonus was paid by the Company and Compañía Minera Ares S.A.C. in the proportion that each company pays his base salary. 8 Roberto Dañino’s total remuneration in 2009 does not include a performance-related bonus which was waived by Mr Dañino to support further the future development of the communities located close to the Group’s operations. 9 Ignacio Bustamante was appointed a Director of the Company with effect from 1 April 2010. The amount of the base salary disclosed relates to the period from his appointment and includes all legal labour benefits and compensation such as, but not restricted to, vacation salaries and compensation for time services (ruled by Peruvian Legislative Decree 6500) but excludes legal profit sharing. The amount disclosed also includes the amount of CAD 39,900 (US$39,593) received by him during the year in his capacity as a Hochschild-nominated director of Lake Shore Gold Corporation. 10 Fred Vinton was appointed a Director of the Company on 1 August 2009. 11 Miguel Aramburú resigned as a Director of the Company on 31 March 2010 and as an employee on 30 June 2010. “Other payments” includes an amount paid by Compañía Minera Ares S.A.C. on termination of Mr Aramburú’s contract in recognition of his length of service to the Group. 12 Ignacio Rosado resigned as an employee and as a Director of the Company on 31 May 2010. The amount of Base Salary disclosed includes the amount of CAD 21,596 (US$21,430) received by him prior to his resignation from the Group in his capacity as a Hochschild-nominated director of Lake Shore Gold Corporation. “Other payments” includes an amount paid by Compañía Minera Ares S.A.C. in recognition of Mr Rosado’s services to the Group. G o v e r n a n c e DIRECTORS’ INTERESTS IN SHARES The interests of the Directors in the Company’s shares are set out in the Directors’ report on page 47. APPROVAL This report has been approved by the Board of Directors of Hochschild Mining plc and is signed on its behalf by: Sir Malcolm Field Chairman, Remuneration Committee 28 March 2011 64 Statement of directors’ responsibilities Hochschild Mining plc Annual Report & Accounts 2010 The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable English law and those International Financial Reporting Standards (IFRS) adopted by the European Union. The Directors are required to prepare Group and parent company financial statements for each financial year which present a true and fair view of the financial position of the Company and of the Group and the financial performance and cash flows of the Company and of the Group for that period. In preparing those financial statements, the Directors are required to: –(cid:3)select suitable accounting policies in accordance with IAS 8: “Accounting Policies, Changes in Accounting Estimates and Errors” and then apply them consistently; –(cid:3)present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; –(cid:3)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; –(cid:3)state that the Group and parent company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and –(cid:3)prepare the accounts on a going concern basis unless, having assessed the ability of the Group and the parent company to continue as a going concern, management either intends to liquidate the entity or to cease trading, or have no realistic alternative but to do so. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable English law and regulations the Directors are responsible for the preparation of a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Report that comply with that law and regulations. In addition the Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in England governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Unlocking value through exploration Independent auditor’s report Hochschild Mining plc Annual Report & Accounts 2010 65 We have audited the financial statements of Hochschild Mining plc for the year ended 31 December 2010 which comprise the Group and Parent Company Statements of Financial Position, the Group Statement of Comprehensive Income, the Group and Parent Company Statements of Cash Flow, the Group and Parent Company Statements of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion: –(cid:3)The financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2010 and of the group’s profit for the year then ended; –(cid:3)The group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and –(cid:3)The parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and –(cid:3)The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: –(cid:3)The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and –(cid:3)The information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: –(cid:3)Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or –(cid:3)The parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or –(cid:3)Certain disclosures of directors’ remuneration specified by law are not made; or –(cid:3)We have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: –(cid:3)The directors’ statement, in relation to going concern; –(cid:3)The part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and –(cid:3)Certain elements of the report to shareholders by the Board on directors’ remuneration. G o v e r n a n c e Richard Murray (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 28 March 2011 66 Financial statements Hochschild Mining plc Annual Report & Accounts 2010 Financial statements 67 Consolidated income statement 68 Consolidated statement of comprehensive income 69 Consolidated statement of ﬁnancial position 70 Consolidated statement of cash ﬂows 71 Consolidated statement of changes in equity 72 Notes to the consolidated ﬁnancial statements 132 Parent company statement of ﬁnancial position 133 Parent company statement of cash ﬂows 134 Parent company statement of changes in equity 135 Notes to the parent company ﬁnancial statements Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 67 Consolidated income statement For the year ended 31 December 2010 Year ended 31 December 2010 Year ended 31 December 2009 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 Notes Total US$000 Impairment and write-off of assets (net) 15,16 – (24,018) (24,018) – (26,713) Continuing operations Revenue Cost of sales Gross profit Administrative expenses Exploration expenses Selling expenses Other income Other expenses Profit from continuing operations before net finance income/(cost), foreign exchange loss and income tax Share of post tax (losses)/profit of associates and joint ventures accounted under equity method Finance income Finance costs Foreign exchange loss Profit from continuing operations before income tax Profit for the year from continuing operations Attributable to: Equity shareholders of the Company Non-controlling interests Basic earnings per Ordinary Share from continuing operations for the year (expressed in US dollars per share) Diluted earnings per Ordinary Share from continuing operations for the year (expressed in US dollars per share) Income tax (expense)/benefit 13 (77,816) – 752,322 539,741 – 539,741 3, 5 752,322 6 (345,667) 406,655 (66,221) (41,537) (26,920) 7 8 9 11 11 (8,861) (8,861) – – – (354,528) (279,298) 397,794 260,443 (66,221) (51,068) (6,918) (6,918) – (41,537) (19,941) (1,049) (26,920) (21,005) 5,605 77,197 82,802 4,501 (10,956) – (10,956) (19,330) – 8,782 (1,247) (286,216) 253,525 (51,068) (20,990) (21,005) 13,283 (20,577) (26,713) 266,626 44,318 310,944 153,600 (27,145) 126,455 18 12 12 (4,607) 4,140 (29,542) 29 236,646 158,830 94,924 63,906 158,830 (1,473) 9,204 (6,080) 13,344 7,617 6,384 39,606 22,300 47,223 28,684 – – 52,049 5,786 57,835 61,687 (3,852) 57,835 (29,542) (46,040) (1,256) (47,296) 29 (256) 288,695 121,305 (72,030) (44,688) 216,665 76,617 – 33,505 11,218 44,723 (256) 154,810 (33,470) 121,340 156,611 60,054 216,665 52,892 23,725 76,617 45,188 (465) 98,080 23,260 44,723 121,340 14 0.28 0.18 0.46 0.17 0.14 0.31 14 0.29 0.17 0.46 0.17 0.14 0.31 i i F n a n c a l s t a t e m e n t s 68 Consolidated statement of comprehensive income For the year ended 31 December 2010 Hochschild Mining plc Annual Report & Accounts 2010 Profit for the year Other comprehensive income Recycling of the exchange differences on translating foreign operations due to Lake Shore Gold sale Exchange differences on translating foreign operations Change in fair value of available-for-sale financial assets Recycling of the gain on available-for-sale financial assets Change in fair value of cash flow hedges taken to equity Recycling of the change in fair value of cash flow hedges taken to equity Deferred income tax relating to components of other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income for the year Total comprehensive income attributable to Equity shareholders of the Company Non-controlling interests Notes Year ended 31 December 2010 US$000 2009 US$000 216,665 121,340 12(3)(4) 2,143 2,982 47,573 (5,915) (2,346) 429 – 25,707 23,019 (19,329) (4,736) 4,723 (7,189) 71 37,677 29,455 254,342 150,795 194,288 127,558 60,054 23,237 254,342 150,795 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 69 Consolidated statement of ﬁnancial position As at 31 December 2010 ASSETS Non-current assets Property, plant and equipment Evaluation and exploration assets 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 Other financial assets 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 Non-controlling interests Total equity Non-current liabilities Trade and other payables Borrowings Provisions Deferred income tax liabilities Current liabilities Trade and other payables Other financial liabilities Borrowings Provisions Income tax payable Total liabilities Total equity and liabilities As at 31 December 2010 US$000 Notes As at 31 December 2009 US$000 15 16 17 18 19 20 28 21 20 22 23 457,183 161,811 20,166 79,068 153,620 36,817 2,401 5,229 438,958 55,828 22,425 450,665 19,181 3,150 1,302 15,852 916,295 1,007,361 55,130 45,813 145,935 164,864 917 20,662 525,482 748,126 9,280 695 77,844 298,496 1,664,421 1,305,857 27 27 158,637 395,928 158,637 395,928 (175,244) (212,921) 528,788 908,109 147,120 385,700 727,344 76,126 1,055,229 803,470 24 25 26 28 24 22 25 26 2,393 81 248,380 219,681 86,443 28,534 55,176 10,662 365,750 285,600 116,074 1,930 69,272 41,871 14,295 243,442 609,192 68,501 2,640 112,908 11,405 21,333 216,787 502,387 1,664,421 1,305,857 These financial statements were approved by the Board of Directors on 28 March 2011 and signed on its behalf by: Ignacio Bustamante Chief Executive Officer 28 March 2011 i i F n a n c a l s t a t e m e n t s 70 Consolidated statement of cash ﬂows For the year ended 31 December 2010 Hochschild Mining plc Annual Report & Accounts 2010 Cash flows from operating activities Cash generated from operations Interest received Interest paid Payment of mine closure costs Tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of evaluation and exploration assets Proceeds from sale of investment in associates Acquisition of subsidiary Dividends received from associates Investment in associates Purchase of available-for-sale financial assets Purchase of intangibles Proceeds from sale of available-for-sale financial assets Proceeds from sale of property, plant and equipment Net cash generated from/(used in) investing activities Cash flows from financing activities Proceeds of borrowings Repayment of borrowings Transaction costs associated with borrowing Acquisition of non-controlling interests Dividends paid Proceeds from issue of ordinary shares under Global offer Transaction costs associated with issue of shares Capital contribution from non-controlling interests Cash flows (used in)/generated from financing activities Net increase/(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 2010 US$000 2009 US$000 32 351,261 215,698 1,749 1,041 (20,604) (12,902) 26 (4,634) (23,540) (2,831) (482) 304,232 200,524 (122,836) (116,009) (35,980) (8,636) 383,614 – – (19,246) 2,633 – (20,336) (216,943) (20,785) (1,857) (94) (16,330) 11,915 832 3,861 2,139 198,963 (373,021) 37,650 285,461 (52,447) (277,185) (690) – (3,568) (1,500) 29 (39,523) (20,048) – – – 143,621 (3,453) 11,115 (55,010) 134,443 448,185 (38,054) (547) (249) 77,844 116,147 23 525,482 77,844 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 71 Consolidated statement of changes in equity For the year ended 31 December 2010 Equity share capital US$000 Share premium US$000 Notes Unrealised gain/(loss) on available- for-sale financial assets US$000 Unrealised gain/(loss) on cash flow hedges US$000 Bond equity component US$000 Cumulative translation adjustment US$000 Merger reserve US$000 Total Other reserves US$000 Retained earnings US$000 Capital and reserves attributable to shareholders of the Parent US$000 Non- controlling interests US$000 Total equity US$000 Balance at 1 January 2009 Other comprehensive income/(loss) Profit for the year Total comprehensive income for 2009 Issuance of shares Transfer to retained earnings Issuance of convertible bonds Purchase of shares from non-controlling interests Dividends declared during the year Dividends paid to non-controlling interests Balance at 31 December 2009 Other comprehensive income Profit for the year Total comprehensive income for 2010 Capital contribution from non- controlling interest Dividends declared during the year Dividends paid to non-controlling interests Balance at 31 December 2010 (40,375) (210,046) (250,831) 167,767 459,330 66,293 525,623 25,742 – 25,742 – – – 29,478 – 29,478 (23) 29,455 – 98,080 98,080 23,260 121,340 29,478 98,080 127,558 23,237 150,795 127,997 127,997 – 140,168 (127,997) (127,997) 127,997 – 8,432 – 8,432 – – – 140,168 – 8,432 146,466 395,928 (410) – – – – 27 12,171 – – – – – 29 29 – – – – – – – – – 3,749 – (13) – 3,749 (13) – – – – – – – – – – – – – – – – – – 8,432 – – – – – – – – – – – – – – – – 4,150 4,150 (5,650) (1,500) (12,294) (12,294) – (12,294) – – (7,754) (7,754) 158,637 395,928 3,339 (13) 8,432 (14,633) (210,046) (212,921) 385,700 727,344 76,126 803,470 – – – – – – – – – – – – 34,469 (1,917) – – 34,469 (1,917) – – – – – – – – – – – – 5,125 – 5,125 – – – 29 29 – – – – – – 37,677 – 37,677 – 37,677 – 156,611 156,611 60,054 216,665 37,677 156,611 194,288 60,054 254,342 – – – – – 36,940 36,940 (13,523) (13,523) – (13,523) – – (26,000) (26,000) 158,637 395,928 37,808 (1,930) 8,432 (9,508) (210,046) (175,244) 528,788 908,109 147,120 1,055,229 i i F n a n c a l s t a t e m e n t s 72 Notes to the consolidated ﬁnancial statements Hochschild Mining plc Annual Report & Accounts 2010 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 three operating mines (Ares, Arcata and Pallancata) and a plant (Selene used to treat ore from the Pallancata mine located in southern Peru, one operating mine (San José) located in Argentina and one operating mine (Moris) located in Mexico. The Group also has a portfolio of projects located across Peru, Argentina, Mexico and Chile at various stages of development. These consolidated financial statements were approved for issue by the Board of Directors on 28 March 2011. The principal activities of the Company’s subsidiaries are as follows: Company Hochschild Mining (Argentina) Corporation S.A. (formerly Hochschild Mining (Argentina) Corporation) Principal activity Country of incorporation Holding company Argentina MH Argentina S.A. Minera Santa Cruz S.A. Cerro Mining Corp.1,2 Southwestern Gold (Bermuda) Limited1 Southwestern Gold (China) Inc.1,2 0848818 BC Ltd1 Hochschild Mining Chile S.A. Minera Hochschild Chile S.C.M. (formerly Minera MH Chile Ltda.) Southwest Minerals (Yunnan) Inc.1 Hochschild Mining Holdings Limited Hochschild Mining Ares (UK) Limited Southwest Mining Inc.1 Southwest Minerals Inc.1 Hochschild Mining Mexico, S.A. de C.V. (formerly Hochschild Mining (Mexico) Corporation) HMX, S.A. de C.V. 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 (Peru) S.A. (formerly Hochschild Mining (Peru) Corporation) Compañía Minera Ares S.A.C. Compañía Minera Arcata S.A. Empresa de Transmisión Callalli S.A.C. Asociación Sumac Tarpuy3 Exploration office Production of gold & silver Subsidiary Holding company Subsidiary Subsidiary Holding company Exploration office Subsidiary Argentina Argentina Bahamas Bahamas Bahamas Canada Chile Chile China Holding company England & Wales Subsidiary England & Wales Subsidiary Subsidiary Holding company Exploration office Exploration office Production of gold & silver Holding company Service company Holding company Production of gold & silver Production of gold & silver Power transmission Not-for-profit Mauritius Mauritius Mexico Mexico Mexico Mexico Mexico Mexico Peru Peru Peru Peru Peru Peru Peru Pallancata Holding S.A.C. (formerly Compañía Minera Coriorco S.A.)4 Holding company Minera Suyamarca S.A.C. Production of gold & silver Equity interest at 31 December 2010 % 100 100 51 – 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 96.8 100 – – 60 2009 % 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 96.8 100 – 100 60 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 73 1 CORPORATE INFORMATION (CONTINUED) Company Inmaculada Holdings S.A.C. Liam Holdings S.A.C. MInera del Suroeste S.A.C.1 Minera Quellopata S.A.C.5 Minas Pacapausa S.A.C. Minera Minasnioc S.A.C. Hochschild Mining (US) Inc. (formerly MH Nevada, Inc.) Principal activity Country of incorporation Holding company Holding company Exploration office Exploration office Exploration office Subsidiary Subsidiary Peru Peru Peru Peru Peru Peru USA Equity interest at 31 December 2010 % 100 100 100 60 100 100 100 2009 % 100 100 100 49 100 100 100 1 These companies were incorporated into the Hochschild Mining Group following the purchase of Southwestern Resources Group on 21 May 2009. 2 On 26 April 2010, Southwestern Gold (Bermuda) Limited absorbed Cerro Mining Corp. and Southwestern Gold (China) Inc. 3 Asociación Sumac Tarpuy is an unincorporated entity, which receives donations from Compañía Minera Ares S.A.C. (“Ares”), and spends this money, at the direction of Ares, on the community and social welfare activities located close to its mine units. As a result, the Group consolidates this entity. 4 On 1 December 2010, Hochschild Mining (Peru) S.A. absorbed Pallancata Holding S.A.C. 5 On 1 November 2010, Compañia Minera Ares S.A.C. increased its interest in Minera Quellopata S.A.C. to 60%. 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 the Companies Act 2006. 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 2010 and 2009 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 2011 or later periods but which the Group has not early adopted. Those that are applicable to the Group are as follows: –(cid:3)IAS 24 “Related Party Disclosures (Amendment)”, applicable for annual periods beginning on or after 1 July 2011. This standard clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduced a partial exemption of disclosure requirements for government-related entities. The Group does not expect the adoption of this standard to impact its financial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard. –(cid:3)IAS 32 “Financial Instruments: Presentation — Classification of Rights Issues”, applicable for annual periods beginning on or after 1 February 2010. This standard changed the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. The adoption of this standard will have no impact on the Group after initial application. –(cid:3)IFRS 9 “Financial Instruments: Classification and Measurement”, applicable for annual periods beginning on or after 1 January 2013. As part of the IASB’s project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’, in November 2009, the IASB issued the first phase of IFRS 9 ‘Financial Instruments’, dealing with the classification and measurement of financial assets. In October 2010, the IASB updated IFRS 9 by incorporating the requirements for the accounting for financial liabilities. However, the Group has determined that the effect shall be quantified in conjunction with the other phases, when issued, to present a comprehensive picture. i i F n a n c a l s t a t e m e n t s 74 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) –(cid:3)IAS 12 “Income Taxes”, applicable for annual periods beginning on or after 1 January 2012. Under IAS 12, an entity is to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. The amendment introduces a presumption that recovery of the carrying amount will normally be through sale. The amendment is deemed to have no impact on the financial statements of the Group. –(cid:3)IFRIC 14 “Prepayments of a minimum funding requirement (Amendment)”, applicable for annual periods beginning on or after 1 January 2011. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is deemed to have no impact on the financial statements of the Group. –(cid:3)IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments”, applicable for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case this cannot be reliably measured, they are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in profit or loss. The adoption of this interpretation will have no effect on the financial statements of the Group. –(cid:3)“Improvements to IFRSs (issued in May 2010)”, applicable for annual periods beginning on or after 1 July 2010 or 1 January 2011. The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. 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 an impact on the financial statements. (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 estimates are 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: –(cid:3)Determination of functional currencies – note 2(e). –(cid:3)Determination of useful lives of assets for depreciation and amortisation purposes – note 2(f). –(cid:3)Determination of ore reserves and resources – note 2(h). –(cid:3)Review of asset carrying values and impairment charges – notes 2(i), (l), (v) and note 15 and 16. –(cid:3)Estimation of the amount and timing of mine closure costs – notes 2(p) and 26. –(cid:3)Income tax – notes 2(t), 13 and 28. –(cid:3)Contingent liabilities regarding claims from tax authorities – note 34. –(cid:3)Judgement in deciding if a company is a subsidiary of the Group – note 2(d). –(cid:3)Judgement in deciding if a transaction has to be recognised as an acquisition of assets or business combination – note 4(b) –(cid:3)Recognition of evaluation and exploration assets and transfer to development costs – note 2(g). (c) Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except for the 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. –(cid:3)IFRS 3 “Business Combinations (revised January 2008)”, applicable for annual periods beginning on or after 1 July 2009. The revised standard will have an impact on the profit or loss reported in the period of an acquisition, the amount of goodwill recognised in a business combination and the profit or loss reported in future periods. IFRS 3 applies prospectively to business combinations occurring after 1 July 2009 and had no impact on the financial statements. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 75 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) –(cid:3)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 a transaction with owners in their capacity as owners. The Group has changed the reference ‘minority interest’ to ‘non-controlling interest’, in accordance with the standard. –(cid:3)IFRIC 17 “Distributions of Non-cash Assets to Owners”, applicable for annual periods beginning on or after 1 July 2009. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. The interpretation had no effect on the financial position or performance of the Group. –(cid:3)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. The amendment had no effect on the financial position or performance of the Group. –(cid:3)IFRS 2 ‘Group Cash-settled Share-based Payment Arrangements’, applicable for annual periods beginning on or after 1 January 2010. The standard has been amended to clarify the accounting for group cash-settled share-based payment transactions, where a subsidiary receives goods or services from employees or suppliers but the parent or another entity in the group pays for those goods or services. IFRIC 8 and IFRIC 11 have been withdrawn. This amendment had no effect on the financial position or performance of the Group. –(cid:3)Improvements to International Financial Reporting Standards (issued 2009). Includes 15 amendments to 12 standards. Applicable for annual periods beginning on or after 1 July 2009: IFRS 2 Share-based Payment, IAS 38 Intangible Assets, IFRIC 9 Reassessment of Embedded Derivatives, IFRIC 16 Hedges of a net Investment in a Foreign Operation. Effective immediately on issue date in April 2009: IAS 18 Revenue. Applicable for annual periods beginning on or after 1 January 2010: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 8 Operating Segments, IAS 1 Presentation of Financial Statements, IAS 7 Statement of Cash Flows, IAS 17 Leases, IAS 36 Impairment of Assets, IAS 39 Financial Instruments: Recognition and Measurement. These improvements had no impact on the financial position or performance of the Group. (d) Basis of consolidation The consolidated financial statements set out the Group’s financial position, performance and cash flows as at 31 December 2010 and 31 December 2009 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, non-controlling interests’ rights to safeguard their interest are fully considered in assessing whether the Group controls a subsidiary. Basis of consolidation from 1 January 2010 Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement. A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it (i) derecognises the assets (including goodwill) and liabilities of the subsidiary; (ii) derecognises the carrying amount of any non-controlling interest; (iii) derecognises the cumulative translation differences, recorded in equity; (iv) recognises the fair value of the consideration received; (v) recognises the fair value of any investment retained; (vi) recognises any surplus or deficit in profit or loss; (vii) reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate. Non-controlling interests represent the equity in a subsidiary not attributable, directly and indirectly, to the parent company and is presented separately within equity in the consolidated balance sheet, separately from equity attributable to owners of the parent. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance. Basis of consolidation prior to 1 January 2010. i i F n a n c a l s t a t e m e n t s 76 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Certain of the above-mentioned requirements were applied on a prospective basis. The following differences, however, are carried forward in certain instances from the previous basis of consolidation: Non-controlling interest represent the portion of profit or loss and net assets in subsidiaries that is not held by the group and is presented separately within equity in the consolidated balance sheet, separately from parent shareholder’s equity. For acquisitions of non-controlling interests, prior to 1 January 2010, the difference between the consideration and the book value of the share of the net assets acquired were recognised in retained earnings. Losses incurred by the Group were attributed to the non-controlling interest until the balance was reduced to nil. Any further excess losses were attributed to the parent, unless the non-controlling interest had a binding obligation to cover these. Losses prior to 1 January 2010 were not reallocated between non-controlling interest and the parent shareholders. Upon loss of control, the Group accounted for the investment retained at its proportionate share of net asset value at the date control was lost. 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. Non-controlling interests primarily represent the interests in Minera Santa Cruz, Compañía Minera Arcata, Minera Suyamarca and Minera Quellopata S.A.C. not held by the Company. In the event of a purchase of non-controlling interests 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. Business combinations from 1 January 2010 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. The choice of measurement of non-controlling interest, either at fair value or at the proportionate share of the acquiree's identifiable net assets is determined on a transaction by transaction basis. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IAS 39 either in profit or loss or in other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non-controlling interest (and where the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree) over the net identifiable amounts of the assets acquired and the liabilities assumed in exchange for the business combination. Assets acquired and liabilities assumed in transactions separate to the business combinations, such as the settlement of pre-existing relationships or post-acquisition remuneration arrangements are accounted for separately from the business combination in accordance with their nature and applicable IFRSs. Identifiable intangible assets, meeting either the contractual-legal or separability criterion are recognised separately from goodwill. Contingent liabilities representing a present obligation are recognised if the acquisition date fair value can be measured reliably. If the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non- controlling interest (and where the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree) is lower than the fair value of the assets, liabilities and contingent liabilities and the fair value of any pre-existing interest held in the business acquired, the difference is recognised in profit and loss. Business combinations prior to 1 January 2010 Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The minority interest is accounted for using the parent entity extension method, whereby the difference between the consideration paid and the book value of the share in net assets acquired is recognised in goodwill. Goodwill is initially measured at cost being the excess of the cost of business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. If the net fair value of the acquired entity’s identifiable assets, liabilities and contingent liabilities is greater than the cost of the investment, the difference is recognised in profit and loss. Contingent consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognised as part of goodwill. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 77 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 statement of financial position date. Exchange gains and losses on settlement of foreign currency transactions which are translated at the rate prevailing at the date of the transactions, or on the translation of monetary assets and liabilities which are translated at period-end exchange rates, are taken to the income statement. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated to the functional currency at the foreign exchange rate prevailing at the date of the transaction. Exchange differences arising from monetary items that are part of a net investment in a foreign operation are recognised in equity and transferred to income on disposal of such net investment. Subsidiary financial statements expressed in their corresponding functional currencies are translated into US dollars by applying the exchange rate at period-end for assets and liabilities and the average exchange rate for income statement items. The resulting difference on consolidation is included as cumulative translation adjustment in equity. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 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. 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: Buildings Plant and equipment Vehicles Years 3 to 33 5 to 10 5 Borrowing costs directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to be ready for its intended use are capitalised as part of the cost of the asset. All other borrowing costs are expensed where incurred. The Group capitalises borrowing costs for those assets where construction commenced on or after 1 January 2009 and continues to expense borrowing costs related to construction projects that commenced prior to 1 January 2009. For borrowings associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowing is used. The Group capitalises the borrowing costs related to qualifying assets with a value of US$1,000,000 or more, considering that the substantial period of time to be ready is six or more months. Mining properties and development costs Expenditure on exploration of mining properties is expensed during the exploration phase of a project and capitalised during their development phase when incurred. Purchased mining properties are recognised as assets at their cost of acquisition or at fair value if purchased as part of a business combination. Costs associated with developments of mining properties 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. i i F n a n c a l s t a t e m e n t s 78 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Construction in progress and capital advances 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) Evaluation and exploration assets Evaluation and exploration expenses shall be capitalised when the future economic benefit of the project can reasonably be regarded as assured. For this purpose, the future economic benefit of the project can reasonably be regarded as assured when any of the following conditions are met: –(cid:3)The Board authorises management to conduct the feasibility study of a project. –(cid:3)Mine-site exploration is being conducted to convert resources into reserves; or –(cid:3)Mine-site exploration is being conducted to confirm resources. Projects in the development phase – Exploration and evaluation costs are capitalised as assets from the date that the Board authorises the management to conduct a feasibility study. Identification of resources – Costs incurred in converting inferred resources to indicated and measured resources (of which reserves are a component) are capitalised as incurred. Costs incurred in identifying inferred resources are expensed as incurred. (h) 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 have 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. (i) 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 statement of financial position 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 statement of comprehensive income of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the statement of comprehensive income. 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 non-controlling 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 statement of financial position 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 79 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) 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 statement of financial position. 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. (k) 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. Right to use energy transmission line Transmission line represents the investment made by the Group during the period of its use. This is an asset with a finite useful life that is amortised applying the units of production method. 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. (l) 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 and evaluation and exploration assets 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 requires 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. (m) 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. When the production process takes a substantial period of time, borrowing costs are included in the production cost. For this purpose, the costs of production include: –(cid:3)costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore; –(cid:3)depreciation of property, plant and equipment used in the extraction and processing of ore; and –(cid:3)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. i i F n a n c a l s t a t e m e n t s 80 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) 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. (o) Share capital Ordinary Shares are classified as equity. Any excess above the par value of shares received upon issuance of those shares is classified as share premium. (p) 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 year-end represents management’s best estimate of the present value of the future rehabilitation costs required. Changes to estimated future costs are recognised in the statement of financial position 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 expenses. 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. (q) 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. (r) Revenue recognition The Group is involved in the production and sale of gold and silver from doré 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 81 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 is recognised in the income statement when all significant risks and rewards of ownership are transferred to the customer, usually when title has passed to the customer. Revenue excludes any applicable sales taxes. The revenue is subject to adjustment based on inspection of the product by the customer. Revenue is initially recognised on a provisional basis using the Group’s best estimate of contained gold and silver. Any subsequent adjustments to the initial estimate of metal content are recorded in revenue once they have been determined. 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 international exchanges. The revaluation of provisionally priced contracts is recorded as an adjustment to “revenue”. Income from services provided to related parties (note 30) is recognised in income when services are provided. (s) Finance income and costs Finance income and costs 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. (t) Income tax Income tax for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items charged or credited directly to equity, in which case it is recognised in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted at the statement of financial position 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: –(cid:3)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. –(cid:3)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 statement of financial position 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 statement of financial position. 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 statement of financial position 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. i i F n a n c a l s t a t e m e n t s 82 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (u) 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. (v) 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, available- for-sale financial assets or as derivatives designated as hedging instruments in an effective hedge (refer to note 2(aa)), 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. 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 statement of financial position date. Fair values The fair value of quoted investments is determined by reference to bid prices at the close of business on the statement of financial position 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 Group assesses at each statement of financial position date whether a financial asset or group of financial assets is impaired. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 83 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 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 For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost, where ‘significant’ is estimated to be around 30% of the original cost of the investment and ‘prolonged’ is no more than 12 months. In addition, the Group analyses any case taking into account the portfolio of projects of the Company, the key technical personnel and the viability of the Company to finance its projects. 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: –(cid:3)the rights to receive cash flows from the asset have expired; or –(cid:3)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. (w) 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. i i F n a n c a l s t a t e m e n t s 84 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (x) Cash and cash equivalents Cash and cash equivalents are carried in the statement of financial position at cost. For the purposes of the statement of financial position, 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. Liquidity funds are classified as cash equivalents if the amount of cash that will be received is known at the time of the initial investment and the risk of changes in value is considered insignificant. (y) 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: –(cid:3)Impairments of assets, including goodwill, assets held for sale, property, plant and equipment and evaluation and exploration assets. –(cid:3)Gains or losses arising on the disposal of subsidiaries, investments or property, plant and equipment. –(cid:3)Fair value gains or losses arising on financial instruments not held in the normal course of trading. –(cid:3)Any gain or loss resulting from any restructuring within the Group. –(cid:3)The related tax impact of the above items. (z) Comparatives Where applicable, certain comparatives have been reclassified to present them in a comparable manner to the current period’s figures. (aa) Hedging The Group uses interest rate swaps to hedge its interest rate risks. These derivative financial instruments are initially recognised at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. For the purpose of hedge accounting, these hedges are classified as cash flow hedges as they are hedging the Group’s exposure to variability in cash flows that is attributable to a particular risk associated with a highly probable forecast transaction. At the inception of a hedging relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine their effectiveness in the financial reporting periods for which they were designated. Where the interest rate swaps meet the strict criteria for hedge accounting, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in the income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast transaction or firm commitment occurs. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or firm commitment occurs. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 85 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 undertakes a number of activities solely to support mining operations including power generation and services. Transfer prices between 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 segments. Those transfers are eliminated on consolidation. For internal reporting purposes, management takes decisions and assesses the performance of the Group through consideration of the following reporting segments: –(cid:3)Operating unit – Ares, which generates revenue from the sale of gold and silver. –(cid:3)Operating unit – Arcata, which generates revenue from the sale of gold, silver and concentrate. –(cid:3)Operating unit – Selene, which until June 2009 generated revenue from the sale of gold, silver and concentrate. The operating unit is no longer considered a reporting segment. –(cid:3)Operating unit – Pallancata, which generates revenue from the sale of concentrate. –(cid:3)Operating unit – San José, which generates revenue from the sale of gold, silver and concentrate. –(cid:3)Operating unit – Moris, which generates revenue from the sale of gold and silver. –(cid:3)Exploration, which explores and evaluates areas of interest in brownfield and greenfield sites with the aim of extending the life of mine of existing operations and to assess the feasibility of new mines. The exploration segment includes expenses reflected through profit and loss and capitalised as assets. –(cid:3)Other – for the year 2010 the amount disclosed includes the profit or loss generated by Empresa de Transmision Callalli S.A.C. (a power generation company), Servicios Corporativos Hochschild Mining Mexico S.A. de C.V. (a service company in Mexico), and the Selene mine that closed in 2009 which, as a consequence, was not considered to be a reportable segment. For the year 2009 the amount disclosed includes the profit or loss generated by Empresa de Transmision Callalli S.A.C., Servicios Corporativos Hochschild Mining Mexico S.A. de C.V. and Compañía Minera Arcata S.A. The Group’s administration, financing, other activities (including other income and expense), and income taxes are managed at a corporate level and are not allocated to operating segments. Segment information is consistent with the accounting policies adopted by the Group. Management evaluates the financial information based on International Financial Reporting Standards (IFRS) as adopted for use in the European Union. The Group measures the performance of its operating units by the segment profit or loss that comprises gross profit, selling expenses and exploration expenses. Segment assets include the items that could be allocated directly to the segment. i i F n a n c a l s t a t e m e n t s 86 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 3 SEGMENT REPORTING (CONTINUED) (a) Reportable segment information Ares US$000 Arcata US$000 Pallancata US$000 San José US$000 Moris US$000 Exploration US$000 Other¹ US$000 Adjustment and eliminations US$000 Total US$000 Year ended 31 December 2010 Revenue for external customers 56,824 181,778 261,877 220,825 30,899 Inter segment revenue Total revenue – – – – – 56,824 181,778 261,877 220,825 30,899 – – – 119 6,992 7,111 – 752,322 (6,992) – (6,992) 752,322 Segment profit/(loss)2 15,053 104,677 158,528 92,804 766 (49,277) 5,030 1,756 329,337 Others3 Profit/(loss) from continuing operations before income tax Other segment information Depreciation4 Amortisation Non-cash expenses Assets Capital expenditure Current assets Other non-current assets5 Total segment assets Not reportable assets6 Total assets (2,788) (18,214) (33,939) (34,730) (10,865) (218) (1,692) – – (42) (1,328) – (102) (2,067) (6,728) – – – (15,464) (301) (354) 5,422 30,230 43,955 55,183 2,728 108,218 2,305 4,661 9,670 20,934 69,968 39,739 82,983 127,869 210,010 14,331 103,917 197,837 249,749 – – – – 7,295 1,428 8,723 – 11 1,926 194,111 12,939 194,122 14,865 – 880,877 14,331 103,917 197,837 249,749 8,723 194,122 895,742 (40,642) 288,695 (102,446) (2,368) (24,018) 248,041 144,534 639,010 783,544 880,877 1,664,421 – – – – – – – – – 1 “Other” revenue primarily relates to revenues earned by Servicios Corporativos Hochschild Mining Mexico S.A. de C.V. for services provided to the Moris mine, and the Mexican exploration activities. 2 Segment profit for the operating segments Ares, Arcata, Selene and Pallancata includes an exceptional item in cost of sales of US$8,861,000 (refer to note 6(1)). 3 Comprised of administrative expenses of US$66,221,000, other income of US$82,802,000, other expenses of US$10,956,000, impairment of assets of US$24,018,000, share of loss of associates and joint ventures of US$6,080,000,, finance income of US$13,344,000, finance cost of US$29,542,000, and foreign exchange gain of US$29,000. 4 Includes US$61,000 of depreciation capitalised in Minera Hochschild Mexico S.A. de C.V. due to the San Felipe project. 5 Includes goodwill in respect of San José amounting to US$2,091,000. 6 Not reportable assets are comprised of intangibles of US$150,000, investments accounted under the equity method of US$79,068,000, available-for-sale financial assets of US$153,620,000, other receivables of US$93,348,000, income tax receivable of US$3,318,000, deferred income tax assets of US$5,229,000, other financial assets of US$20,662,000 and cash and cash equivalents of US$525,482,000. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 87 3 SEGMENT REPORTING (CONTINUED) (a) Reportable segment information (continued) Ares US$000 Arcata US$000 Selene US$000 Pallancata US$000 San José US$000 Moris US$000 Exploration US$000 Other¹ US$000 Adjustment and eliminations US$000 Total US$000 Year ended 31 December 2009 Revenue for external customers 53,312 141,574 10,757 160,416 147,102 26,440 Inter segment revenue – – – – – – Total revenue 53,312 141,574 10,757 160,416 147,102 26,440 – – – 140 3,027 3,167 – 539,741 (3,027) (3,027) – 539,741 Segment profit/(loss)2 18,907 74,922 (2,874) 84,810 41,767 7,674 (24,558) 2,160 8,722 211,530 Others3 Profit/(loss) from continuing operations before income tax Other segment information Depreciation4 (5,362) (19,292) (8,235) (15,324) (29,510) (4,868) (202) (1,129) Non-cash expenses (15,263) – (4,805) – – 3,446 (10,091) (6,185) Assets Capital expenditure 3,484 29,688 16,579 24,117 26,113 480 5,778 2,296 Current assets Other non-current assets5 5,239 7,114 21,004 2,708 51,228 33,190 72,979 60,574 55,882 200,170 8,307 9,489 – 1,118 97,100 13,561 Total segment assets 12,353 93,983 63,282 107,110 233,360 17,796 97,100 14,679 Not reportable assets6 – – – – – – – 666,194 Total assets 12,353 93,983 63,282 107,110 233,360 17,796 97,100 680,873 (56,720) 154,810 (83,922) (32,898) 108,535 122,794 516,869 639,663 666,194 1,305,857 – – – – – – – – 1 “Other” revenue primarily relates to revenues earned by Servicios Corporativos Hochschild Mining Mexico S.A. de C.V. for services provided to the Moris mine, and the Mexican exploration activities. 2 Segment profit for the operating segments Ares, Arcata, Selene and Pallancata includes an exceptional item in cost of sales of US$6,918,000 (refer to note 6(1)). 3 Comprised of administrative expenses of US$51,068,000, other income of US$13,283,000, other expenses of US$20,577,000, impairment of property, plant and equipment of US$26,713,000, share of gains of associates and joint ventures of US$47,223,000, finance income of US$28,684,000, finance cost of US$47,296,000, and foreign exchange loss of US$256,000. 4 Includes US$11,000 of depreciation capitalised in Minera Hochschild Mexico S.A. de C.V. due to the San Felipe project. 5 Includes goodwill in respect of San José amounting to US$2,091,000. 6 Not reportable assets are comprised of intangibles of US$342,000, investments accounted under the equity method of US$450,665,000, available-for-sale financial assets of US$19,181,000, other receivables of US$91,033,000, income tax receivable of US$10,582,000, deferred income tax assets of US$15,852,000, other financial assets of US$695,000 and cash and cash equivalents of US$77,844,000. i i F n a n c a l s t a t e m e n t s 88 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 3 SEGMENT REPORTING (CONTINUED) (b) Geographical information Based on the entity-wide disclosure stated in IFRS 8, the revenue for the period based on the country in which the customer is located is as follows: External customer USA Peru Canada Germany Switzerland United Kingdom Korea Total Inter-segment Peru Mexico Total Year ended 31 December 2010 US$000 2009 US$000 147,701 130,126 158,540 159,339 137,713 128,834 88,457 38,802 52,275 98,960 84,121 57,549 1,925 7,721 752,322 539,741 882 6,110 1,161 1,866 759,314 542,768 In the periods set out below, certain customers accounted for greater than 10% of the Group’s total revenues as detailed in the following table: Year ended 31 December 2010 Year ended 31 December 2009 US$000 % Revenue Segment US$000 % Revenue Segment Consorcio Minero S.A. 158,464 21% Teck Metals Ltd. (formerly Teck Cominco Metals Ltd) 137,713 18% Aurubis AG (formerly Nordeutsche Affinerie AG) 128,834 17% Johnson Matthey Inc. 79,384 11% International Commodities Inc. 42,853 6% Arcata San José Arcata Pallancata Selene Pallancata San José Ares Arcata San José Moris Ares Arcata Moris 155,182 29% 98,960 18% 84,121 16% 47,375 9% 61,979 11% Arcata Pallancata San José Arcata Selene Pallancata Selene Pallancata San José Ares Arcata Selene San José Moris Ares Arcata Selene Moris Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 89 3 SEGMENT REPORTING (CONTINUED) Based on the entity-wide disclosure requirements set out in IFRS 8, non-current assets, excluding financial instruments and income tax assets, were allocated based on the geographical area where the assets are located as follows: Peru Argentina Mexico Chile Canada United Kingdom Total non-current segment assets Available-for-sale financial assets Trade and other receivables Deferred income tax assets Income tax receivable Total non-current assets 4 ACQUISITIONS As at 31 December 2010 US$000 399,905 210,265 28,699 68 – 79,291 718,228 153,620 36,817 5,229 2,401 2009 US$000 242,170 200,384 49,328 54 24,902 451,038 967,876 19,181 3,150 15,852 1,302 916,295 1,007,361 (a) Acquisition of associates Lake Shore Gold Corp. On 9 March 2009 the Group acquired 14,900,000 shares of Lake Shore Gold Corp. (“Lake Shore Gold”) for US$18,003,000 as part of its commitment to participate in the bought-deal financing agreement entered into by Lake Shore Gold. After completion of the transaction, the Group’s ownership in Lake Shore Gold was maintained at 39.99%. On 6 November 2009 Lake Shore Gold acquired all of the outstanding common shares of West Timmins Mining Inc. (“West Timmins”) by issuing 103,951,125 common shares and 8,550,264 options and warrants. At the date of the transaction the Group held an interest of 18.40% in West Timmins (acquired between August and November of 2009 for a total consideration of US$63,782,000). As a consequence of the transaction, the Group’s interest in Lake Shore Gold was diluted from 39.99% to 26.10% and a net gain of US$42,279,000 was recognised as an exceptional item in the consolidated income statement within the caption “Share on post tax profit/loss of associates” (refer to note 18 (a)). On the same day, 28,300,000 shares held by the Group in West Timmins were converted into 20,700,000 shares in Lake Shore Gold, increasing the Group’s interest in Lake Shore Gold to 32.20%. During December 2009 the Group acquired an additional interest of 3.88% in Lake Shore Gold for a total consideration of US$86,168,000. Also, at 31 December 2009 the accumulated interest held by the Group of 36.09% was diluted to 35.69% due to the issuance of a package of shares, options and warrants by Lake Shore Gold. The total loss recognised in connection with the dilution of US$4,493,000 is recognised as an exceptional item in the consolidated income statement within the caption “Share on post tax profit/loss of associates” (refer to note 18 (a)). On 16 February 2010 the Group acquired 1,273,036 shares of Lake Shore Gold for CAD$5,130,000 (US$4,813,000). After completion of this transaction, the Group’s ownership in Lake Shore Gold increased from 35.69% to 35.92%. At 6 October 2010 the Group diluted its interests in Lake Shore Gold to 32.7%. On 14 October 2010 the Group entered into an agreement with RBC Dominion Securities Inc., BMO Nesbitt Burns Inc. and CIBC World Markets Inc. to dispose of 109,000,000 shares held in Lake Shore Gold (approximately 27.3%) pursuant to a bought deal transaction, at a price of CAD$3.60 per share. The sale was completed on 3 November 2010. After this transaction the Group holds approximately a 5.4% interest, no longer has Board representation and no longer exercises significant influence over Lake Shore Gold (refer to note 38(c)). i i F n a n c a l s t a t e m e n t s 90 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 4 ACQUISITIONS (CONTINUED) Gold Resource Corporation In connection with the Strategic Alliance Agreement signed with Gold Resource Corporation (“GRC”), an underground precious metals mining company with a number of development projects in Mexico, the Group purchased 1,670,000 common shares (4.9%) for US$5,010,000 on 5 December 2008. The Group also acquired an option to purchase a further 4,330,000 common shares for US$12,990,000 (US$3 per share). On 25 February 2009, the Group exercised its option to purchase a further 4,330,000 common shares. As a result of the acquisition of the second tranche, the Group held a 13.6% interest in GRC and appointed one of the four directors, giving the Group 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 since 25 February 2009. On 30 June 2009, the Group exercised its option to purchase an additional 5,000,000 common shares for a total cash consideration of US$20,000,000. The purchase was completed in two tranches: US$5,000,000 which closed on 30 June 2009 and a second tranche of US$15,000,000 which closed on 20 July 2009. On 16 December 2009, the Group purchased 1,954,795 common shares for a total cash consideration of US$16,000,000. Between 26 January 2010 and 5 February 2010 the Group acquired 440,500 shares of its associate GRC for US$4,351,000 in the open market. In addition, on 8 March 2010 the Group signed a subscription agreement with GRC by which the Group acquired 600,000 shares for a total consideration of US$5,172,000. In addition, on 27 May 2010 the Group acquired 631,579 shares of GRC for a total consideration of US$6,000,000. Following completion of this purchase, the Group’s ownership in GRC increased to 25.28% on a fully diluted basis as at 31 December 2010. (b) Acquisition of assets Minera Quellopata S.A.C. On 13 August 2007, the Group and Ventura Gold Corp. (“Ventura”) entered into a letter of agreement by which the Group granted the option to Ventura to earn in an initial interest of 51% in the Inmaculada property (located in Peru). Under the agreement, Ventura was required to drill a minimum of 15,000m and issue 1,000,000 shares of Ventura within a three year period. Also, to maintain the option, Ventura was required to issue a further 2,000,000 additional shares to the Group between 2011 – 2015. On 19 December 2008, Ventura exercised its option to acquire an initial 51% interest in the project after completing the initial drilling and issuing 1,000,000 shares to the Group (which was effectively completed during 2009). Pursuant to the letter of agreement, the Group and International Minerals corporation (“IMZ”) (which acquired 100% of Ventura and became party to the letter of agreement) formed a Peruvian company called Minera Quellopata S.A.C. ("Quellopata"), owned 51% by IMZ and 49% by the Group and entered into a Shareholders agreement on October 2009 (the “Quellopata Shareholders Agreement”). The Group contributed the Inmaculada Property and IMZ contributed all the exploration studies, in respect of the Inmacualada property, to Quellopata. Ventura had the option to acquire an additional 19% interest in the project (totalling 70%) in exchange for funding the feasibility study within 6 years. On 12 October 2010, the Group signed a Framework Agreement with IMZ, through which the Group acquired an additional 30% interest in the Inmaculada project (totalling 60%) in exchange for: (i) the purchase of US$20,000,000 of common shares in IMZ by way of a private placement, (ii) a payment of US$15,000,000, (iii) a commitment to fund the first US$100,000,000 needed to plan, develop and construct a mining operation within the Inmaculada property, (iv) the transfer of Minera del Suroeste S.A.C.’s ownership in Minas Pacapausa S.A.C. to Minera Suyamarca S.A.C. Minera Oro Vega which will transfer to Quellopata, together with the Puquiopata project. The Group will be the operator of the new venture pursuant to a separate Management Agreement similar in form and substance to the Pallancata management agreement. On 23 December 2010 (“effective date”), the Group signed a new joint venture agreement with IMZ which details the approved structure and plan for the Inmaculada project and terminates the Quellopata Shareholders Agreement and the Pallancata Joint Venture Agreement. This transaction has been accounted for as an asset acquisition as on the basis that Quellopata has no existing processes. As a result of the acquisition, the Group obtained control over Quellopata and has consolidated it as a subsidiary. The net assets received in the asset acquisition were US$91,782,000 and the Non-Controlling Interest generated by the transaction was US$36,940,000. The Group recognised a contingent consideration of US$39,243,000 and an obligation to IMZ of US$15,594,000 as disclosed in the notes 26 and 24 respectively. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 91 4 ACQUISITIONS (CONTINUED) (c) Acquisition of subsidiaries Southwestern Resources Corporation On 21 May 2009, the Group acquired a 100% interest of Southwestern Resources Corp. (“Southwestern”), a mineral exploration company with a number of gold, silver and base metals projects adjacent to the Group’s operations in southern Peru. The acquisition has been accounted for using the purchase method of accounting. The net assets acquired in the transaction and the negative goodwill arising were as follows: Cash and cash equivalents Available-for-sale financial assets Investment in associate Property, plant and equipment Other assets Deferred income tax liability Other current liabilities Net assets Negative goodwill arising on acquisition Total acquisition cost Fair value US$000 5,349 949 361 24,266 200 (3,663) (522) 26,940 (7,694) 19,246 The total acquisition cost of US$19,246,000 comprised a cash payment of US$19,056,000 and cost of US$190,000 directly attributable to the acquisition. (d) Acquisition of non-controlling interest Minas Santa Maria de Moris On 5 June 2009, the Group acquired the remaining 30% interest in Minas Santa Maria de Moris from its former partner Exmin S.A. de C.V., obtaining full ownership of its subsidiary for a total cash consideration of US$1,500,000. In compliance with the Group’s accounting policy, the difference between the consideration paid of US$1,500,000 and the carrying value of the non-controlling interest at the acquisition date of US$5,650,000 has been recognised as an increase of retained earnings. 5 REVENUE Gold (from doré) Silver (from doré) Concentrate Services Total The concentrate sold contained: Gold Silver Other minerals Total concentrate As at 31 December 2010 US$000 2009 US$000 125,613 107,521 98,431 71,546 528,173 360,534 105 140 752,322 539,741 As at 31 December 2010 US$000 118,327 409,846 – 2009 US$000 90,516 269,930 88 528,173 360,534 Included within revenue is a gain of US$60,473,436 relating to provisional pricing adjustments representing the change in the fair value of embedded derivatives (2009: gain of US$27,538,526) arising on sales of concentrates and doré (refer to notes 2(r) and 22(3)). i i F n a n c a l s t a t e m e n t s 92 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 5 REVENUE (CONTINUED) The total volumes of gold and silver sold are as follows: Total in thousands of net ounces: Gold Silver 6 COST OF SALES Included in cost of sales are: As at 31 December 2010 2009 196 204 23,506 23,563 Depreciation and amortisation Personnel expenses1 Mining royalty Change in products in process and finished goods Year ended 31 December 2010 Year ended 31 December 2009 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 102,705 88,194 15,091 (3,609) – 102,705 8,861 – – 97,055 15,091 (3,609) 83,426 51,284 9,458 8,066 – 6,918 – – Total US$000 83,426 58,202 9,458 8,066 1 The exceptional item corresponds to a one-off bonus paid to the mining workers in Peru. In 2010 the pre exceptional amount also includes an additional bonus to the mining workers in Peru of US$6,851,000. 7 ADMINISTRATIVE EXPENSES Personnel expenses Professional fees Social and community welfare expenses1 Lease rentals Travel expenses Communications Indirect taxes Depreciation Amortisation of software licences Contribution to Peruvian Government Technology and systems Security Supplies Other Total 1 Represents amounts expended by the Group on social and community welfare activities surrounding its mining units. Year ended 31 December 2010 US$000 34,337 9,557 6,686 1,176 1,756 133 2,008 1,747 301 1,814 1,354 437 250 4,665 66,221 2009 US$000 25,381 6,637 5,971 1,653 1,435 125 2,283 485 311 870 1,192 286 303 4,136 51,068 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 93 8 EXPLORATION EXPENSES Mine site exploration1 Arcata Ares Selene Pallancata San José Moris Prospects2 Peru Argentina Mexico Chile Generative3 Peru Argentina Mexico Chile China Mining rights Personnel4 Other Total Year ended 31 December 2010 Year ended 31 December 2009 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 Total US$000 2,476 – – 3,742 2,153 – 8,371 5,292 2,767 1,485 7,607 17,151 3,356 46 460 175 – 4,037 1,194 7,851 2,933 41,537 – – – – – – – – – – – – – – – – – – – – – – 2,476 1,345 – – 3,742 2,153 – – – 701 451 – 8,371 2,497 5,292 2,767 1,485 7,607 17,151 93 1,016 222 1,501 2,832 3,356 3,142 46 460 175 – 4,037 1,194 7,851 2,933 122 580 280 231 4,355 537 6,085 3,635 – – – – – – – – – – – – – – – – – – – 1,049 – 1,345 – – 701 451 – 2,497 93 1,016 222 1,501 2,832 3,142 122 580 280 231 4,355 537 7,134 3,635 41,537 19,941 1,049 20,990 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 the termination benefits paid to employees of the companies of the Southwestern Group. 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 As at 31 December 2010 US$000 1,117 2009 US$000 965 As at 31 December 2010 US$000 21,036 2009 US$000 7,469 i i F n a n c a l s t a t e m e n t s 94 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 9 SELLING EXPENSES Transportation of doré, concentrate and maritime freight Sales commissions Personnel expenses Warehouse services Other Total 10 PERSONNEL EXPENSES Salaries and wages1 Workers’ profit sharing2 Other legal contributions3 Termination benefits4 Statutory holiday payments Executive Long-Term Incentive Plan Other Total As at 31 December 2010 US$000 2009 US$000 7,559 1,466 296 15,146 2,453 26,920 7,493 1,145 270 10,223 1,874 21,005 As at 31 December 2010 US$000 77,803 22,830 15,215 2,768 5,406 6,975 14,307 145,304 2009 US$000 67,770 2,073 8,859 3,989 3,867 – 6,804 93,362 1 Included in salaries and wages is the Directors’ remuneration (refer to note 30(b)) and defined pension contributions of US$283,681 (2009: US$440,169). 2 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 Corresponds to legal obligations for the deposit of compensation for services rendered, pension plans and contributions to Government entities. 4 The 2010 amount includes termination benefits paid to management of US$1,170,140. The 2009 amount includes US$1,049,000 termination benefits paid to the employees of the companies of the Southwestern Group. Personnel expenses are distributed as follows: Cost of sales (refer to note 6) Administrative expenses (refer to note 7) Exploration expenses (refer to note 8) Selling expenses (refer to note 9) Property, plant and equipment Total Average number of employees for 2010 and 2009 were as follows: Peru Argentina Mexico Chile United Kingdom Total As at 31 December 2010 US$000 97,055 34,337 7,851 296 5,765 2009 US$000 58,202 25,381 7,134 270 2,375 145,304 93,362 As at 31 December 2010 2,323 1,083 160 19 9 2009 2,282 838 158 13 8 3,594 3,299 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 95 11 OTHER INCOME AND OTHER EXPENSES Year ended 31 December 2010 Year ended 31 December 2009 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 Total US$000 Other income: Export incentive Gain on recovery of expenses Gain on sale of property, plant and equipment Lease rentals Gain on sale of investment in El Quevar1 Gain on sale of investment in Zincore Metals Inc. 2 Gain on sale of investment in Lake Shore Gold3 Recovery of impairment of deposits in Kaupthing, Singer and Friedlander Bank Negative goodwill on acquisition of subsidiary Reversal of ElectroPeru contingency Other Total Other expenses: Increase in provision for mine closure4 Write off of value added taxes Termination benefits5 Loss on sale of property, plant and equipment Loss on sale of other assets Compensation claims provision6 Provision for obsolescence of supplies7 Impairment of trade receivables8 Other Total 1,843 210 – 151 – – – 135 – – 3,266 5,605 (3,839) (949) – (93) (373) (378) (1,252) (241) (3,831) (10,956) – – – – 6,010 7,533 1,843 210 – 151 6,010 7,533 63,654 63,654 – – – – 77,197 135 – – 3,266 82,802 1,921 472 – 302 – – – – – – 1,806 4,501 (3,839) (11,526) (949) – (93) (373) (378) (1,252) (241) (3,831) – – – (1,635) (1,850) (1,128) (1,116) (2,075) – – – – – – – – – – – – 153 – – – – 584 7,694 351 – 1,921 472 153 302 – – – 584 7,694 351 1,806 8,782 13,283 – – (662) – – – (585) – – (11,526) – (662) – (1,635) (1,850) (1,713) (1,116) (2,075) (10,956) (19,330) (1,247) (20,577) 1 Corresponds to the gain generated due to the sale of the Group´s interest in the El Quevar project in Argentina in exchange for 400,000 common shares and a warrant to purchase 300,000 common shares of Golden Minerals at a price per share of US$15. 2 Corresponds to the gain generated by the sale of the Group´s interest in Zincore Metals Inc. to Inversiones Pacasmayo S.A., a related party of the Group. 3 Corresponds to the gain generated by the sale of 109,000,000 Lake Shore Gold shares on 3 November 2010 (refer to note 4(a)). 4 In 2010 corresponds to changes in the estimated mine closure costs of closed operations in Peru of US$3,691,000 (2009: US$11,800,000), refer to note 26 (1); together with the loss generated due to the change in the discount rate of US$148,000 (2009: net of gain of US$274,000). 5 In 2009 represents the termination benefits paid to the employees due to the closing of the Selene mine. 6 Corresponds to compensation claims provisions related to the Peruvian companies. 7 In 2010 mainly includes the provision of obsolescence of supplies in Compañia Minera Ares and Minera Suyamarca of US$319,000, Minas Santa María de Moris of US$426,000 and Minera Santa Cruz of US$ 486,000. In 2009 mainly corresponds to the write-off of supplies at the Sipan mine that could not be sold or used in the other mining units of Peru and the obsolescence of supplies at the Selene mine due to the closure of the mine. 8 In 2010 corresponds to the impairment of an account receivable in Compañia Minera Ares. In 2009 mainly corresponds to the impairment of a trade receivable from a customer in Peru. i i F n a n c a l s t a t e m e n t s 96 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 12 FINANCE INCOME AND FINANCE COSTS Year ended 31 December 2010 Year ended 31 December 2009 Before exceptional items US$000 Exceptional items US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 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 Gain on exchange of available-for-sale financial assets4 Interest on loans to non-controlling interests (note 20) Change in discount rate5 Other Total Finance costs: Interest on bank loans and long-term debt (note 25) Interest on convertible bond (note 25) Unwind of discount rate6 Loss from changes in the fair value of forward contracts7 Loss from changes in the fair value of financial instruments8 Other Total 350 – – – 2,514 283 993 4,140 (8,744) (8,588) (538) (3) (9,091) (2,578) (29,542) – 3,289 5,713 202 – – – 350 3,289 5,713 202 2,514 283 993 9,204 13,344 819 – – – 2,609 2,837 119 6,384 Total US$000 819 9,045 623 – 9,045 623 12,632 12,632 – – – 2,609 2,837 119 22,300 28,684 – – – – – – – (8,744) (8,588) (538) (13,976) (1,663) (278) (3) (25,962) – – – – (9,091) (2,578) (2,452) (1,709) (1,256) – (13,976) (1,663) (278) (25,962) (3,708) (1,709) (29,542) (46,040) (1,256) (47,296) 1 Mainly corresponds to interest on liquidity funds (refer to note 23). 2 In 2010 the amount corresponds to the gain from change in the fair value of Golden Minerals and Iron Creek warrants of US$2,972,000 and US$168,000 respectively. In addition includes US$149,000 related to the fair value adjustment in acquisition of International Minerals shares on November 2010. In 2009 the amount mainly corresponds to the gain realised upon the exercise of an option over shares in Gold Resource Corp. on 25 February 2009 of US$5,493,000, the gain of the option contract to buy 3,750,000 shares of Gold Resource Corp. of US$1,912,500 and the change in the fair value of Fortuna Silver Mine Inc. warrants of US$1,639,000. 3 In 2010 corresponds to the gain on sale of Golden Minerals and Fortuna River shares of US$5,833,000 and US$53,000 respectively, net of the loss generated by the sale of Dia Bras Exploration and Lara Explorations Ltd shares of US$152,000 and US$21,000 respectively. In 2009 corresponds to the sale of 3,287,570 shares in Fortuna Silver Mines Inc. resulting in a realised gain of US$623,000 which has been recycled from equity into the income statement. 4 In 2010 corresponds to the gain for receiving shares of International Minerals Corporation due to the merger with Ventura Gold Corp. In 2009 mainly corresponds to the gain from change in the fair value of West Timmins Mining Inc. shares due to their exchange for additional Lake Shore Gold shares. The 2009 amount also includes the gain on receipt of shares of Dia Bras Exploration due to the merger with EXMIN Resources Inc. of US$391,000 and on receipt of shares of Lara Exploration Ltd. due to the merger with Maxy Gold Corp. of US$112,000. 5 Corresponds to the gain arising on the reduction in the discount rate used to calculate the recoverable amount of VAT of Minera Santa Cruz of US$283,000 (2009: US$2,837,000) 6 Corresponds to the unwind of the discount on the provision for mine closure costs of US$538,000 (2009: US$278,000). 7 Corresponds to the realised loss due to changes in the fair value of derivative instruments, being the future contracts of gold and silver signed with Citibank, JP Morgan and INTL Commodities Inc. with the intention to remove the risk of fluctuations in metal prices. 8 Corresponds to the loss due to changes in the fair value of the zero cost collar contracts signed by Cia. Minera Ares in 2009. These contracts were over 5,200,000 ounces of silver, with a cap of US$17/oz for 1,400,000 ounces, US$19.5/oz for 400,000 ounces and US$19.95/oz for 400,000 ounces, and a floor of US$11.00/oz, and contracts with a cap of US$20.92/oz and floor of US$13.80/oz for 1,500,000 ounces, and a cap of US$21/oz and a floor of US$14/oz for 1,500,000 ounces. The contracts expired between January and December 2010. In addition, this includes a loss of US$1,495,000 (2009: US$1,256,000) relating to the fair value of the swap contract signed with BBVA and Citibank to fix the interest rate of the JP Morgan led syndicated loan at 1.75% (refer to note 25). Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 97 12 FINANCE INCOME AND FINANCE COSTS (CONTINUED) 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 13 INCOME TAX EXPENSE As at 31 December 2010 US$000 2,864 (17,332) (14,468) 2009 US$000 3,428 (15,639) (12,211) Current tax: Current tax charge from continuing operations Deferred taxation: Origination and reversal of temporary differences from continuing operations (note 28) Withholding taxes Year ended 31 December 2010 Year ended 31 December 2009 Before exceptional items US$000 Exceptional items1 US$000 Before exceptional items US$000 Exceptional items US$000 Total US$000 50,138 50,138 (2,659) (2,659) 47,479 47,479 30,946 30,946 (2,275) (2,275) 27,165 27,165 513 (3,127) (3,127) – 24,038 24,038 513 12,486 12,486 1,256 (8,943) (8,943) – Total US$000 28,671 28,671 3,543 3,543 1,256 Total taxation charge in the income statement 77,816 (5,786) 72,030 44,688 (11,218) 33,470 1 This amount mainly relates to a current tax credit of US$2,659,000 in connection with the one-off bonus paid to the mining workers in Peru (2009: US$2,076,000), and a US$3,127,000 deferred tax credit in connection with a write-off recognised in the period (US$9,048,000 in connection with an impairment loss recognised in 2009). The weighted average statutory income tax rate was 31.4% for 2010 and 30.1% for 2009. 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 tax related to items charged or credited to equity is as follows: Current tax: Current tax charge from continuing operations Deferred taxation: Deferred income tax relating to fair value gains on available-for-sale financial assets Total tax charge in the statement of other comprehensive income As at 31 December 2010 US$000 2009 US$000 – – 7,189 7,189 7,189 – – (71) (71) (71) i i F n a n c a l s t a t e m e n t s 98 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 13 INCOME TAX EXPENSE (CONTINUED) 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 31.4% (2009: 30.1%) Expenses not deductible for tax purposes Non-taxable income1 Non-taxable negative goodwill2 Deferred tax recognised on special investment regime Recognition of previously unrecognised deferred tax assets3 Non-taxable share of losses/(gains) of associates Net deferred tax assets generated in the year not recognised Change in tax regime Change in statutory Income Tax Rate Foreign exchange rate effect4 Derecognition of deferred tax assets previously recognised5 Other At average effective income tax rate of 25.0% (2009: 21.62%) Taxation charge attributable to continuing operations Total taxation charge in the income statement As at 31 December 2010 US$000 2009 US$000 288,695 154,810 90,594 2,250 (17,976) – – (14,525) 1,702 8,179 – – (430) – 2,236 72,030 72,030 72,030 46,702 2,049 (6,662) (2,308) (629) (4,222) (13,276) 11,204 (2,002) (786) 25 4,790 (1,415) 33,470 33,470 33,470 1 Mainly corresponds to the non taxable gain on the sale of Lake Shore Gold shares of US$17,743,000. 2 In 2009, corresponds to non-taxable negative goodwill on acquisition of the Southwestern Group. 3 Mainly corresponds to the use of previously unrecognised tax losses in 2010 of US$15,736,000 (US$7,687,000 in 2009), recognised tax losses upon tax restructuring of the Mexican companies of US$6,329,000 (US$7,392,000 in 2009), the reversal of the write-off of tax credits of US$4,790,000, previously written off in 2009, following certain steps taken to increase the probability of the assets being available in the future, and the non taxable gain on sale of Zincore Metals Inc. shares of US$2,586,000. 4 Mainly corresponds to the foreign exchange effect from converting tax bases and monetary items from local currency to the functional currency. 5 Relates to the reversal of a deferred tax asset previously recognised, as the ability to utilise this potential deferred tax asset against future taxable profits is now uncertain. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 99 14 BASIC AND DILUTED EARNINGS PER SHARE Earnings per share (“EPS”) is calculated by dividing profit for the year attributable to equity shareholders of the Company by the weighted average number of ordinary shares issued during the year. The Company has dilutive potential ordinary shares. As at 31 December 2010 and 2009, EPS has been calculated as follows: Basic and earnings per share from continuing operations: Before exceptional items (US$) Exceptional items (US$) Total for the year and from continuing operations (US$) Diluted earnings per share from continuing operations: Before exceptional items (US$) Exceptional items (US$) Total for the year and from continuing operations (US$) As at 31 December 2010 2009 0.28 0.18 0.46 0.29 0.17 0.46 0.17 0.14 0.31 0.17 0.14 0.31 Net profit from continuing operations before exceptional items and attributable to equity holders of the parent is derived as follows: Profit for the year from continuing operations (US$000) Less non-controlling interests (US$000) Profit attributable to equity holders of the parent – continuing operations (US$000) Exceptional items after tax – attributable to equity holders of the parent (US$000) As at 31 December 2010 2009 216,665 121,340 (60,054) (23,260) 156,611 98,080 (61,687) (45,188) Profit from continuing operations before exceptional items attributable to equity holders of the parent (US$000) Interest on convertible bond (US$000) 94,924 8,588 Diluted profit from continuing operations before exceptional items attributable to equity holders of the parent (US$000) 103,512 52,892 1,663 54,555 The followings reflects the share data used in the basic and diluted earnings per share computations: Basic weighted average number of ordinary shares in issue (thousands) Dilutive potential ordinary shares related to convertible bond Diluted weighted average number of ordinary shares in issue and dilutive potential ordinary shares (thousands) As at 31 December 2010 2009 338,085 314,043 18,161 3,564 356,246 317,607 i i F n a n c a l s t a t e m e n t s 100 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 15 PROPERTY, PLANT AND EQUIPMENT Year ended 31 December 2009 Cost At 1 January 2009 Additions Acquisition of subsidiary Change in discount rate Disposals Write-off2 Change in mine closure estimate Reclassification to intangibles Transfers and other movements Transfer to evaluation and exploration assets Foreign exchange At 31 December 2009 Accumulated depreciation and impairment At 1 January 2009 Depreciation for the year Write-off2 Impairment3 Disposals Reclassification to intangibles Foreign exchange At 31 December 2009 Net book amount at 31 December 2009 Mining properties and development costs US$000 Land and buildings US$000 Plant and equipment1 US$000 Vehicles US$000 Mine closure asset US$000 Construction in progress and capital advances US$000 237,818 100,393 183,245 3,420 41,681 50,969 23,800 – (1,148) (27,718) – – – (1,921) 2,087 381 16,032 – – – (1,894) – – 10,244 – 3 347 – (1,639) (5,496) – (5,891) 28,433 – 546 160 119 – (96) (162) – – 255 – 12 – – (1,770) – – 15,220 – – – – 65,933 32,357 – – (169) 62 – – (38,932) – 33 Total US$000 632,490 99,899 24,266 (1,770) (3,052) (35,208) 15,220 (5,891) – (1,921) 2,681 283,887 109,127 215,577 3,708 55,131 59,284 726,714 107,516 45,229 (26,666) 9,671 – – – 21,311 13,719 (1,147) 4,390 – (606) – 51,628 23,345 (2,924) 5,093 (956) (1,559) 141 135,750 148,137 37,667 71,460 74,768 140,809 1,306 33,376 788 215,925 375 (80) 50 (110) – – 1,541 2,167 1,254 130 2,172 – – – – – 83,922 (30,687) 310 21,686 – – – (1,066) (2,165) 141 36,932 18,199 1,098 287,756 58,186 438,958 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 101 15 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Year ended 31 December 2010 Cost At 1 January 2010 Additions Acquisition of subsidiary Change in discount rate Disposals Transfer of leases Write-off2 Change in mine closure estimate Transfers and other movements Transfer from evaluation and exploration assets Foreign exchange At 31 December 2010 Accumulated depreciation and impairment At 1 January 2010 Depreciation for the year Write-off2 Disposals Transfer of leases Foreign exchange At 31 December 2010 Net book amount at 31 December 2010 Mining properties and development costs US$000 Land and buildings US$000 Plant and equipment1 US$000 Vehicles US$000 Mine closure asset US$000 Construction in progress and capital advances US$000 Total US$000 283,887 109,127 215,577 3,708 71,473 80 14,138 – – – – (934) – 273 4,249 1,096 – – – – (2,705) – 5 – (1,498) (717) (7,624) – 14,438 15,068 – 8 – (61) 14 – – (448) – (43) – 366 – 9 55,131 1,081 – 989 – – – 59,284 39,572 726,714 126,358 – – – – 5 989 (1,946) (717) (6,803) (18,109) (1,108) – (1,108) – – – (30,145) – 17 – 4,249 1,069 360,044 120,948 234,888 3,606 56,093 61,925 837,504 135,750 54,027 37,667 17,976 74,768 26,201 (201) (2,657) (5,911) – – – – – 1 (648) (123) 45 189,576 170,468 52,987 67,961 94,332 140,556 1,541 408 (24) (373) – 10 1,562 2,044 36,932 3,834 – – – – 1,098 – – – – – 287,756 102,446 (8,793) (1,021) (123) 56 40,766 15,327 1,098 60,827 380,321 457,183 1 The carrying value of plant and equipment held under finance leases at 31 December 2010 was US$7,936,000 (2009: US$11,177,000). Additions during the year included US$1,239,000 (2009: US$6,058,000) of plant and equipment under finance leases. Leased assets are pledged as security for the related finance lease. 2 Mainly comprises the effects of the result of the physical verification exercise performed every three years at the Peruvian mine units which resulted in a write-off in the Ares mine unit of US$1,727,000 and in the Pallancata mine unit of US$102,000. In addition, 2010 includes a write off of US$12,000 in México, US$747,000 in Peru related to the Crespo project and US$6,728,000 in Argentina related to the proposed conversion of San José’s production to doré only. In 2009, due to the cessation of mining activities at the Selene mine unit, the remaining net book value of assets of US$4,523,000 was written off. 3 During 2010 the Group tested its mine units Arcata, San José and Moris for impairment and determined that there was no impairment to be recorded in profit and loss. At 31 December 2009, the Group recognised impairments totalling US$21,686,000, which included (i) a charge of US$15,041,000 in respect of the Ares mine unit; (ii) a charge of US$10,091,000 in respect of the Crespo project; and (iii) a reversal of the impairment loss in respect of the Moris unit of US$3,446,000. The trigger for the impairment of Ares was the proximity of the closing and the resulting revision to its remaining recoverable reserves and resources. In assessing whether an 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. 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. There were no borrowing costs capitalised in property, plant and equipment as no significant qualifying assets were constructed during 2010. i i F n a n c a l s t a t e m e n t s 102 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 15 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) For the 2009 impairment tests the Group utilised the following assumptions: –(cid:3)(cid:5)Commodity prices – Commodity prices of gold and silver are based on external market consensus forecasts. Gold prices range from $837.5/oz to $1,015/oz and silver prices range from $13.22/oz to $16/oz. –(cid:3)(cid:5)Estimation of reserves and resources – Reserves and resources are based on management’s estimates using appropriate exploration and evaluation techniques. –(cid:3)(cid:5)Production volumes and grades – Tonnage produced was estimated at plant capacity with 19 days of maintenance per year. –(cid:3)(cid:5)Capital expenditure – The cash flows for each mining unit include capital expenditure to maintain the mine and to convert resources to reserves. –(cid:3)(cid:5)Operating costs – Costs are based on historical information from previous years and current mining conditions. –(cid:3)(cid:5)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 Ares San José Moris 16 EVALUATION AND EXPLORATION ASSETS Cost Balance at 1 January 2009 Additions Write-off Foreign exchange Transfers and other movements Balance at 31 December 2009 Additions1 Foreign exchange Transfers and other movements Balance at 31 December 2010 Accumulated impairment Balance at 1 January 2009 Impairment2 Foreign exchange Balance at 31 December 2009 Impairment2 Foreign exchange difference Balance at 31 December 2010 Net book value as at 31 December 20093 Net book value as at 31 December 20103 2009 Real pre-tax discount rate % 3.21 14.30 5.43 Total US$000 60,480 8,636 (284) 1,606 1,921 72,359 122,764 3,058 (4,249) 193,932 15,754 222 555 16,531 14,702 888 32,121 55,828 161,811 1 Mainly comprises the increase in evaluation and exploration assets due to the acquisition of the subsidiary Minera Quellopata S.A.C. of US$91,507,000 2 The Group has impaired the San Felipe property by US$14,702,000. The impairment was triggered by the conclusion of the marketing process conducted during the year and reflects the Company’s estimate of the recoverable amount. The recoverable amount was based on fair value less cost to sell. As observable market prices are not available, this was calculated using a discounted cash flow methodology taking account of assumptions that would be made by market participants. In 2009, the Group also impaired the Ares mine unit by US$222,000. The trigger for this impairment was the proximity of the closing of Ares and the resulting revision to the remaining recoverable reserves and resources. 3 Of the net book value at 31 December 2010, US$25,874,000 corresponds to the investment in San Felipe (2009: US$37,825,000), US$20,241,000 corresponds to the Azuca project (2009: US$7,079,000), US$91,507,000 corresponds to the Inmaculada project in Peru (2009: Nil) and the balance relates to amounts capitalized in respect of converting inferred resources to indicated and measured resources at the Group´s unit mines. There were no borrowing costs capitalised in evaluation and exploration assets. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 103 17 INTANGIBLE ASSETS Cost Balance at 1 January 2009 Additions Reclassification Balance at 31 December 2009 Additions Balance at 31 December 2010 Accumulated amortisation Balance at 1 January 2009 Amortisation for the year Reclassification Balance at 31 December 2009 Amortisation for the year Foreign exchange difference Balance at 31 December 2010 Net book value as at 31 December 2009 Net book value as at 31 December 2010 Goodwill US$000 Transmission line US$000 Software licences US$000 2,091 – – 2,091 – – 16,266 5,891 22,157 – 913 76 – 989 111 Total US$000 3,004 16,342 5,891 25,237 111 2,091 22,157 1,100 25,348 – – – – – – – 2,091 2,091 – 2,078 87 2,165 2,067 – 4,232 19,992 17,925 336 311 – 647 301 2 950 342 150 336 2,389 87 2,812 2,368 2 5,182 22,425 20,166 The carrying amount of goodwill is reviewed annually to determine whether it is in excess of its value-in-use. The value-in-use is determined at the cash-generating unit level, in this case being the San José mine, by discounting the expected cash flows estimated by management over the life of the mine. The calculation of value-in-use is most sensitive to the following assumptions: –(cid:3)Commodity prices – Commodity prices of gold and silver are based on prices considered in the Group’s 2011 budget (2009: 2010 budget) and external market consensus forecasts. The prices considered in the 2010 (2009) impairment tests were: Year 2010 2011 2012 2013 2014 2015 2016 2017-2022 2010 – Gold – US$/oz 2010 – Silver – US$/oz 2009 – Gold – US$/oz 2009 – Silver – US$/oz – – 25.0 1,000.0 1,015.0 16.0 15.8 1,300.0 1,367.50 1,300.0 1,200.0 1,175.0 1,175.0 1,000.0 26.3 990.0 15.0 23.8 900.0 14.5 21.7 900.0 14.5 21.7 837.5 13.2 23.5 837.5 13.2 16.9 – – –(cid:3)Estimation of reserves and resources – Reserves and resources are based on management’s estimates using appropriate exploration and evaluation techniques. –(cid:3)(cid:5)Production volumes and grades – Tonnage produced was estimated at plant capacity with 12 days of maintenance per year (2009: 19 days). –(cid:3)Capital expenditure – The cash flows for each mining unit include capital expenditures to maintain the mine and to convert resources to reserves. –(cid:3)Operating costs – Costs are based on historical information from previous years and current mining conditions. –(cid:3)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. The pre-tax discount rate used in the 2010 impairment test was 16.63% (2009:14.30%). i i F n a n c a l s t a t e m e n t s 104 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 17 INTANGIBLE ASSETS (CONTINUED) Management believes that the following changes to the main assumptions would cause the carrying value of the cash generating unit (including 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 2010 Variation (13.1)% (10.7)% 2009 Variation (6.8)% (6.3)% (52.9)% (17.0)% 11.9% 107.0% 7.9% 4.3% Headroom for the 2010 and 2009 impairment tests were US$61,523,000 and US$16,732,000 respectively. Cash flows used for impairment tests were based on the annual 2011 budget presented and approved by the Board in December 2010. The starting point in all cases was January 2011. Individual cash flows are based on the annual 2011 budget and an estimated set of reserves and resources as of December 2010 provided by the Explorations and Operations teams. In addition, in respect of subsequent years, the Group makes the necessary conservative adjustments to accurately reflect the nature of each operation. In the case of revenue, production figures were estimated assuming reserve grade (after extracted tonnage) and full capacity. In the case of operating expenses, all figures are based on the 2011 budget. Future capital expenditure is based on the 2011 budget, excluding one-off expenses and considering the Operations team’s view on developments and infrastructure, according to the estimated set of reserves and resources. 18 INVESTMENTS ACCOUNTED UNDER EQUITY METHOD Lake Shore Gold Corp(a) Cabo Sur(b) Gold Resource Corp.(c) Zincore Metals Inc.(d) Total (a) Lake Shore Gold Corp The following table summarises the financial information of the Group’s investment in Lake Shore Gold Corp: Year end 31 December 2010 US$000 – – 79,068 – 2009 US$000 386,190 (57) 62,467 2,065 79,068 450,665 Share of the associate’s statement of financial position: 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)/profit1 Carrying amount of the investment Year ended 31 December 2010 US$000 2009 US$000 – – – – – – – 47,520 345,948 (7,663) (50,758) 335,047 51,143 386,190 – (9,785) – 46,951 – 386,190 1 Share of the associate’s loss in 2010 includes (1) a pre-exceptional loss from the Group’s share in the results of the period of Lake Shore Gold of US$1,430,000, (2) an exceptional loss from dilution of the Group’s interest from 35.9% to 35.7% on 30 June 2010 of US$2,021,000, (3) an exceptional gain from dilution of the Group’s interest from 35.7% to 33.6% on 10 September 2010 of US$3,817,000 and (4) an exceptional loss from dilution of the Group’s interest from 33.6% to 32.7% on 6 October 2010 of US$10,151,000. Share of the associate’s profit in 2009 includes (1) a gain of US$101,503,000 from the Group’s share in Lake Shore Gold’s acquisition of 100% of West Timmins’ net assets, (2) a gain from the Group’s share in the results of the period of Lake Shore Gold of US$9,165,000, (3) a loss from dilution of the Group’s interest from 39.99% to 26.1% on 6 November 2009 of US$59,224,000, and (4) a loss from dilution of the Group’s interest from 36.09% to 35.69% on 31 December 2009 of US$4,493,000. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 105 18 INVESTMENTS ACCOUNTED UNDER EQUITY METHOD (CONTINUED) On 3 November 2010 the Group disposed 109,000,000 shares held in Lake Shore Gold (approximately 27.3% interest) for a total consideration of US$374,016,000 generating a gain of US$63,654,000. After of this transaction the Group no longer has significant influence over Lake Shore Gold. (b) Cabo Sur During 2010 the Group sold its interest in Cabo Sur to Mirasol Resources Ltd. for 6,300 Argentinian Pesos (approximately US$2,000). As a result of this transaction the Group no longer has significant influence over this company. The following table summarises the financial information of the Group’s investment in Cabo Sur: Share of the joint venture’s statement of financial position: 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 (c) Gold Resource Corp. The following table summarises the financial information of the Group’s investment in Gold Resource Corp: Share of the associate’s statement of financial position: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Goodwill on acquisition Share of the associate’s revenue, profit and loss: Revenue Profit/(losses) 1 Carrying amount of the investment Year ended 31 December 2010 US$000 2009 US$000 – – – – – – (6) – 6 6 (69) – (57) – (61) (57) Year ended 31 December 2010 US$000 2009 US$000 15,087 56,065 (1,632) 5,671 46,873 (181) (14,808) (11,609) 54,712 24,356 3,730 3,711 79,068 40,754 21,713 – (1,240) 62,467 1 Share of the associate’s profit in 2010 includes (1) a pre-exceptional loss from the Group’s share in the results of the period of Gold Resource Corp. of US$3,171,000 (2009: US$995,000) and (2) an exceptional gain from dilution of US$6,882,000 (2009: loss of US$245,000). (d) Zincore Metals Inc. On 21 May 2009, the Group acquired Southwestern Resources Corporation, which resulted in the acquisition of 38,100,000 shares of Zincore Metals Inc. equivalent to a 48.2% interest. In September 2009, Zincore Metals Inc. issued 24,060,000 shares resulting in a dilution of the Group’s interest to 36.8%, which generated a gain by the Group of US$2,065,000. On 5 March 2010, the Group sold its 36.8% to Inversiones Pacasmayo S.A., a related party of the Group, at a price of C$0.27 per share (a total of C$10,287,000) representing a 11.6% premium over the 20 day average closing price, realising a gain on disposal of US$7,533,000. As a result of the transaction, the Group no longer has an interest in Zincore. The disposal was approved on behalf of Hochschild by a committee comprising solely independent Non-Executive Directors (“the Independent Committee”). The Independent Committee was advised by Canaccord Adams Limited that the terms of the disposal were fair and reasonable as far as shareholders are concerned. i i F n a n c a l s t a t e m e n t s 106 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 18 INVESTMENTS ACCOUNTED UNDER EQUITY METHOD (CONTINUED) The following table summarises the financial information of the Group’s investment in Zincore Metals Inc: Share of the joint venture’s statement of financial position: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of the joint venture’s revenue and profit: Revenue Profit Carrying amount of the investment 19 AVAILABLE-FOR-SALE FINANCIAL ASSETS Beginning balance Additions1 Increase in value of available-for-sale financial assets due to merger of companies2 Fair value change recorded in equity Disposals3 Reclassification to investments accounted under equity method4 Reclassification from investments accounted under equity method5 Ending balance Year ended 31 December 2010 US$000 2009 US$000 – – – – – – – – 2,110 67 (96) (16) 2,065 – 1,704 2,065 Year ended 31 December 2010 US$000 19,181 25,786 4 47,573 (11,924) 2009 US$000 17,794 70,022 357 23,019 (4,749) – (87,262) 73,000 – 153,620 19,181 1 The amount represents the fair value of shares at the date of acquisition and mainly includes the purchase of shares of: (i) International Minerals for US$20,150,000, (ii) Golden Minerals for US$5,000,000, (iii) Iron Creek Capital Corp for US$67,000 and (iv) Brionor Resources for US$568,000 (2009: mainly includes the purchase of shares of: (i) Fortuna Silver Mines Inc. for US$3,196,000, (ii) Ventura Gold Corp. for US$158,000, (iii) Pembrook Mining Corp. for US$1,857,000, (iv) West Timmins Mining Inc. for US$63,782,000, (v) Northern Superior Resources Inc. for US$705,000, (vi) Empire Petroleum Corp. for US$82,000, and (vii) Maxy Gold Corp for US$243,000). 2 In 2010 corresponds to the transfer of shares due to the merger between Ventura Gold Corp. and International Minerals. In 2009 corresponds to the transfer of shares due to the merger between EXMIN Resources Inc. and Dia Bras Exploration (US$325,000) and the merger between Maxy Gold Corp. and Lara Explorations Ltd. (US$32,000). The net effect was recognised in profit and loss. 3 In 2010 corresponds to the sale of (i) 663,600 shares of Fortuna River, (ii) 3,751,047 shares of Dia Bras Exploration, (iii) 495,200 shares of Lara Explorations Ltd. and (iv) 400,000 shares of Golden Minerals. In 2009 corresponds to the sale of 3,287,570 shares in Fortuna Silver Mines Inc. (refer to note 12). 4 Corresponds to the reclassification to investments accounted under the equity method of the West Timmins Mining Inc. shares of US$82,252,000 and of Gold Resource Corp. of US$5,010,000 on the date’s they became associates of the Group. 5 Corresponds to the reclassification of the Group’s Lake Shore Gold shares from investments accounted under equity method to available-for-sale financial assets as at 31 December 2010. The Group does not have significant influence over this company. Available-for-sale financial assets include the following: Equity securities – quoted Canadian companies Equity securities – quoted US companies Equity securities – quoted British companies Equity securities – unquoted1 Bonds Total 1 Includes Pembrook Mining Corp and Electrum Capital Inc. shares. Year ended 31 December 2010 US$000 131,603 39 8,397 13,581 – 2009 US$000 4,225 119 3,086 11,743 8 153,620 19,181 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 107 19 AVAILABLE-FOR-SALE FINANCIAL ASSETS (CONTINUED) The breakdown of the investments in equity securities held is as follows (number of shares): Number of shares held at 1 January 2009 663,600 Fortuna River1 Additions Transfers Disposals Number of shares held at 31 December 2009 Additions Transfers Disposals – – 663,600 (3,287,570) – – – – – – – Fortuna Silver Mines Inc.2 812,215 2,475,355 Mirasol Resources Ltd 500,000 – Pembrook Mining Corp3 5,714,286 1,111,111 Gold Resource Corp4 Electrum Capital Inc Iron Creek Capital Corp5 Mariana Resources Ltd EXMIN Resources Inc6 1,670,000 4,205,462 2,000,000 11,002,948 18,387,487 – – – – (1,670,000) – – – – (18,387,487) Ventura Gold Corp7 300,000 700,000 – West Timmins Mining Inc8 – 28,331,500 (28,331,500) Northern Superior Resources Inc9 Empire Petroleum Corp10 Maxy Gold Corp11 Dia Bras Exploration6,12 Lara Explorations Ltd11,13 International Minerals7 Brionor Resources14 Golden Minerals Company15 Lake Shore Gold Corp.16 – 10,053,007 1,333,333 – – – – – – – – 3,961,600 (3,961,600) – – – – – – 3,751,047 495,200 – – – – 2,000,000 280,000 – – – – – – – – – – – – – – – (1,000,000) – – – – – – – – – – – – – – – – 2,730,000 400,000 500,000 6,825,397 – 4,205,462 – – – – – – 11,002,948 – – – – 1,000,000 – – 10,053,007 – – – – – – – – 1,333,333 – 3,751,047 495,200 – – – – Number of shares held at 31 December 2010 – – 500,000 6,825,397 – 4,205,462 2,280,000 (663,600) – – – – – – – 11,002,948 – – – – – – – 10,053,007 – – (3,751,047) (495,200) 1,333,333 – – – 100,000 – – – – 100,000 2,730,000 (400,000) – – 21,540,992 – 21,540,992 1 The investment in Fortuna River was sold by the Group on 28 April 2010. 2 At 31 December 2009 the Group had sold its total interest in Fortuna Silver Mine. 3 Pembrook Mining Corp. (5.7%) is a privately held exploration company with projects in Peru and Canada. Additions in 2009 relates to the purchase of 1,111,111 common shares on 15 September 2009. 4 The investment in Gold Resource Corp., an underground precious metals mining company with a number of prime development projects in Mexico, relates to the transfer of shares to investments in associates, due to the Group’s significant influence following its increased investment in the Company in February 2009. 5 The investment in Iron Creek Capital Corp. (8.6%) relates to the purchase of 280,000 common shares on 1 March 2010. 6 In 2009 the Group received shares from Dia Bras Exploration in exchange for its holding of EXMIN Resources Inc. shares, due to the merger of these companies. This investment is treated as an available-for-sale financial asset on the basis that the Group does not have significant influence over the company. 7 As at 31 December 2009, Ventura Gold Corp. had issued 1,000,000 shares to the Group. On 12 January 2010 the Group received 100,000 shares of International Minerals in exchange for its holding of 1,000,000 Ventura Gold Corp. shares due to the merger of these companies. 8 The investment in West Timmins Mining Inc. (Nil), relates to the purchase of common shares during 2009 which were subsequently transferred under the terms of its business combination with Lake Shore Gold. 9 The investment in Northern Superior Resources Inc. (6.8%), resulted from the acquisition of Southwestern Resources Corp. on 21 May 2009. 10 The investment in Empire Petroleum Corp. (1.6%), resulted from the acquisition of Southwestern Resources Corp. on 21 May 2009. 11 The investment in Maxy Gold Corp. resulted from the acquisition of Southwestern Resources Corp. on 21 May 2009. In addition, during 2009, the Group received shares from Lara Explorations Ltd. in exchange for its holding of Maxy Gold Corp. shares, due to the merger between these companies. 12 On 12 July 2010 the Group sold its interest in Dia Bras Exploration. 13 Between April and August 2010 the Group sold its interest in Lara Explorations Ltd. 14 The investment in Brionor Resources (9.7%) relates to the purchase of shares between March and June 2010. 15 Corresponds to the shares received in exchange for the sale of the Group´s interest in the El Quevar project in Argentina. Between November and December 2010 the Group sold 400,000 shares of Golden Minerals. 16 Corresponds to the reclassification from investment in associates of the Lake Shore Gold shares. i i F n a n c a l s t a t e m e n t s 108 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 19 AVAILABLE-FOR-SALE FINANCIAL ASSETS (CONTINUED) During the period there were no reclassifications between quoted and unquoted investments. 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.) were recognised at their acquisition cost given that there is not an active market for these investments. The investment in Electrum Capital Inc. was impaired in 2008 resulting in a loss of US$2,637,000 recorded in profit and loss. The investment in Pembrook Mining Corp. is measured at the latest purchase price in Canadian dollars, updated for the foreign exchange difference. Available-for-sale financial assets are denominated in the following currencies: Canadian dollars US dollars Pounds sterling Total 20 TRADE AND OTHER RECEIVABLES Trade receivables1 Advances to suppliers Credit from exports2 Loan to non-controlling interests3 Receivables from related parties (note 30) Loans to employees Interest receivable Receivable from Kaupthing, Singer and Friedlander Bank Other Provision for impairment4 Financial assets classified as receivables Prepaid expenses Value Added Tax (VAT)5 Total 2010 US$000 145,184 39 8,397 2009 US$000 15,968 127 3,086 153,620 19,181 As at 31 December Non- current US$000 – – – – – 1,276 – – 22 – 2009 Current US$000 76,981 5,436 3,587 39,443 996 1,585 38 965 720 (2,443) 1,298 127,308 516 1,336 5,454 32,102 3,150 164,864 Non- current US$000 – – 578 32,165 – 2,128 – – 25 – 34,896 933 988 36,817 2010 Current US$000 89,404 9,050 4,004 9,393 1,609 3,297 4 648 1,027 (2,533) 115,903 4,252 25,780 145,935 The fair values of trade and other receivables approximate their book value. 1 At 31 December 2010, trade accounts receivable mainly comprised of amounts receivable from Consorcio Minero S.A. (US$11,577,000), Teck Metals Ltd. (US$30,274,000), Aurubis AG (US$24,802,000), MRI Trading AG (US$6,380,000), LS Nikko (US$10,691,000), Doe Run Peru SRL (US$1,108,000), Johnson Matthey Inc (US$4,313,000), Traxis Peru S.A.C. (US$34,000) and Argor Heraus S.A. (US$215,000). At 31 December 2009, trade accounts receivable mainly comprised of amounts receivable from Consorcio Minero S.A. (US$21,628,000), Teck Cominco Metals Ltd (US$17,481,000), Aurubis AG (US$29,040,000), MRI Trading AG (US$2,078,000), LS Nikko (US$4,922,000), Doe Run Peru SRL (US$1,108,000), Johnson Matthey Inc (US$605,000), and Argor Heraus S.A. (US$116,000). Trade receivables are denominated in the following currencies: – US dollars 89,394,000 (2009: 76,978,000) – Peruvian nuevos soles 10,000 (2009: 3,000) 2 Corresponds to the credits due on exports of Minera Santa Cruz. 3 This relates to loans to Minera Andes Inc. The effective interest rate was between 7.86% and 8.21% until the renegotiation of the terms of those loans on 17 September 2010 resulting in a change in the interest rate to 7% (between 7.86% and 8.21% in 2009) (refer to note 37(g)). 4 Includes the provision for impairment of trade receivable from a customer in Peru of US$1,108,000 (2009: US$1,108,000), the impairment of deposits in Kaupthing, Singer and Friedlander of US$648,000 (2009: US$798,000) and other receivables of US$777,000 (2009: US$537,000). 5 This includes an amount of US$14,593,000 (2009: US$20,838,000) 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$2,282,000 (2009: US$4,091,000) and Minas Santa María de Moris of US$2,456,000 (2009: US$5,628,000). The value added tax is valued at its recoverable amount. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 109 20 TRADE AND OTHER RECEIVABLES (CONTINUED) Movements in the provision for impairment of receivables: At 1 January 2009 Provided for during the year Released during the year At 31 December 2009 Provided for during the year Released during the year At 31 December 2010 Individually impaired US$000 Collectively impaired US$000 1,987 1,116 (660) 2,443 241 (151) 2,533 – – – – – – – Total US$000 1,987 1,116 (660) 2,443 241 (151) 2,533 As at 31 December, the ageing analysis of trade and other receivables net of impairment is as follows: Year 2010 2009 21 INVENTORIES Finished goods Products in process Raw materials Supplies and spare parts Provision for obsolescence of supplies Total Past due but not impaired Neither past due nor impaired US$000 150,799 128,606 Less than 30 days US$000 – – Total US$000 150,799 128,606 30 to 60 days US$000 61 to 90 days US$000 91 to 120 days US$000 – – – – – – Over 120 days US$000 – – As at 31 December 2010 US$000 As at 31 December 2009 US$000 4,601 17,620 255 33,788 56,264 (1,134) 55,130 6,074 12,538 1,002 28,610 48,224 (2,411) 45,813 Finished goods include ounces of gold and silver and concentrate. Doré is an alloy containing a variable mixture of silver, gold and minor impurities delivered in bar form to refiners and is considered 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 is sold to smelters. The amount of doré on hand at 31 December 2010 included in products in process is US$4,995,000 (2009: US$2,977,000). As part of the management’s short-term financing policies, the Group acquires pre-shipment loans which are guaranteed by the sales contracts. The amount of expense recognised in profit and loss related to the inventory is US$67,907,000 (2009: US$59,215,000). The amount of the expense related to the increase of the inventory provision is US$1,252,000 (2009: US$1,713,000). The amount of income relating to the reversal of the inventory provision is US$Nil (2009: US$181,000). i i F n a n c a l s t a t e m e n t s 110 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 22 OTHER FINANCIAL ASSETS AND LIABILITIES Other financial assets Warrants in Golden Minerals Company1 Warrants in Iron Creek Capital Corp.2 Embedded derivatives3 Total financial assets at fair value through profit or loss Other financial liabilities Embedded derivatives3 Total financial liabilities at fair value through profit or loss Zero cost collar contracts4 Swap contracts5 Total derivatives designated as hedge instruments Total financial liabilities As at 31 December 2010 US$000 2009 US$000 3,982 168 16,512 20,662 – – – 1,930 1,930 1,930 – – 695 695 175 175 2,452 13 2465 2,640 1 At 31 December 2010, this item represents a balance of 300,000 warrants of Golden Minerals Company. The expiry date of the warrants is 7January 2013. Warrants were fair valued using the Black-Scholes option pricing model. 2 At 31 December 2010, this item represents a balance of 280,000 warrants of Iron Creek Capital Corp. The expiry date of the warrants is 1 March 2012. Warrants were fair valued using the Black-Scholes option pricing model. 3 Sales of concentrate 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 for the smelter to refine and sell the concentrate or for 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 entered into zero cost collar contracts covering 5,200,000 ounces of silver in 2010, at an average cap price of US$19.7 and an average floor price of US$12.7. These contracts expired during 2010. 5 At the end of 2009 the Group signed a swap contract with Citibank and BBVA to fix the interest rate of the JP Morgan-led syndicated loan of US$114,320,000 (refer to note 25). 23 CASH AND CASH EQUIVALENTS Cash at bank Liquidity funds1 Current demand deposit accounts2 Time deposits3 Cash and cash equivalents considered for the statement of cash flows As at 31 December 2010 US$000 694 424,049 44,346 56,393 525,482 2009 US$000 1,430 28,294 40,447 7,673 77,844 The fair value of cash and cash equivalents approximates their book value. The Group does not have undrawn borrowing facilities available in the future for operating activities or capital commitments. 1 The liquidity funds are mainly invested in certificates of deposit, commercial paper and floating rate notes with a weighted average annual effective interest rate of 0.26% and a weighted average maturity between 33 to 56 days as at 31 December 2010 (2009: 0.71% and between 30 and 55 days) (refer to note 37(g)). 2 Relates to bank accounts which are freely available and bear interest between 0.03% and 1.1%. 3 The effective interest rate as at 31 December 2010 was 1.95% (2009: 3.00%). These deposits have an average maturity from 1 to 30 days (2009: 1 to 30 days) (refer to note 37(g)). Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 111 24 TRADE AND OTHER PAYABLES Trade payables1 Professional fees Interest payable Taxes and contributions Salaries and wages payable2 Mining royalty (note 36) Dividends payable Accrued expenses Guarantee deposits Swap contract3 Other4 Total As at 31 December Non- current US$000 – – – – 2,385 – – 8 – – – 2010 Current US$000 49,407 1,247 88 11,157 21,120 3,537 339 3,777 2,697 – 22,705 Non- current US$000 – – – – – – – 81 – – – 2009 Current US$000 29,026 1,179 114 9,061 13,275 2,192 336 6,304 1,307 4,337 1,370 2,393 116,074 81 68,501 The fair value of trade and other payables approximate their book values. 1 Trade payables relate mainly to 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 dollars Peruvian nuevos soles Argentinian pesos Mexican pesos Pounds sterling Chilean pesos Canadian dollars Total 2 Salaries and wages payable were as follows: Remuneration payable Board members remuneration Executive long term incentive plan Total 2010 US$000 18,841 20,697 8,295 610 279 590 95 2009 US$000 13,783 9,298 5,006 374 140 375 50 49,407 29,026 2010 US$000 16,633 947 5,925 2009 US$000 10,956 2,319 – 23,505 13,275 3 Corresponds to the amount payable related to the contracts signed with Citibank, JP Morgan and INTL Commodities Inc. with the intention to remove the risk of fluctuations in metal prices. As these contracts were closed, the Group transferred the balance previously classified as a financial liability at fair value through profit and loss to other payables. 4 Mainly includes an account payable to Internationl Minerals due to the Minera Quellopata transaction of US$15,594,000 (refer to note 4 (b)), the account payable to Iron Creek Capital Corp. of US$615,000 by Minera Hochschild Chile S.C.M. and the account payable related to the zero cost collar contracts of US$4,179,000 (refer to note 12(8)). i i F n a n c a l s t a t e m e n t s 112 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 25 BORROWINGS Secured bank loans (a) Amount due to non-controlling interests (b) Convertible bond payable (c) Amounts due to related parties (note 30) Total (a) Secured bank loans As at 31 December 2010, the balance corresponds to: As at 31 December Non- current US$000 85,525 59,028 2010 Current US$000 Non- current US$000 53,030 115,854 11,074 – 103,827 5,145 103,827 – 23 – 2009 Current US$000 34,773 75,570 1,663 902 248,380 69,272 219,681 112,908 i. Pre-shipment loans for a total amount of US$20,000,000 in Minera Santa Cruz S.A. These obligations accrue an effective annual interest rate ranging from 1.60% to 2.40% and are guaranteed by the inventories and the trade receivables of the company (refer to note 21). Pre-shipment loans 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$3,714,000 in Compañía Minera Ares. This obligation accrues an effective annual interest rate of 3.25%. iii. Leasing agreement with BIF for an amount of US$1,363,000 in Compañía Minera Ares S.A.C. This obligation accrues an effective annual interest rate of 5.5%. The following table demonstrates the present value and maturity of future minimum lease payments as at 31 December 2010 and 2009: Not later than one year Between 1 and 2 years Between 2 and 5 years Total As at 31 December 2010 US$000 2009 US$000 3,774 1,279 24 5,077 4,406 3,664 935 9,005 The following table reconciles the total minimum lease payments and their present values as at 31 December 2010 and 2009: Present value of leases Future interest Total minimum lease payments As at 31 December 2010 US$000 2009 US$000 5,077 155 5,232 9,005 718 9,723 The carrying amount of net lease liabilities approximate their fair value. iv. 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 2010 is comprised of the secured term loan facility of US$114,320,000 plus accrued interest of $2,393,000 and net of transaction costs of US$3,235,000. During 2010 and 2009 the Group has a swap contract with BBVA and Citibank to fix the interest rate of the loan at 1.75%. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 113 25 BORROWINGS (CONTINUED) The schedule of payments is as follows: Date 13 July 2011 15 January 2012 15 July 2012 13 January 2013 Total payments US$000 28,560 28,560 28,560 28,640 114,320 The Company has granted the following guarantees on its $114,320,000 syndicated loan: –(cid:3)Pledge of all shares in Compañía Minera Ares S.A.C. (“CMA”) (wholly-owned subsidiary). –(cid:3)Subsidiary guarantees by certain wholly-owned subsidiaries whereby these subsidiaries guarantee the repayment of the loan with their cash flows. The main administrative and financial covenants that the Company and CMA must comply with during the term of the syndicated loan are as follows: –(cid:3)(cid:5)Provision of quarterly unaudited and annual audited financial statements for Hochschild Mining plc and CMA. –(cid:3)(cid:5)Investments in restricted and unrestricted subsidiaries based on an agreed limit (unlimited within restricted subsidiaries). –(cid:3)(cid:5)Maintain the following ratios (at a consolidated and CMA 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. Compliance with the restrictive covenants described in the preceding paragraph is overseen by CMA management and the Administrative Agent. The Group and CMA have complied with the commitments and financial covenants mentioned in the syndicated loan agreement. The balance as at 31 December 2009 corresponds to: i. Pre-shipment loans for a total amount of US$8,750,000 in CMA and US$20,000,000 in Minera Santa Cruz S.A. These obligations accrue an effective annual interest rate ranging from 1.05% to 4.75% and are guaranteed by the inventories and the trade receivables of the Company (refer to note 21). ii. Leasing agreement with Banco de Credito for an amount of US$5,693,000 in CMA. This obligation accrues an effective annual interest rate ranging from 6.80% to 7.60%. iii. Leasing agreement with BIF for an amount of US$3,016,000 entered into by CMA. This obligation accrues an effective annual interest rate ranging from 7.15% to 8.25%. iv. Leasing agreement with Interbank for an amount of US$296,000 entered into by CMA. This obligation accrues an effective annual interest rate of 9.01%. v. 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 CMA. The balance as at 31 December 2009 is comprised of the secured-term loan facility of US$114,320,000 plus accrued interest of US$1,787,000 and net of transaction costs of US$3,235,000. During 2009 the Group signed a swap contract with BBVA and Citibank to fix the interest rate of the loan at 1.75% (b) Amounts due to non-controlling interests The balance as at 31 December 2010 mainly corresponds to a loan from Minera Andes Inc. to Minera Santa Cruz S.A. for an amount of US$64,070,000 (2009: US$67,124,000) with interest rate of 7% (2009: between 7.86% and 12%). There is a further loan of US$6,032,000 advanced to Minera Santa Cruz S.A. by Minera Andes S.A. (2009: US$8,446,000) with an interest rate of 7% (2009: 12%) (refer to note 37(g)). i i F n a n c a l s t a t e m e n t s 114 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 25 BORROWINGS (CONTINUED) (c) Convertible bond payable Placement of US$115,000,000 of senior unsecured convertible bonds, due 2014, which are convertible into ordinary shares of Hochschild Mining plc. The bonds have a coupon of 5.75% per annum payable semi-annually on 28 January and 28 July of each year. The issuer has the option to call the bonds on or after 20 October 2012 until maturity in the event the trading price of the ordinary shares exceeds 130% of the conversion price over a certain period. In addition, the Group has the right to redeem the bonds if at any time the aggregate principal amount of the bonds outstanding is equal to or less than 15% of the aggregate principal amount of the bonds initially issued. The following information has to be considered for conversion of the bonds into ordinary shares: –(cid:3)Conversion premium: 35% above the Reference Share Price. –(cid:3)Reference Share Price: GBP 2.95. –(cid:3)Initial Conversion Price: GBP 3.9825. –(cid:3)Fixed Exchange Rate: US$1.59/GBP 1.00. The balance as at 31 December 2010 is comprised of the principal of US$115,000.000 (2009: US$115,000,000) plus accrued interest of US$5,145,000 (2009: US$1,663,000) and net of transaction costs of US$2,741,000 (2009: US$2,741,000) and the bond equity component of US$8,432,000 (2009: US$8,432,000). The maturity of non-current borrowings is as follows: Between 1 and 2 years Between 2 and 5 years Over 5 years Total As at 31 December 2010 US$000 59,265 2009 US$000 31,586 136,951 188,095 52,164 – 248,380 219,681 The carrying amount of current 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 non-controlling interests and related parties (fixed rates) Convertible bond payable Total Carrying amount as at 31 December Fair value as at 31 December 2010 US$000 2009 US$000 2010 US$000 2009 US$000 85,525 59,028 103,827 248,380 115,854 – 84,728 80,184 116,358 – 103,827 121,709 126,331 219,681 286,621 242,689 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 115 26 PROVISIONS At 1 January 2009 Additions Accretion Change in discount rate Change in estimate Payments Foreign exchange Other At 31 December 2009 Less current portion Non-current portion At 1 January 2010 Additions Accretion Change in discount rate (refer to note 11(4) and 15) Change in estimate Payments Foreign exchange At 31 December 2010 Less current portion Non-current portion Workers’ profit sharing2 US$000 Contributions to Peruvian Government US$000 Long-term Incentive Plan³ US$000 Contingency Consideration4 US$000 Provision for mine Closure¹ US$000 38,899 – 278 (2,045) 27,020 (2,831) – – 861 2,073 – – – (948) (78) 88 61,321 1,996 (6,640) (1,996) 54,681 61,321 – 1,996 991 870 – – – (956) (12) 893 (893) – 893 – – – – – – – – – – – – – – – – – – – – – – – – Bonus to mining workers US$000 – 6,918 – – – Other US$000 1,213 1,499 – – – Total US$000 41,964 11,360 278 (2,045) 27,020 (6,918) (371) (12,024) – – – – – – 30 (60) 88 2,371 66,581 (1,876) (11,405) 495 2,371 378 – – – – 55,176 66,581 73,776 538 1,137 2,583 (16,221) 1,081 14,487 1,814 1,061 39,243 15,712 538 1,137 2,583 – – – (4,634) (2,001) – (40) 62,026 14,442 (10,592) (14,442) – – – (725) (162) 1,820 (1,820) 51,434 – – 1,061 – – – – – – – – – – – – (8,861) 14 108 (80) 1,061 39,243 6,865 2,857 128,314 – (5,859) 33,384 (6,865) (2,293) (41,871) – 564 86,443 1 The provision represents the discounted values of the estimated cost to decommission and rehabilitate the mines at the expected date of closure of each of the mines. 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 2010 and 2009 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. During 2010 the Group made an internal review of the provision for mine closure for all its mining units. Consequently, at 31 December 2010 an increase of US$3,664,000 (addition in estimate of US$1,081,000 plus change in estimate of US$2,583,000) has been recognised mainly related to five additional years of water treatment at the Sipan mine unit. Of the total amount, US$1,108,000 has been recognised as a decrease in the mine closure asset, US$1,081,000 as an addition (refer to note 15) and the remaining US$3,691,000 has been recognised within other expenses (refer to note 11 (4)). This increase in estimate relates to the Sipan (US$3,819,000), Moris (US$176,000), Crespo (US$620,000), Azuca (US$461,000), net of a decrease at Ares (US$38,000), Selene (US$128,000), Arcata (US$4,000), Pallancata (US$194,000), and San José (US$1,048,000). 2 Corresponds to the workers profit sharing of Compañía Minera Ares S.A.C. (US$3,235,000) and Minera Suyamarca S.A.C. (US$11,207,000). 3 In May 2010, a grant of awards under the Group’s cash based Long-Term Incentive Plan was made. The awards will rest on satisfaction of a TSR-based performance condition relative to a comparator group comprising international silver and gold mining companies over a three-year performance period. The performance period runs from 1 January 2010 to 31 December 2012 and should awards vest a cash payment will be made to participants in May 2013. Only employees who remain in the Group’s employment until this date will be entitled to a cash payment on vesting subject to exceptions approved by the Remuneration Committee of the Board. The provision represents the discounted values of the estimated cost of the long-term employee benefit. In 2010 there is a provision of US$1,061,109 that is disclosed under administrative expenses (US$909,154) and exploration expenses (US$151,955). 4 This contingent consideration provision relates to International Minerals Corporation’s discounted share of Hochschild’s commitment to fund the first $100,000,000 needed to plan, develop and construct a mining operations within the Inmaculada property (refer to note 4(b)). i i F n a n c a l s t a t e m e n t s 116 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 27 EQUITY (a) Share capital and share premium Issued share capital The issued share capital of the Company as at 31 December 2010 is as follows: Class of shares Ordinary shares The issued share capital of the Company as at 31 December 2009 is as follows: Class of shares Ordinary shares Number Issued Amount 338,085,226 £84,521,307 Number Issued Amount 338,085,226 £84,521,307 At 31 December 2010 and 2009, all issued shares with a par value of 25p (2010: weighted average of US$0.469, 2009: weighted average of US$0.469 per share) each were fully paid. Rights attached to ordinary shares: At general meetings of the Company, on a show of hands and on a poll, every member who is present in person or subject to the below, by proxy, has one vote for every share of which they are the holder/proxy. However in the case of a vote on a show of hands where a proxy has been appointed by more than one member, the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution. The changes in share capital are as follows: Shares issued as at 1 January 2009 Shares issued and paid pursuant to the placing of shares on 12 October 2009 Shares issued as at 31 December 2009 Shares issued as at 31 December 2010 Number of shares 307,350,226 30,735,000 338,085,226 338,085,226 Share capital US$000 146,466 12,171 158,637 158,637 Share Premium US$000 395,928 – 395,928 395,928 On 12 October 2009 a share placement was completed and 30,735,000 shares with an aggregate nominal value of US$12,171,000 were issued for a cash consideration of US$140,168,000 net of transaction costs of US$3,453,000. The share placement was effected through a structure which resulted in the excess of the net proceeds received over the nominal value of the share capital issued being transferred to retained earnings. (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. Unrealised gain/loss on cash flow hedges Correspond to the effective portion of the gain or loss on the hedging instrument (refer to note 2(aa)) Cumulative translation adjustment The cumulative translation adjustment account is used to record exchange differences arising from the translation of the financial statements of subsidiaries and associates 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. Bond equity component Represents the equity component of the Convertible bond issued on 20 October 2009 (refer to note 25(c). When the initial carrying amount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting the fair value of the instrument as a whole the amount separately determined for the liability component. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 117 28 DEFERRED INCOME TAX The changes in the net deferred income tax assets/(liabilities) are as follows: Beginning of the year Income statement (charge)/credit Deferred income tax arising on net unrealised gains on available-for-sale financial assets recognised in equity Initial balance of deferred tax asset of Minera Quellopata S.A.C. Reclassification of withholding tax Initial balance of deferred tax liability of Southwestern Group Foreign exchange effect End of the year As at 31 December 2010 US$000 5,190 (24,038) (7,189) 1,762 1,208 – (238) (23,305) 2009 US$000 12,619 (3,543) 71 – – (3,663) (294) 5,190 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: Differences in cost of PP&E US$000 Mine development US$000 Financial instruments US$000 Others US$000 Total US$000 Deferred income tax liabilities: At 1 January 2009 Income statement (credit) charge Net deferred income tax from unrealised gain on available-for-sale financial assets Foreign exchange Arising on acquisition At 31 December 2009 Income statement (credit) charge Net deferred income tax from unrealised gain on available-for-sale financial assets Reclassification of withholding tax Foreign exchange At 31 December 2010 4,341 1,186 – – – 5,527 10,027 – – – 11,679 4,977 – 294 3,663 20,613 14,101 – – 238 1,236 (366) 2,306 (1,447) 19,562 4,350 (71) – – 799 3,627 7,189 – – – – – 859 1,254 – (1,208) – 905 (71) 294 3,663 27,798 29,009 7,189 (1,208) 238 63,026 15,554 34,952 11,615 Deferred income tax assets: At 1 January 2009 (restated) Income statement credit (charge) At 31 December 2009 Income statement credit (charge) Arising on acquisition At 31 December 2010 Differences in cost of PP&E US$000 Provision for mine closure US$000 Tax losses US$000 Interest payable US$000 Others US$000 Total US$000 2,048 7,759 9,807 1,873 – 11,680 5,742 (770) 4,972 1,482 – 6,454 11,559 (8,789) 2,770 3,846 – 7,268 942 8,210 (3,068) – 6,616 5,142 5,564 1,665 7,229 838 1,762 9,829 32,181 807 32,988 4,971 1,762 39,721 i i F n a n c a l s t a t e m e n t s 118 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 28 DEFERRED INCOME TAX (CONTINUED) The amounts after offset, as presented on the face of the statement of financial position, are as follows: Deferred income tax assets Deferred income tax liabilities 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 Total tax losses (recognised and unrecognised) As at 31 December 2010 US$000 2009 US$000 5,229 15,852 (28,534) (10,662) As at 31 December 2010 US$000 2009 US$000 – – – – 23,789 23,789 624 2,997 2,548 4,592 55,416 66,177 88,313 1,100 763 607 849 6,044 9,363 543 1,411 3,137 2,667 53,231 60,989 70,352 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 forecasts prepared by management. Other unrecognised deferred income tax assets comprises (gross amounts): Provision for mine closure1 Impairments of assets2 Interest expense and exchange difference loss3 As at 31 December 2010 US$000 39,350 14,702 2009 US$000 44,611 – – 13,686 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. 2 Corresponds to the impairment of the San Felipe project recognised in 2010. 3 Corresponds to interest expense and exchange difference loss in respect of the project finance loan payable to Minera Andes Inc. Unrecognised deferred tax liability on retained earnings At 31 December 2010, there was no recognised deferred tax liability (2009: nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries, or its associate or joint venture as the intention is that these amounts are permanently reinvested. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 119 29 DIVIDENDS PAID AND PROPOSED Declared and paid during the year: Equity dividends on ordinary shares: Final dividend for 2009: US$0.02 (2008: US$0.02) First interim for 2010: US$0.02 (2009: US$0.02) Dividends paid to non-controlling interest: US$0.40 (2009: US$8.63 and US$0.23) Dividends paid Proposed for approval by shareholders at the AGM: Final dividend for 2010: US$0.03 (2009: US$0.02) 2010 US$000 2009 US$000 6,762 6,761 26,000 39,523 6,147 6,147 7,754 20,048 10,143 6,762 Dividends per share The dividends declared in August 2010 were US$6,761,704 (US$0.02 per share). A dividend in respect of the year ending 31 December 2010 of US$0.03 per share, amounting to a total dividend of US$10,142,557 is to be proposed at the Annual General Meeting on 2 June 2011. These financial statements do not reflect this dividend payable. 30 RELATED-PARTY BALANCES AND TRANSACTIONS (a) Related-party accounts receivable and payable The Group had the following related-party balances and transactions during the years ended 31 December 2010 and 2009. The related parties are companies owned or controlled by the main shareholder of the parent company, joint ventures or associates. Other Fosfatos del Pacífico S.A. Cementos Pacasmayo S.A.A. Gold Resource Corp (refer to note 18(c)) Joint ventures Cabo Sur Total Current related party balances Total Accounts receivable at 31 December Accounts payable at 31 December 2010 US$000 2009 US$000 2010 US$000 2009 US$000 28 291 1,290 1,609 – – 1,609 1,609 1,609 28 – – 28 968 968 996 996 996 – 23 – 23 – – 23 23 23 – – – – 902 902 902 902 902 As at 31 December 2010 and 2009 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 Gain on sale of Zincore Metals Inc. shares to Inversiones Pacasmayo S.A. (refer to note 18(d)) Dividend recognised for Gold Resource Corp. investment (refer to note 18(a)) Revenue recognised for services performed to Gold Resource Corporation Transactions between the Group and these companies are on an arm’s-length basis. As at 31 December 2010 US$000 2009 US$000 7,533 2,633 29 – – – i i F n a n c a l s t a t e m e n t s 120 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 30 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 As at 31 December 2010 US$000 11,121 11,121 2009 US$000 8,679 8,679 This amount includes the remuneration paid to the Directors of the parent company of the Group of US$6,996,557 (2009: US$5,931,185), out of which US$239,975 (2009: US$399,117) relates to pension payments. Compensation of key management personnel (including directors) Short term employee benefits Termination benefits Long term incentive plan Workers profit sharing Others Total compensation As at 31 December 2010 US$000 6,751 1,170 2,348 205 647 11,121 2009 US$000 7,971 63 – 99 546 8,679 In 2009, the Group made a loan to one of the Directors of US$200,000 with an interest rate of 7.45% until 30 April 2009, 3.50% from 1 May 2009 to 31 July 2009 and 3.00% from 1 August 2009. The balance as at 31 December 2010 was nil (2009: US$227,214, composed of principal of US$200,000 and interest of US$27,214). (c) Participation in placing by Pelham Investment Corporation (“Pelham”) Pelham, a company controlled by the Executive Chairman, Eduardo Hochschild, participated in a placing of the Company’s Ordinary Shares (“Shares”) in October 2009 by subscribing for 1,064,780 Shares at a price of 295p per Share. (d) Purchase of additional interest in Inmaculada project During the year, the Group acquired an additional interest in the Inmaculada project effectively diluting the interest of its joint- venture partners, International Minerals Corporation (“IMZ”). This acquisition qualified as a small related party transaction under the UKLA Listing Rules in light of IMZ’s 40% interest in the Pallancata Joint-Venture. See note 4(b) for further details. 31 AUDITOR’S REMUNERATION The auditor’s remuneration for services provided to the Group during the years ended 31 December 2010 and 2009 is as follows: Audit fees pursuant to legislation1 Other services pursuant to legislation Other services relating to taxation Services relating to corporate finance transactions Total Ernst & Young year ended 31 December 2010 US$000 1,250 150 139 241 2009 US$000 1,255 188 206 94 1,780 1,743 Others year ended 31 December 2010 US$000 2009 US$000 38 – – – 38 30 – – – 30 1 Includes US$408,000 (2009: US$515,000) 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. In 2010 all fees are included in administrative expenses, within the “professional fees” caption (refer to note 7). In 2009, US$1,650,000 are included in administrative expenses, within the “professional fees” caption (refer to note 7), US$66,910 are capitalised due to the Southwestern acquisition and US$55,815 are capitalised within the transactions costs related to the convertible bond issuance. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 121 32 NOTES TO THE STATEMENT OF CASH FLOWS Reconciliation of profit for the year to net cash generated from operating activities Profit for the year Adjustments to reconcile Group operating profit to net cash inflows from operating activities: Depreciation (refer to note 15) Amortisation of intangibles Impairment and write-off of assets (net) Write-off of other receivables Write-off of value added tax Negative goodwill generated in acquisition of subsidiary Loss/(gain) on sale/disposal of property, plant and equipment Loss/(gain) on sale of other assets Transfer of lease contract Gain on sale of available-for-sale financial assets Gain on sale of investment in associates Share of post tax losses/(gains) of associates and joint ventures accounted under equity method Increase in provision for mine closure Unwind of discount of value added taxes Finance income Finance costs Income tax expense Provision for obsolescence of supplies Compensation claims provision 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 As at 31 December 2010 US$000 2009 US$000 216,665 121,340 102,446 2,368 24,018 241 949 – 93 373 594 (5,915) (77,197) 6,080 3,838 (283) 83,911 311 26,713 – – (7,694) (153) – – – – (47,223) 11,526 – (7,146) (28,684) 29,542 72,030 1,252 378 469 47,296 33,470 1,535 – 63 (42,239) (19,045) 7,264 (27,389) (10,095) 31,140 21,785 4,690 (22,831) 4,507 3,771 2,195 351,261 215,698 Transactions not affecting cash flows The main transactions that did not affect cash flows and which are not disclosed elsewhere in the financial statements are: Compensation of income tax payable with value added tax As at 31 December 2010 US$000 31,065 2009 US$000 – i i F n a n c a l s t a t e m e n t s 122 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 33 COMMITMENTS (a) 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 obligations. 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 Statement of Financial Position 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 2010 US$000 1,208 5,760 2009 US$000 560 10,436 (i) 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 had the right to acquire a 51% interest in the project by investing US$3,000,000 within three years. At 31 December 2010, the Group completed the investment and exercised its option to acquire a 51% interest in the project. (ii) 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 is obliged to invest at least US$750,000 before withdrawing from the venture. At 31 December 2010 the Group completed the investment of US$6,000,000 (31 December 2009 US$1,668,000) and exercised its option to obtain a 60% interest over the project. In addition, the Group participated in a private placement whereby the Group subscribed for shares in Iron Creek for a 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. (iii) IAMGOLD and Minera Mariana Argentina S.A. (Los Amigos) On 5 November 2009, the Group entered into an option and joint venture agreement with IAMGOLD Corporation (“IAMGOLD”) and Minera Mariana Argentina S.A. (“Mariana”) to explore and develop minerals in the two groups of properties located in Argentina, which comprise the “Los Amigos” project (part of the La Flora property). At 31 December 2010 the Group invested US$607,000 in the project. Under the arrangements, the Group will have the right to acquire a 51% interest in each group of properties by investing US$1,500,000 within two years. The Group can withdraw from the agreement at any time without incurring any further expenditures or penalties. (iv) Sociedad Contractual Minera Valleno (Valeriano) On 10 November 2010, the Group entered into a purchase option agreement with Sociedad Contractual Minera Valleno amongst others (“Minera Valleno”) to earn in a right to 100% of the properties in the “Valeriano Project Area” located in Chile, currently owned by Minera Valleno. Upon signing of the agreement the Group paid US$500k to Minera Valleno. In order to exercise the option, the Group is required to incur exploration expenditure of US$3,000,000 within three years and is required to undertake exploration works comprising 2,000 metres of drilling by 31 December 2011 and 7,600 metres of drill holes by 31 December 2013. The Group is able to withdraw from the agreement at any time prior to incurring the required exploration work expenditure to vest the option but after having funded the first US$1,000,000 in exploration expenditure. As at 31 December 2010 the Group has a provision of US$1,000,000 disclosed in “Trade and other payables”, under the caption “Accrued Expenses”. (v) Minera Zalamera S.A. de C.V. (Corazón de Tinieblas) On 18 December 2010, the Group entered into a purchase option agreement with Minera Zalamera S.A. de C.V. (“Minera Zalamera”) to earn in a right to 100% of the properties in the “Corazón de Tinieblas Project Area” located in Guerrero, Mexico, currently owned by Minera Zalamera. Upon signing of the letter of intent the Group paid US$10,000 and upon signing the purchase option agreement the Group paid US$25,000 to Minera Zalamera. In order to exercise the option, the Group is required to make a total payment of US$2,100,000 and incur exploration expenditure of US$4,000,000 within five years by 31 October 2015. The Group is entitled to withdraw from the agreement at any time prior to incurring the exploration work expenditure necessary to vest the option. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 123 33 COMMITMENTS (CONTINUED) (b) Operating lease contract The Group has a number of operating lease agreements. The lease expenditure charged to the income statement during the years 2010 and 2009 are included in the production costs and administrative expenses. As at 31 December 2010 and 2009, the future aggregate minimum lease payments under the operating lease agreements are as follows: For the year ended 31 December Not later than one year Later than one year and not later than five years 2010 US$000 2,245 1,490 2009 US$000 1,777 2,431 (c) Finance lease contract During 2009 Compañía Minera Ares S.A.C. signed lease agreements for equipment with Banco de Crédito del Peru, Interbank and Banco Interamericano de Finanzas (refer to note 25). (d) Capital commitments Peru Mexico Argentina For the year ended 31 December 2010 US$000 39,490 34 6,200 45,724 2009 US$000 34,089 247 14,900 49,236 34 CONTINGENCIES As at 31 December 2010, 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 undertaken by it, there remains a risk that significant additional tax liabilities may arise. At 31 December 2010, the Group has exposures totalling US$26,760,000 which are assessed as “possible”, rather that “probable”. No amounts have been provided in respect of these items. 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. i i F n a n c a l s t a t e m e n t s 124 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 35 GUARANTEES AND TAX STABILITY AGREEMENTS (a) Compañía Minera Ares S.A.C. (“CMA”) Arcata Unit On 31 July 2007, the Ministry of Energy and Mines granted legal stability to CMA for the Arcata operating unit, starting 1 January 2009 for a 10-year term. Under the terms of the arrangement, the Peruvian Government is obliged to guarantee stability of the tax regime that was in effect as at 5 February 2007, for a period of 10 years. On 8 June 2009, CMA effectively resigned part of the stability agreement as the actual income tax rate (30%) was lower than the rate included in the stability agreement (32%). (b) Minera Santa Cruz S.A. (“MSC”) MSC has been granted with tax stability certificates in relation to provincial and national taxes in Argentina in respect of the San José mine. The stability certificates run for a 30-year period commencing on 21 November 2005. Under these certificates and the Mining Investment Law No 24,196, MSC’s tax stability in respect of the San José operating unit covers, among others, the following areas: –(cid:3)(cid:5)The mining royalty cannot exceed 3% of the pit-head value of the production. 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 where the final product is doré; and (ii) 2.55% of the pit-head value of the production where the final product is mineral concentrate or precipitates. –(cid:3)(cid:5)The National Export tax is 5% where the final product is doré and 10% when the final product is gold or silver concentrate 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). –(cid:3)(cid:5)Income tax rate no higher than 35%. 36 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 concentrate or equivalent, based on the quoted market prices. As at 31 December 2010, the amount payable as mining royalties for the mining units of Ares, Arcata and Pallancata amounted to approximately US$2,946,000 (Ares, Arcata, Selene, and Pallancata amounted to US$1,988,000 as at 31 December 2009), and is recorded under the caption “Trade and other payables” in the Statement of Financial Position. The amount recorded in the Income Statement was US$11,223,000 (2009: US$7,287,000). Argentina In accordance with Argentinian 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 where the final product is doré and 2.55% where the final product is mineral concentrate or precipitates. As at 31 December 2010, the amount payable as mining royalties amounted to US$591,000 (2009: US$204,000). The amount recorded in the income statement was US$3,868,000 (2009: US$2,171,000). 37 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. The Group has made significant developments in the management of the Group's risk environment which seeks to identify and, where appropriate, implement the controls to mitigate the impact of the Group’s significant risks. This effort is supported by a Risk Committee with the participation of the CEO, the Vice Presidents, the Country General Managers 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 125 37 FINANCIAL RISK MANAGEMENT (CONTINUED) (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, Argentinian 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 of financial assets and liabilities, at the reporting date denominated in their respective currencies, 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 2010 Pounds sterling Argentinian pesos Mexican pesos Peruvian nuevos soles Canadian dollars 2009 Pounds sterling Argentinian pesos Mexican pesos Peruvian nuevos soles Canadian dollars Increase/ decrease in US$/other currencies’ rate Effect on profit before tax US$000 +/–10% +/–10% +/–10% +/–10% –/+107 –/+227 +/–679 +/–852 Effect on equity US$000 +/–840 – – – +/–10% +/–415 +/–14,519 +/–10% +/–194 +/–309 +/–10% +/–22 +/–10% +/–400 +/–10% –/+3,431 – – – +/–10% – +/–1,596 (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. Whilst committed to being un-hedged, management continuously monitors silver and gold prices but shall take the necessary action, where appropriate and within Board approved parameters, to mitigate the impact of this risk. During 2008, as a result of the financial crisis, the Company found itself constrained in its ability to use its cash balance given uncertainty surrounding commodity prices. Authorisation was granted to hedge a portion of the Group's 2009 and 2010 production schedule 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 also has embedded derivatives arising from the sale of concentrate and doré which were provisionally priced at the time the sale is recorded (refer to notes 5 and 22(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 2010 2009 Increase/ decrease price of ounces of: Gold +/–10% Silver +/–10% Gold +/–10% Silver +/–10% Effect on profit before tax US$000 +/–713 +/–5,334 +/–550 –1,534 +766 i i F n a n c a l s t a t e m e n t s 126 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 37 FINANCIAL RISK MANAGEMENT (CONTINUED) (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 statement of financial position date. Counterparty credit exposure based on commercial activities, including embedded derivatives, cash balances in banks and hedging activities as at 31 December 2010 and 31 December 2009: Summary commercial partners – Trade receivables Teck Metals Ltd (formerly Teck Cominco Metals Ltd.) Aurubis AG (formerly Nordeutsche Affinerie AG) Consorcio Minero S.A. LS Nikko. MRI Trading AG Johnson Matthey Inc. Doe Run Peru S.R.L. Argor Heraus S.A. Traxys Peru S.A.C. Others Summary commercial partners – Embedded derivatives Teck Metals Ltd (formerly Teck Cominco Metals Ltd.) Consorcio Minero S.A. LS Nikko. Aurubis AG (formerly Nordeutsche Affinerie AG) MRI Trading AG Argor Heraus S.A. Traxys Peru S.A.C. As at 31 December 2010 US$000 Credit rating or % collected as at 24 March 2011 As at 31 December 2009 US$000 Credit rating or % collected as at 23 March 2010 30,274 24,802 11,577 10,691 6,380 4,313 1,108 215 34 10 89,404 BBB 99% 82% A1 92% 100% 0% 100% 0% 0% 17,481 29,040 21,628 4,922 2,078 605 1,108 116 – 3 76,981 BB+ 91% 92% A1 98% 100% 0% 100% – NA As at 31 December 2010 US$000 Credit rating or % collected as at 24 March 2011 As at 31 December 2009 US$000 Credit rating or % collected as at 23 March 2010 6,464 4,347 2,916 2,498 245 24 18 16,512 BBB 82% A1 99% 92% 100% 0% 497 58 (187) 248 (96) – – 520 BB+ 92% A1 91% 98% – – Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 127 37 FINANCIAL RISK MANAGEMENT (CONTINUED) Financial counterparties JP Morgan Citibank Banco Nacional de México Banco de Crédito del Peru Banco de la Nación (Peru) Banco Bilbao Vizcaya Argentaria Banorte TD Canada Trust Banco Santander HSBC Bank of Montreal Scotiabank Others (including cash in hand) Total As at 31 December 2010 US$000 As at 31 December 2009 US$000 Credit rating1 Credit rating1 380,887 92,406 – A+ A – 30,474 BBB – – 5,426 1,519 956 900 618 598 74 11,624 525,482 – AA BBB– – AA AA A+ AA– NA 13,024 A –1 +(S&P) 40,348 A –1(S&P) 5,350 11,691 1,072 F1(FR) F2(FR) A(S&P) 199 A –1 +(S&P) – – – – 1,001 A –1(S&P) 818 – B(S&P) – 67 A –3(S&P) 4,274 77,844 NA 1 As at 31 December 2010, the Group included the long term credit rating. As at 31 December 2009, the Group included the short term credit rating. As a result of the recent financial crisis, the Group evaluated and introduced additional efforts to try to mitigate credit risk exposure. To manage the credit risk associated with commercial activities, the Group took the following steps: –(cid:3)(cid:5)Active use of prepayment/advance clauses in sales contracts. –(cid:3)(cid:5)Delaying delivery of title and/or requiring advance payments to reduce exposure timeframe (potential delay in sales recognition). –(cid:3)(cid:5)Obtaining parent guarantees to shore up the credit profile of the customer (where possible). –(cid:3)(cid:5)Maintaining as diversified a portfolio of clients as possible. –(cid:3)(cid:5)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 took the following steps: –(cid:3)(cid:5)Increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit and to diversify credit risk. –(cid:3)(cid:5)Investing cash (to the extent possible) with counterparties with whom the Group has debt outstanding. –(cid:3)(cid:5)Investing cash in short-term, highly liquid and low risk instruments (money market accounts). –(cid:3)(cid:5)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 20. There are no exposures related to loans to non-controlling interest. (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. i i F n a n c a l s t a t e m e n t s 128 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 37 FINANCIAL RISK MANAGEMENT (CONTINUED) 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 priced sales), with all other variables held constant: Year 2010 2009 Increase/ decrease in prices +25% –25% +10% –10% Effect on profit before tax US$000 +1,895 –2,066 – – Effect on equity US$000 +38,405 –38,300 +1,917 –1,917 (e) Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As at 31 December 2010 and 2009, the Group held the following financial instruments measured at fair value: Assets measured at fair value Embedded derivatives (refer to note 22(3)) Equity shares (refer to note 19) Warrants Liabilities measured at fair value Swap contracts (refer to note 22(5)) Assets measured at fair value Embedded derivatives (refer to note 22(3)) Equity shares (refer to note 19) Debt securities (refer to note 19) Liabilities measured at fair value Embedded derivatives (refer to note 22(3)) Zero cost collars contracts (refer to note 22(4)) Swap contracts (refer to note 22(5)) 31 December 2010 US$000 Level 1 US$000 Level 2 US$000 16,512 – 153,620 140,039 4,150 1,930 – – – – 4,150 1,930 31 December 2009 US$000 695 19,173 8 175 2,452 13 Level 1 US$000 – 7,430 8 – – – Level 2 US$000 – – – – 2,452 13 During the period ending 31 December 2010 and 2009, there were no transfers between these levels. The reconciliation of the financial instruments categorised as level 3 is as follows: Balance at 31 December 2009 Gain from the period recognised in revenue (refer to note 5) Fair value change through equity Balance at 31 December 2010 Embedded derivatives assets US$000 Embedded derivatives liabilities US$000 695 15,817 – 16,512 (175) 175 – – Level 3 US$000 16,512 13,581 – – Level 3 US$000 695 11,743 – 175 – – Equity shares US$000 11,743 – 1,838 13,581 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 129 37 FINANCIAL RISK MANAGEMENT (CONTINUED) (f) 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. In 2009 the Group increased its short term bank lines by over 30% in addition to accessing further long-term financing through the issue of equity and convertible bonds. In 2010 the Group has maintained these short term bank lines. The table below categorises the undiscounted cash flows of Group’s financial liabilities into relevant maturity groupings based on the remaining period as at the statement of financial position to the contractual maturity date. Interest cash flows have been calculated using the spot rate at year end. At 31 December 2010 Trade and other payables Swap contracts Borrowings Provisions Total At 31 December 2009 Trade and other payables Swap contracts 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$000 102,220 2,393 1,938 75,133 5,895 – 69,978 34,105 – – – – 104,613 1,938 163,634 66,068 374,813 1,095 – 41,095 185,186 106,476 164,729 66,068 522,459 58,133 13 123,412 181,558 81 – – – 39,819 209,178 39,900 209,178 – – – – 58,214 13 372,409 430,636 (g) Interest rate risk The Group has financial assets and liabilities which are exposed to interest rate risk. Changes in interest rates primarily impact 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 currently all existing financial obligations are either at fixed rates or have been fixed with the use of derivatives. As at 31 December 2010 Fixed rate Cash at bank (note 23) Time deposits (note 23) Loans to non-controlling interests (note 20) Amounts due to non-controlling interests (note 25) Secured bank loans (note 25) Convertible bond payable (note 25) Floating rate Liquidity funds (note 23) Within 1 year US$000 694 56,393 9,393 (11,074) (53,030) (5,145) Between 1 and 2 years US$000 Between 2 and 5 years US$000 Over 5 years US$000 – – 1,173 (1,668) – – – – 2,047 28,945 (5,196) (52,164) (70,102) (57,597) (27,928) – (103,827) i i F n a n c a l s t a t e m e n t s Total US$000 694 56,393 41,558 – – – (138,555) (108,972) 380,887 380,887 – – 130 Notes to the consolidated ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 37 FINANCIAL RISK MANAGEMENT (CONTINUED) Fixed rate Cash at bank (note 23) Time deposits (note 23) Loans to non-controlling interests (note 20) Amounts due to non-controlling interests (note 25) Secured bank loans (note 25) Convertible bond payable (note 25) Floating rate Liquidity funds (note 23) Between 1 and 2 years US$000 Between 2 and 5 years US$000 As at 31 December 2009 Over 5 years US$000 Total US$000 – – – – – – – – (31,586) (84,268) – – (103,827) – – – – – – – – 1,430 7,673 39,443 (75,570) (150,627) (105,490) 12,994 Within 1 year US$000 1,430 7,673 39,443 (75,570) (34,773) (1,663) 12,994 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. 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 2010 and 2009 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 2010 2009 Increase/ decrease interest rate Effect on profit before tax US$000 +/–50bps +/–1,904 +/–50bps –/+490 (h) 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 25 and 27). Even though management aims to maintain the Group´s debt free position in order to offer shareholders maximum exposure to commodity prices, other than for the use of short term pre-shipment financing (financing of commercial accounts receivables and finished goods inventory), management reserves the right to raise financial debt in order to fund new future operations and/or mergers’ and acquisitions’ activity. Should such an event occur, financial leverage would be kept within an appropriate level: –(cid:3)Less than 2.5x EBITDA (2010: 0.77x) –(cid:3)Less than 20% of Capital Structure (Debt plus Market Capitalisation) (2010: 0.08x) All leverage incurred beyond the use of short-term pre-shipment credit lines, is reviewed and approved by the Board. Management also retains the right to fund operations (fully owned and joint ventures) with a mix of equity and joint venture partners’ debt. Debt financing provided by joint venture partners is not included within the thresholds described above. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 131 38 SUBSEQUENT EVENTS (a) Repayment of syndicated loan facility led by JP Morgan On 28 January 2011, the Group repaid the total outstanding principal amount of US$114,320,000 plus interest of US$383,448 under the syndicated loan facility led by JP Morgan. In addition, on 31 January 2011, the Group cancelled the two interest rate swap contracts signed with Citibank and BBVA related to this facility. The amount paid to cancel these contracts was US$1,667,500. (b) Payment of Project Finance Loan interest and receipt of interest from Minera Andes Inc (“MAI”) In January 2011, Minera Santa Cruz S.A. paid US$9,120,786 of interest that had arisen under the Project Finance Loan from MAI. In addition, the Group collected the same amount from MAI, representing interest on the Project Finance Loan advanced by the Group to MAI. (c) Sale of remaining interest in Lake Shore Gold On 2 December 2010 the Group entered into a Block Trade Letter Agreement (“the Agreement”) with RBC Capital Markets to dispose of the Group’s remaining 21,540,992 common shares in Lake Shore Gold (approximately 5.4% interest in Lake Shore Gold on a fully diluted basis) at a price of CAD$3.70 per share raising total net proceeds of CAD$79,701,670. Due to the size of the combined sales (the initial disposal of 27.3% of Lake Shore Gold in November 2010 and the subsequent disposal of the remaining 5.4%), the second transaction was subject to shareholder approval which was granted on 8 February 2011. The transaction closed on the same date and a gain of US$4,950,000 will be recognised in 2011 in respect of the disposal. i i F n a n c a l s t a t e m e n t s 132 Parent company statement of ﬁnancial position As at 31 December 2010 Hochschild Mining plc Annual Report & Accounts 2010 ASSETS Non-current assets Property, plant and equipment Investments in subsidiaries Investments in associates 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 Trade and other payables Borrowings Provisions Current liabilities Trade and other payables Other financial liabilities Borrowings Total liabilities Total equity and liabilities As at 31 December Notes 2010 US$000 2009 US$000 4 5 6 8 9 223 316 2,319,649 1,350,395 – 4,651 2,319,872 1,355,362 3,128 – 1,191 4,319 3,878 40 5,581 9,499 2,324,191 1,364,861 10 10 158,637 158,637 416,154 416,154 1,321,898 356,185 177,661 208,327 2,074,350 1,139,303 11 12 13 11 14 12 223 – 188,049 215,082 44 – 188,316 215,082 25,194 1,930 34,401 61,525 7,183 13 3,280 10,476 249,841 225,558 2,324,191 1,364,861 The financial statements on pages 132 to 152 were approved by the Board of Directors on 28 March 2011 and signed on its behalf by: Ignacio Bustamante Chief Executive Officer 28 March 2011 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 133 Parent company statement of cash ﬂows For the year ended 31 December 2010 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 Reversal of impairment of subsidiary Gain on sale of associates Income tax expense Finance income Finance costs (excluding impairment of available-for-sale financial assets) Foreign exchange loss/(gain) Increase (decrease) of cash flows from operations due to changes in assets and liabilities: Other receivables Trade and other payables Provision for 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 Receipts on sale of associates Loans to subsidiaries Net cash generated from/(used in) investing activities Cash flows from financing activities Proceed of borrowing Repayment of borrowings Transaction costs associated with borrowing Dividends paid Proceeds from issue of ordinary shares Transaction costs associated with issue of shares Cash flows generated from 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 Year ended 31 December Notes 2010 US$000 2009 US$000 950,487 (11,577) 4 93 (967,630) (4,947) 8 (55) 12,389 52 814 (439) 44 (9,184) 40 (8,249) – 115 – – (11) (1,049) 8,584 (3,183) (726) 4,841 – (3,006) 1,148 (9,383) 29 (17,393) (11,212) – (5) (1,624) (216,806) 9,598 (9) (4,651) (2,500) 7,965 (223,962) 18,613 115,000 – – (85,680) (3,568) (13,523) (12,294) – – 5,090 (4,338) (52) 5,581 1,191 143,621 (3,453) 153,626 (81,548) 3,183 83,946 5,581 4 5 6 16 10 10 9 i i F n a n c a l s t a t e m e n t s 134 Parent company statement of changes in equity For the year ended 31 December 2010 Hochschild Mining plc Annual Report & Accounts 2010 Balance at 1 January 2009 Net fair value gains on available-for-sale financial assets Recycling of realised fair value gains on available-for-sale financial assets Unrealised gain/(loss) in the valuation of cash flow hedges Other comprehensive income Loss for the year Total comprehensive loss for 2009 Issuance of shares Transfer Issuance of convertible bonds Dividends Equity share capital US$000 Share premium US$000 146,466 416,154 – – – – – – 12,171 – – – – – – – – – – – – – Unrealised gain/(loss) on available- for-sale financial assets and valuation of cash flow hedges US$000 Bond equity component US$000 Merger reserve US$000 Total other reserves US$000 Retained earnings US$000 Total equity US$000 – 654 (654) (13) (13) – (13) – – – – – – – – – – – – – 347,766 347,766 104,201 1,014,587 – – – – – – 654 (654) (13) (13) – – – – 654 (654) (13) (13) – (11,577) (11,577) (13) (11,577) (11,590) 127,997 127,997 – 140,168 (127,997) (127,997) 127,997 – 8,432 – – – 8,432 – 8,432 – (12,294) (12,294) Balance at 31 December 2009 158,637 416,154 (13) 8,432 347,766 356,185 208,327 1,139,303 Unrealised gain/(loss) in the valuation of cash flow hedges Recycling of the change in fair value of cash flow hedges Other comprehensive income Profit for the year1 Total comprehensive loss for 2010 Transfer1 Dividends – – – – – – – – – – – – – – (2,346) 429 (1,917) – (1,917) – – – – – – – – – – – – – – (2,346) 429 (1,917) – – – (2,346) 429 (1,917) – 950,487 950,487 (1,917) 950,487 948,570 967,630 967,630 (967,630) – – – (13,523) (13,523) Balance at 31 December 2010 158,637 416,154 (1,930) 8,432 1,315,396 1,321,898 177,661 2,074,350 1 The profit for the year includes the reversal of the impairment of the investment in subsidiaries of US$967,630,000 (refer to note 5). This amount has subsequently been transferred from retained earnings to the merger reserve. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 135 Notes to the parent company ﬁnancial statements For the year ended 31 December 2010 1 CORPORATE INFORMATION Hochschild Mining plc (hereinafter “the Company”) is a public limited company incorporated on 11 April 2006 under the Companies Act 1985 as a Limited Company and registered in England and Wales with registered number 05777693. The Company’s registered office is located at 46 Albemarle Street, London W1S 4JL, United Kingdom. The Company was incorporated to serve as a holding company to be listed on the London Stock Exchange. The Company acquired its interest in a group of companies to constitute the Hochschild Mining Group (“the Group”) pursuant to a share exchange agreement (“Share Exchange Agreement”) dated 2 November 2006. The ultimate controlling party of the Company is Mr Eduardo Hochschild whose beneficial interest in the Company and its subsidiaries (together “the Group” or “Hochschild Mining Group”) is held through Pelham Investment Corporation, a Cayman Islands company. On 8 November 2006, the Company’s shares were admitted to the Official List of the UKLA (United Kingdom Listing Authority) and to trading on the London Stock Exchange. 2 SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and are also consistent with IFRS issued by the IASB, as applied in accordance with the Companies Act 2006. The financial statements of the Company have been prepared on a historical cost basis, except for derivatives and available-for- sale financial instruments which have been valued at fair value. The financial statements are presented in US dollars (US$) 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 2010 and 31 December 2009. As permitted by section 408 of the Companies Act 2006, 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 impairment 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 for the adoption of new and amended standards: The Company 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 Company. –(cid:3)IFRIC 17 “Distributions of Non-cash Assets to Owners”, applicable for annual periods beginning on or after 1 July 2009. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. The interpretation had no effect on the financial position or performance of the Company. –(cid:3)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. The amendment had no effect on the financial position or performance of the Company. –(cid:3)IFRS 2 “Group Cash-settled Share-based Payment Arrangements”, applicable for annual periods beginning on or after 1 January 2010. The standard has been amended to clarify the accounting for group cash-settled share-based payment transactions, where a subsidiary receives goods or services from employees or suppliers but the parent or another entity in the group pays for those goods or services. IFRIC 8 and IFRIC 11 have been withdrawn. This amendment had no effect on the financial position or performance of the Company. i i F n a n c a l s t a t e m e n t s 136 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) –(cid:3)Improvements to International Financial Reporting Standards (issued 2009) Includes 15 amendments to 12 standards. Applicable for annual periods beginning on or after 1 July 2009: IFRS 2 Share-based Payment, IAS 38 Intangible Assets, IFRIC 9 Reassessment of Embedded Derivatives, IFRIC 16 Hedges of a net Investment in a Foreign Operation. –(cid:3)Effective immediately on issue date in April 2009: IAS 18 Revenue. Certain new standards, amendments and interpretations to existing standards have been published and are mandatory for the Company’s accounting periods beginning on or after 1 January 2011 or later periods but which the Company 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. (f) Property, plant and equipment Property, plant and equipment is stated at 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. 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 its own physical life. Estimates of remaining useful lives are made on a regular basis for all buildings, machinery and equipment, with annual reassessments for major items. Depreciation is charged to administrative expenses over the estimated useful life of the individual asset on a straight-line basis. Changes in estimates 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. Borrowing costs directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to be ready for its intended use are capitalised as part of the cost of the asset. All other borrowing costs are expensed where incurred. The Company capitalises borrowing costs for those assets where construction commenced on or after 1 January 2009 and continues to expense borrowing costs related to construction projects that commenced prior to 1 January 2009. For borrowings associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowing is used. The Company capitalises the borrowings cost related to qualifying assets with a value of US$1,000,000 or more, considering that the substantial period of time to be ready is six or more months. 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 expenditure are recognised in the income statement as incurred. (g) 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 Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the company makes an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment is considered impaired and is written down to its recoverable amount. If, in subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the profit and loss account, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 137 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Investment in associates An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Investments in associates are accounted at acquisition cost. (i) Dividends receivable Dividends are recognised when the Company’s right to receive payments is established. Dividends received are recorded in the income statement. (j) 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. (k) 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. (l) 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. (m) 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. Uncertainties in estimating the award include potential changes in the TSR, the number of participants in the plan, and levels of interest rates. Where the Company is remunerating employees of its subsidiaries through a share based payment, the costs of the transactions are recorded as capital contributions in the subsidiaries. (n) 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. i i F n a n c a l s t a t e m e n t s 138 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (o) 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: –(cid:3)(cid:5)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. –(cid:3)(cid:5)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. (p) 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 139 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 For available-for-sale financial assets, the Company assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost, where ‘significant’ is estimated to be around 30% of the original cost of the investment and ‘prolonged’ is no more than 12 months. In addition, the Company analyses each case, taking into account the portfolio of projects of the Company, the key technical personnel and the viability of the Company to finance its projects. 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: –(cid:3)(cid:5)the rights to receive cash flows from the asset have expired; or –(cid:3)(cid:5)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. i i F n a n c a l s t a t e m e n t s 140 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. (q) 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. (r) Convertible bond The relevant standards within the accounting framework governing the treatment of this transaction are: (a) IAS 32 – Financial Instruments: Presentation and (b) IAS 39 – Financial Instruments: Recognition and Measurement. The convertible bond is a compound financial instrument that includes a financial liability and an equity instrument. At initial recognition the Company determines the fair value of the liability component, and the equity component as a residual amount that is never remeasured after initial recognition. Derecognition of the convertible bond issued by the Company will be done when the debt is cancelled. 3 PROFIT AND LOSS ACCOUNT The Company made a gain attributable to equity shareholders of US$950,487,000 (2009: loss of US$11,577,000). 4 PROPERTY, PLANT AND EQUIPMENT Year ended 31 December 2009 Cost At 1 January 2009 Additions At 31 December 2009 Accumulated depreciation At 1 January 2009 Depreciation At 31 December 2009 Net book value at 31 December 2009 Year ended 31 December 2010 Cost At 1 January 2010 and 31 December 2010 Accumulated depreciation At 1 January 2010 Depreciation At 31 December 2010 Net book value at 31 December 2010 Office Building US$000 Equipment US$000 Total US$000 277 – 277 18 29 47 230 262 5 267 95 86 181 86 277 267 47 27 74 203 181 66 247 20 539 5 544 113 115 228 316 544 228 93 321 223 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 141 5 INVESTMENTS IN SUBSIDIARIES Year ended 31 December 2009 Cost At 1 January 2009 Additions At 31 December 2009 Accumulated Impairment At 1 January 2009 At 31 December 2009 Net book value at 31 December 2009 Year ended 31 December 2010 Cost At 1 January 2010 Additions At 31 December 2010 Accumulated impairment At 1 January 2010 Reversal of impairment At 31 December 2010 Net book value at 31 December 2010 Total US$000 2,101,219 216,806 2,318,025 967,630 967,630 1,350,395 2,318,025 1,624 2,319,649 967,630 (967,630) – 2,319,649 The breakdown of the investments in subsidiaries is as follows: Name Hochschild Mining Holdings Limited Total As at 31 December 2010 Country of incorporation England & Wales Equity interest % 100% Carrying value US$000 As at 31 December 2009 Country of incorporation Equity interest % Carrying value US$000 2,319,649 England & 100% 1,350,395 Wales 2,319,649 1,350,395 The list of subsidiaries of the Group is presented in note 1 (Corporate information) of the notes to the Consolidated Financial Statements. During 2009, the Company subscribed for 1,800 shares of £1.00 each in Hochschild Mining Holdings Limited through capital contributions paid in cash totalling US$216,805,529. During 2010, the Company subscribed for 100 shares of £1.00 each in Hochschild Mining Holdings Limited through capital contributions paid in cash totalling US$1,623,454. The Company reversed in 2010 the impairment recognised in 2008 of US$967,629,582, following the significant improvements in the commodity markets during 2010, and the resulting impact on the value of the Group´s operations and investments. i i F n a n c a l s t a t e m e n t s 142 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 6 INVESTMENTS IN ASSOCIATES Zincore Metals Inc. Total Year ended 31 December 2010 US$000 2009 US$000 – – 4,651 4,651 On 10 September 2009 the Company purchased 38,100,000 shares of Zincore Metals Inc. (“Zincore”) at CAD 0.165 per share with a discount of 20%. The total cash consideration paid was CAD 5,029,200 equivalent to US$4,651,507. At 31 December 2009, the interest of the Company was 36.9%. On 5 March 2010, Inversiones Pacasmayo S.A., a related party of the Group, purchased Hochschild Mining plc’s 36.9% stake in Zincore at a price of C$0.27 per share (a total of C$10,287,000 (US$9,978,390)) representing a 11.6% premium over the 20 day average closing price, realising a gain on disposal of US$4,947,000. As a result of the transaction, Hochschild Mining plc has no further interest in Zincore. The disposal was approved on behalf of the Hochschild Board by a committee comprised solely by independent Non-Executive Directors (“the Independent Committee”). The Independent Committee was advised by Canaccord Adams Limited that the terms of the disposal are fair and reasonable as far as shareholders are concerned. 7 AVAILABLE-FOR-SALE FINANCIAL ASSETS Beginning balance Fair value change recorded in equity Disposals1 Ending balance Year ended 31 December 2010 US$000 2009 US$000 – – – – 57 654 (711) – 1 At 31 December 2009, the Company had sold its investment in Mirasol Resources Ltd. to Hochschild Mining Holdings Ltd. for a total cash consideration of US$711,000. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 143 8 OTHER RECEIVABLES Amounts receivable from subsidiaries (note 15) Prepayments Accrued income Receivable from Kaupthing, Singer and Friedlander Other debtors Provision for impairment1 Total Year ended 31 December 2010 US$000 2009 US$000 2,773 3,214 255 – 461 100 3,589 (461) 3,128 362 35 667 100 4,378 (500) 3,878 The fair values of other receivables approximate their book values. 1 Corresponds to the balance of the impairment of cash deposits with Kaupthing, Singer and Friedlander of US$461,000 accrued in 2008 and partially recovered in 2010 (2009: US$500,000). Movements in the provision for impairment of receivables: At 1 January 2009 Charge for the year Amounts recovered At 31 December 2009 Amounts recovered At 31 December 2010 As at 31 December, the ageing analysis of other receivables is as follows: Individually impaired US$000 Collectively impaired US$000 Total US$000 758 – (258) 500 (39) (461) – – – – – – 758 – (258) 500 (39) (461) Past due but not impaired Year 2010 2009 9 CASH AND CASH EQUIVALENTS Neither past due nor impaired US$000 3,128 3,711 Total US$000 3,128 3,878 Less than 30 days US$000 30 to 60 days US$000 61 to 90 days US$000 91 to 120 days US$000 Over 120 days US$000 – – – – – – – 167 – – Bank current account Liquidity funds1 Cash and cash equivalents considered for the cash flow statement Year ended 31 December 2010 US$000 2009 US$000 43 1,148 1,191 330 5,251 5,581 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 0.26% and a weighted average maturity between 33 to 56 days as at 31 December 2010 (2009: 0.71% and between 30 to 55 days) (refer to note 17(d)). The liquidity funds generated interest of US$4,000 (2009: US$301,000). i i F n a n c a l s t a t e m e n t s 144 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 10 EQUITY (a) Share capital and share premium Issued share capital The issued share capital of the Company as at 31 December 2010 is as follows: Class of shares Ordinary Shares The issued share capital of the Company as at 31 December 2009 is as follows: Class of shares Ordinary Shares Number Issued Amount 338,085,226 £84,521,307 Number Issued Amount 338,085,226 £84,521,307 At 31 December 2010 and 2009, all issued shares with a par value of 25p (2010: weighted average of US$0.469, 2009: weighted average of US$0.469 per share) each were fully paid. Rights attached to ordinary shares At general meetings of the Company, on a show of hands and on a poll, every member who is present in person or subject to the below by proxy, has one vote for every share of which they are the holder/proxy. However in the case of a vote on a show of hands where a proxy has been appointed by more than one member, the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution. The changes in share capital are as follows: Shares issued as at 1 January 2009 Shares issued and paid pursuant to the placing of shares on 12 October 2009 Shares issued as at 31 December 2009 Shares issued as at 31 December 2010 Number of shares 307,350,226 30,735,000 338,085,226 338,085,226 Equity share capital US$000 Share premium US$000 146,466 12,171 158,637 158,637 416,154 – 416,154 416,154 On 12 October 2009, a share placement was completed and 30,735,000 shares with an aggregate nominal value of US$12,171,000 were issued for a cash consideration of US$140,168,000 net of transaction costs of US$3,453,000. The share placement was effected through a structure which resulted in the excess of the net proceeds received over the nominal value of the share capital issued being transferred to retained earnings. (b) Other reserves Merger reserve The merger reserve represents the difference between the fair 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. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 145 11 TRADE AND OTHER PAYABLES Trade payables Payables to subsidiaries (note 15) Professional fees Board members’ remuneration Remuneration payable Audit fees Accrued expenses Taxes and contributions Total As at 31 December 2010 Non-current US$000 Current US$000 Non-current US$000 – – – – 223 – – – 784 23,019 95 120 465 497 86 128 223 25,194 – – – – – – – – – 2009 Current US$000 509 5,337 106 320 132 544 103 132 7,183 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. 12 BORROWINGS Secured bank loans1 Convertible bond payable2 Total As at 31 December 2010 Non-current US$000 Current US$000 Non-current US$000 84,222 103,827 188,049 29,256 111,255 5,145 103,827 34,401 215,082 2009 Current US$000 1,617 1,663 3,280 1 Secured bank loans As at 31 December 2010, the balance corresponds to: –(cid:3)(cid:5)A 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 2010 is comprised of the secured term loan facility of US$114,320,000 plus accrued interest of US$2,393,000 and net of transaction costs of US$3,235,000. During 2010 and 2009, the Company has a swap contract with BBVA and Citibank to fix the interest rate at 1.75% The Company has granted the following guarantees on its US$114,320,000 bank syndicated loan: –(cid:3)(cid:5)Pledge of all shares in Compañía Minera Ares S.A.C. (“CMA”) (wholly-owned subsidiary). –(cid:3)(cid:5)Subsidiary guarantees by certain wholly-owned subsidiaries whereby these subsidiaries guarantee the repayment of the loan with their cash flows. i i F n a n c a l s t a t e m e n t s 146 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 12 BORROWINGS (CONTINUED) The main administrative and financial covenants that the Company and Compañía Minera Ares S.A.C. (“CMA”) must comply with during the term of the syndicated loan are as follows: –(cid:3)(cid:5)Quarterly unaudited and annual audited financial statements for Hochschild Mining plc and CMA. –(cid:3)(cid:5)Investments in restricted and unrestricted subsidiaries based on an agreed upon limit (unlimited within restricted subsidiaries). –(cid:3)(cid:5)Maintain the following ratios (at a consolidated and CMA level) beginning on the date of execution of the agreement and during the term of the loan: –(cid:3)Interest expense coverage ratio greater than 3:1. –(cid:3)Debt to EBITDA ratio lower than 2.5:1 from 2009 onwards. Compliance with the restrictive covenants described in the preceding paragraph is overseen by CMA’ management and the Administrative Agent. The Group and CMA have complied with the commitments and financial covenants mentioned in the syndicated loan agreement. As at 31 December 2009, the balance corresponds to: –(cid:3)(cid:5)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 CMA. The balance as at 31 December 2009 is comprised of the secured term loan facility of US$114,320,000 plus accrued interest of US$1,787,000 and net of transaction costs of US$3,235,000. 2 Convertible bond payable This relates to the placement of US$115,000,000 of senior unsecured convertible bonds, due 2014, which are convertible into ordinary shares of Hochschild Mining plc. The bonds have a coupon of 5.75% per annum payable semi-annually on 28 January and 28 July of each year. The issuer has the option to call the bonds on or after 20 October 2012 and until maturity, in the event the trading price of the ordinary shares exceeds 130% of the conversion price over a certain period. In addition, the Group has the right to redeem the bonds if at any time the aggregate principal amount of the bonds outstanding is equal to or less than 15% of the aggregate principal amount of the bonds initially issued. The following information has to be considered for the conversion into ordinary shares: –(cid:3)Conversion premium: 35% above the Reference Share Price –(cid:3)Reference Share Price: GBP 2.95 –(cid:3)Initial Conversion Price: GBP 3.9825 –(cid:3)Fixed Exchange Rate: US$1.59/GBP 1.00 The balance as at 31 December 2010 is comprised of the principal of US$115,000,000 (2009: US$115,000,000) plus accrued interest of $5,145,000 (2009: US$1,663,000) and net of transaction costs of US$2,741,000 (2009: US$2,741,000) and the bond equity component of US$8,432,000 (2009: US$8,432,000). The maturity of non-current borrowings is as follows: Between 1 and 2 years Between 2 and 5 years As at 31 December 2010 US$000 2009 US$000 56,318 27,922 131,731 187,160 188,049 215,082 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 147 12 BORROWINGS (CONTINUED) 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 Convertible bond payable Total 13 PROVISIONS Beginning balance Increase of provision At 31 December 2010 Less current portion Non-current portion Carrying amount As at 31 December Fair values As at 31 December 2010 US$000 2009 US$000 2010 US$000 2009 US$000 84,222 111,255 83,351 103,827 103,827 121,709 188,049 215,082 205,060 110,967 126,331 237,298 As at 31 December 2010 US$000 2009 US$000 – 44 44 – 44 – – – – – 1 In May 2010, a grant of awards under the Company’s cash based Long-Term Incentive Plan was made. The awards will vest on satisfaction of a TSR-based performance condition relative to a comparator group comprising international silver and gold mining companies over a three-year performance period. The performance period runs from 1 January 2010 to 31 December 2012 and should awards vest a cash payment will be made to participants in May 2013. Only employees who remain in the Company’s employment until this date will be entitled to a cash payment on vesting subject to exceptions approved by the Remuneration Committee of the Board. The provision represents the discounted values of the estimated cost of the long-term employee benefit. In 2010 there is a provision of US$44,000 included in administrative expenses. 14 OTHER FINANCIAL LIABILITIES Swap contracts1 Total liabilities As at 31 December 2010 US$000 1,930 1,930 2009 US$000 13 13 1 At the end of 2009 the Company signed a swap contract with Citibank and BBVA to fix the interest rate of the JP Morgan led syndicate loan of US$114,320,000 (refer to note 12). The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As at 31 December 2010, the Company held the following financial instruments measured at fair value: Liabilities measured at fair value Swap contracts (refer to note 22(5) of the Consolidated financial statements) 1,930 – 1,930 – During the period ending 31 December 2010, there were no transfers between these levels. 31 December 2010 US$000 Level 1 US$000 Level 2 US$000 Level 3 US$000 i i F n a n c a l s t a t e m e n t s 148 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 15 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 2010 and 31 December 2009. Subsidiaries Compañía Minera Ares S.A.C. 1 Minera Hochschild Chile S.C.M. 0848818 BC (formerly Southwestern Resources) 2 Hochschild Mining (Argentina) S.A. (formerly Hochschild Mining (Argentina) Corporation) Hochschild Mining (Mexico), S.A. de C.V. (formerly Hochschild Mining (Mexico) Corporation) Hochschild Mining (Chile) S.A. Servicios Corporativos Hochschild Mining Mexico S.A. de C.V. Moris Holding S.A. de C.V. Hochschild Mining Ares (UK) Ltd Hochschild Mining Holdings Ltd. 3 Minas Santa María de Moris S.A. de C.V. 4 Hochschild Mining (Peru) S.A. (formerly Hochschild Mining (Peru) Corporation) As at 31 December 2010 As at 31 December 2009 Accounts receivable US$000 Accounts payable US$000 Accounts receivable US$000 Accounts payable US$000 1 1 – 1 1 1 1 1 1 1,484 – 2,894 2 1 – – – – – – – – – – – – – 209 2,554 2 18,638 – – 710 2,504 – 2,629 – 2,678 – 1 – – – – 25 – 4 2,773 23,019 3,214 5,337 1 Mainly relates to the services performed by Compañía Minera Ares S.A.C. to Hochschild Mining plc during 2010 of US$1,562,455 (2009: US$1,580,000). 2 Mainly relates to the purchase of 38,100,000 shares of Zincore Metals Inc. made on 10 September 2009 (refer to note 6). The amount outstanding as at 31 December 2010 and 2009 was CAD 2,809,799, equivalent to US$2,825,056 and US$2,678,000 respectively. 3 Relates to loans receivable by and payable to Hochschild Mining Holdings Ltd. The loan payable is repayable on demand and is free of interest. 4 Corresponds to a loan of US$2,500,000 granted to Minas Santa María de Moris S.A. de C.V. on 4 December 2009 with an annual interest rate of 2%. 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. During 2010 the Company made the following transactions with related parties: –(cid:3)Sale of Zincore Metals Inc. shares to Inversiones Pacasmayo S.A. (refer to note 6) –(cid:3)The Company made capital contributions to Hochschild Mining Holdings Ltd. totalling to US$1,623,454 (refer to note 5). (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$1,322,000 (2009: US$1,457,000), out of which US$79,975 (2009: US$79,994) relates to cash supplements in lieu of pension contributions. Compensation of key management personnel (including directors) Short term employee benefits Total compensation As at 31 December 2010 US$000 2009 US$000 1,322 1,322 1,457 1,457 Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 149 15 RELATED-PARTY BALANCES AND TRANSACTIONS (CONTINUED) (c) Participation in placing by Pelham Investment Corporation (“Pelham”) Pelham, a company controlled by Eduardo Hochschild, participated in a placing of the Company’s Ordinary Shares (“Shares”) in October 2009 by subscribing for 1,064,780 Shares at a price of 295p per Share. 16 DIVIDENDS PAID AND PROPOSED Declared and paid during the year: Equity dividends on ordinary shares: Final dividend for 2009: US$0.02 (2008: US$0.02) First interim for 2010: US$0.02 (2009: US$0.02) Dividends paid Proposed for approval by shareholders at the AGM: Final dividend for 2010: US$0.03 (2009: US$0.02) 2010 US$000 2009 US$000 6,762 6,761 6,147 6,147 13,523 12,294 10,143 6,762 Dividends per share The dividends declared in August 2010 were US$6,761,704 (US$0.02 per share). A dividend in respect of the year ended 31 December 2010 of US$0.03 per share, amounting to a total dividend of US$10,142,557 is to be proposed at the Annual General Meeting on 2 June 2011. These financial statements do not reflect this dividend payable. 17 FINANCIAL RISK MANAGEMENT The Company is exposed to a variety of risks and uncertainties which may have an impact on the achievement of financial and economic objectives. These risks include strategic, operational and financial risk and are further categorised into risk areas to facilitate risk assessment. (a) Foreign currency risk Due to the operations of the Company, it has cash and cash equivalents and trade payables denominated in Pounds sterling and Canadian Dollars. According the financial results of the Company may be affected by exchange rate fluctuations. The Company does not use derivative instruments to manage its foreign currency risks. The following table demonstrates the sensitivity of financial assets and liabilities, at the reporting date denominated in their respective currencies, to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Company’s profit before tax and the Company’s equity. Year 2010 Canadian dollars Pounds sterling 2009 Canadian dollars Pounds sterling Increase/ decrease in US$/other currencies rate Effect on profit before tax US$000 Effect on equity US$000 +/–10% +/–10% –/+289 –/+335 +/–10% +/–10% –/+ 268 +/–174 – – – – i i F n a n c a l s t a t e m e n t s 150 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 17 FINANCIAL RISK MANAGEMENT (CONTINUED) (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. In 2008, as a result of the recent financial crisis, the Company 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 the following options: –(cid:3)(cid:5)Increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit and to diversify credit risk. –(cid:3)(cid:5)Investing cash (to the extent possible) with counterparties with whom the Company has debt outstanding. –(cid:3)(cid:5)Investing cash in short-term, highly liquid and low risk instruments (money market accounts). –(cid:3)(cid:5)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 8 and 9. (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 Company is funded by Hochschild Mining Holdings Ltd. through loans in order to meet its obligations. Liquidity is supported by the balance of cash in the Company and Hochschild Mining Holdings at 31 December 2010 of US$1,190,314 and US$391,552,096 respectively. The Company also serves as principal funding conduit for the group's capital raising activities such as equity and debt issuances. The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date: At 31 December 2010 Trade and other payables Swap contracts Borrowings Provisions At 31 December 2009 Trade and other payables Swap contracts Borrowings 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 25,066 1,938 35,961 – 7,051 13 7,118 223 – – – 63,041 146,856 – – – 45 – – 35,957 208,214 – – – – – – – 25,289 1,938 245,858 45 7,051 13 251,289 (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. It is important to note that currently all existing financial obligations are either at fixed rates or have been fixed with the use of derivatives. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 151 17 FINANCIAL RISK MANAGEMENT (CONTINUED) As at 31 December 2010 Fixed rate Bank current account (refer to note 9) Amounts receivable from subsidiaries (refer to note 15) Secured bank loans (refer to note 12) Convertible bond payable (refer to note 12) Floating rate Liquidity funds (refer to note 9) Fixed rate Bank current account (refer to note 9) Amounts receivable from subsidiaries (refer to note 15) Secured bank loans (refer to note 12) Convertible bond payable (refer to note 12) Floating rate Liquidity funds (refer to note 9) Within 1 year US$000 43 2,554 Within 1 year US$000 330 2,504 (1,617) (1,663) Between 1 and 2 years US$000 Between 2 and 5 years US$000 Over 5 years US$000 – – – – (29,256) (56,318) (27,904) (5,145) – (103,827) 1,148 – – As at 31 December 2009 Between 1 and 2 years US$000 Between 2 and 5 years US$000 Over 5 years US$000 – – – – (27,922) (83,333) – (103,827) 5,251 – – Total US$000 43 2,554 (113,478) (108,972) 1,148 Total US$000 330 2,504 (112,872) (105,490) 5,251 – – – – – – – – – 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 2010 and 2009 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 2010 2009 Increase/ decrease in interest rate Effect on profit before tax US$000 +/–50bps +/–50bps +/–10 –/+530 (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 before submission to the Board for ultimate approval, where applicable. i i F n a n c a l s t a t e m e n t s 152 Notes to the parent company ﬁnancial statements Continued Hochschild Mining plc Annual Report & Accounts 2010 18 SUBSEQUENT EVENTS (a) Repayment of syndicated loan facility led by JP Morgan On 28 January 2011, the Company repaid the total outstanding principal amount of US$114,320,000 plus interest of US$383,448 of the syndicated loan facility provided by JP Morgan. In addition, on 31 January 2011, the Company cancelled the two interest rate swap contracts signed with Citibank and BBVA related to this syndicated loan facility. The amount paid for the cancellation of both contracts was US$1,667,500. (b) Collection of Minas Santa María de Moris S.A. de C.V. loan receivable On 8 February 2011, the Company collected the capital of US$2,500,000 plus interest of US$49,465 related to the loan granted by the Company to Minas Santa María de Moris S.A. de C.V. in 2009. Unlocking value through exploration Further information Hochschild Mining plc Annual Report & Accounts 2010 153 Further information 154 Proﬁt by operation 155 Reserves and resources 161 Production 163 Glossary 164 Shareholder information F u r t h e r i n f o r m a t i o n 154 Proﬁt by operation1 (Segment report reconciliation) as at December 2010 Hochschild Mining plc Annual Report & Accounts 2010 Company (US$000) Revenue Ares Arcata Pallancata San José Moris Consolidation adjustment Total 56,824 181,778 261,877 220,825 30,899 119 752,322 Cost of sales (pre-consolidation) (41,652) (74,526) (99,812) (107,282) (30,133) (1,123) (354,528) Consolidation adjustment Cost of sales (post-consolidation) Production cost w/o depreciation Depreciation in production cost Other items Change in inventories Gross profit Administrative expenses Exploration expenses Selling expenses Other income/expenses (53) (286) 289 (1,123) (989) (99,759) (106,996) (30,422) 55 (41,707) (32,018) (2,649) (6,658) (382) 129 (74,655) (46,017) (18,991) (9,146) (501) (56,345) (34,409) (12,454) 3,449 (71,711) (34,664) (2,227) 1,606 15,172 107,252 162,065 113,543 – – – – – – – – (119) (2,575) (3,537) (20,739) – – – – (19,065) (10,865) – (492) 766 – – – – – – – – – (353,539) (225,156) (101,578) (30,485) 3,680 (1,004) 397,794 (66,221) (66,221) (41,537) (41,537) 50 (26,920) 71,846 71,846 Operating profit before impairment 15,053 104,677 158,528 92,804 766 (36,866) 334,962 Impairment of assets Investments under equity method Finance income Finance costs FX gain/(loss) Profit/(loss) from continuing operations before income tax² Income tax – – – – – – – – – – – – – – – – – – – – – – – – – (24,018) (24,018) (6,080) (6,080) 13,344 13,344 (29,542) (29,542) 29 29 15,053 104,677 158,528 92,804 – – – – 766 – (83,133) 288,695 (72,030) (72,030) Profit/(loss) for the year from continuing operations 15,053 104,677 158,528 92,804 766 (155,163) 216,665 1 On a post exceptional basis. 2 Hochschild profit before income tax reflected in 2010 annual report. Unlocking value through exploration Reserves and resources Hochschild Mining plc Annual Report & Accounts 2010 155 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 156 to 160 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 2010, 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$900 per ounce and Ag Price: US$15 per ounce. F u r t h e r i n f o r m a t i o n 156 Reserves and resources Continued Hochschild Mining plc Annual Report & Accounts 2010 ATTRIBUTABLE METAL RESERVES AS AT 31 DECEMBER 2010 Reserve category MAIN OPERATIONS¹ Arcata Proved Probable Total Pallancata Proved Probable Total San José Proved Probable Total Main operations total Proved Probable Total OTHER OPERATIONS Ares Proved Probable Total Moris Proved Probable Total Other operations total Proved Probable Total Group total Proved Probable TOTAL Proved and probable (t) Ag (g/t) Au (g/t) Ag (moz) Au (koz) Ag Eq (moz) 998,441 1,105,447 2,103,888 2,012,015 315,662 2,327,677 363,389 385,769 749,158 3,373,845 1,806,878 5,180,723 111,771 39,133 150,904 94,401 330,007 424,408 206,172 369,140 575,312 3,580,017 2,176,018 5,756,035 375 356 365 308 313 308 511 394 451 349 357 352 99 109 102 5 5 5 56 16 30 333 299 320 1.11 1.09 1.10 1.48 1.35 1.46 7.26 5.45 6.33 1.99 2.06 2.02 4.72 3.02 4.28 1.48 1.54 1.52 3.23 1.69 2.25 2.06 2.00 2.04 12.0 12.7 24.7 19.9 3.2 23.1 6.0 4.9 10.9 37.9 20.7 58.6 0.4 0.1 0.5 0.0 0.1 0.1 0.4 0.2 0.6 35.5 38.6 74.1 95.8 13.7 109.5 84.8 67.6 152.5 216.1 120.0 336.10 17.0 3.8 20.8 4.5 16.3 20.8 21.4 20.1 41.5 38.3 20.9 59.2 237.5 140.0 377.6 14.2 15.0 29.1 25.7 4.0 29.7 11.1 8.9 20.0 50.9 27.9 78.8 1.4 0.4 1.7 0.3 1.0 1.3 1.7 1.4 3.1 52.5 29.3 81.8 Note: Where reserves are attributable to a joint venture partner, reserve figures reflect the Company’s ownership only. Includes discounts for ore loss and dilution. 1 Main operations were audited by P&E Consulting. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 157 ATTRIBUTABLE METAL RESOURCES AS AT 31 DECEMBER 2010 Resource category MAIN OPERATIONS¹ Ag (g/t) Au (g/t) Zn (%) Pb (%) Cu (%) Ag Eq (g/t) Ag (moz) Au (koz) Ag Eq (Moz) Zn (kt) Pb (kt) Cu (kt) Arcata Measured Indicated Total Inferred Pallancata Measured Indicated Total Inferred San José Measured Indicated Total Inferred Main operations total Measured Indicated Total Inferred OTHER OPERATIONS Ares Measured Indicated Total Inferred Moris Measured Indicated Total Inferred Other operations total Measured Indicated Total Inferred OTHER PROJECTS¹ Azuca Measured Indicated Total Inferred Crespo Measured Indicated Total Inferred 1,411,118 1,241,366 2,652,484 3,282,100 2,561,183 377,990 2,939,173 1,441,039 527,951 1,029,953 1,557,904 1,522,859 4,500,252 2,649,309 7,149,561 6,245,998 452,204 124,667 576,871 285,782 281,909 375,383 657,292 26,335 489 451 472 402 390 345 385 329 570 426 475 373 443 426 437 379 161 145 157 183 4.1 4.9 4.5 3.7 734,113 101 500,050 1,234,163 40 76 312,117 168 0 2,048,718 2,048,718 5,945,438 2,966,294 13,922,275 16,888,568 8,872,647 0 226 226 206 51 31 34 11 1.47 1.34 1.41 1.40 1.82 1.48 1.78 1.35 8.10 6.14 6.80 5.96 2.45 3.22 2.74 2.50 6.02 3.78 5.54 3.03 1.12 1.44 1.30 1.13 4.14 2.02 3.28 2.87 0.00 0.96 0.96 1.07 0.65 0.55 0.57 0.42 578 532 556 486 500 434 491 410 22.2 18.0 40.2 42.5 66.6 53.3 120.0 147.5 32.1 150.0 4.2 36.3 15.3 18.0 168.0 62.5 1,056 9.7 137.5 14.1 23.8 18.3 203.3 340.8 291.8 26.2 21.2 47.4 51.3 41.1 5.3 46.4 19.0 17.9 26.3 44.2 35.8 795 883 731 589 620 601 528 522 372 489 365 71 91 83 71 349 161 273 340 0 284 284 270 90 63 68 37 64.0 36.3 354.1 274.6 100.4 628.7 76.0 501.8 85.3 52.8 138.1 106.1 2.3 0.6 2.9 1.7 0.0 0.1 0.1 0.0 2.4 0.6 3.0 1.7 0.0 14.9 14.9 39.3 4.8 13.7 18.5 87.5 15.1 102.7 27.8 10.1 17.4 27.5 1.0 97.7 32.5 130.2 28.8 0.0 63.0 63.0 204.9 62.1 245.8 307.9 3.2 121.1 7.6 1.5 9.1 3.3 0.6 1.1 1.7 0.1 8.2 2.6 10.8 3.4 0.0 18.7 18.7 51.6 8.6 28.4 37.0 10.4 F u r t h e r i n f o r m a t i o n 158 Reserves and resources Continued Hochschild Mining plc Annual Report & Accounts 2010 ATTRIBUTABLE METAL RESOURCES AS AT 31 DECEMBER 2010 (CONTINUED) Resource category Inmaculada Measured Indicated Total Inferred San Felipe Measured Indicated Total Inferred Other projects total Measured Indicated Total Inferred TOTAL Measured Indicated Total Inferred Ag (g/t) Au (g/t) Zn (%) Pb (%) Cu (%) Ag Eq (g/t) Ag (moz) Au (koz) Ag Eq (M oz) Zn (kt) Pb (kt) Cu (kt) 656,374 2,710,576 3,366,949 2,131,994 1,393,716 1,354,261 2,747,977 1,257,731 5,016,383 20,035,829 25,052,213 125 177 167 199 69 82 76 84 66 74 72 18,207,809 102 10,250,749 23,185,188 33,435,937 24,765,924 234 113 150 172 4.65 4.65 4.65 4.97 0.02 0.06 0.04 0.05 1.00 1.11 1.09 1.14 1.86 1.37 1.52 1.51 7.12 6.14 6.64 6.18 1.98 0.42 0.73 0.43 0.97 0.36 0.55 0.31 3.10 2.73 2.92 2.26 0.86 0.18 0.32 0.16 0.42 0.16 0.24 0.11 0.39 0.31 0.35 0.19 0.11 0.02 0.04 0.01 0.05 0.02 0.03 0.01 405 456 446 498 315 295 305 283 194 155 163 184 379 208 260 273 2.6 15.4 18.1 13.7 3.1 3.6 6.7 3.4 10.6 47.6 58.1 59.5 98.2 405.6 503.7 340.7 0.9 2.4 3.3 1.9 161.2 716.8 878.0 668.6 8.5 39.8 48.3 34.1 14.1 99.3 12.9 83.2 43.1 37.0 27.0 182.4 80.1 11.5 77.8 28.5 31.2 99.3 43.1 99.7 83.2 130.9 182.4 37.0 80.1 107.6 77.8 28.5 77.0 613.0 124.7 99.3 43.1 84.5 1023.9 155.1 83.2 161.5 1636.9 279.8 182.4 37.0 80.1 137.2 1199.1 217.1 77.8 28.5 5.5 4.2 9.7 2.3 5.5 4.2 9.7 2.3 5.5 4.2 9.7 2.3 1 Main operations and other projects (excluding San Felipe) were audited by P&E Consulting. Note: Resources include undiscounted reserves, where resources are attributable to a joint venture partner, resources figures reflect the Company’s ownership only. No ore loss or dilution has been included, and stockpiled ore excluded. Unlocking value through exploration Hochschild Mining plc Annual Report & Accounts 2010 159 CHANGE IN TOTAL RESERVES AND RESOURCES Ag equivalent content (million ounces) Category December 2009 Production¹ Movements² 2010 Net difference % change December Arcata (cid:3) Pallancata (cid:3) San José (cid:3) Main operations total (cid:3) Ares (cid:3) Moris (cid:3) Other operations total (cid:3) Azuca (cid:3) Crespo (cid:3) Inmaculada San Felipe (cid:3) Other projects total (cid:3) Total (cid:3) Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve 79.4 29.8 108.9 55.9 110.0 43.7 298.3 129.4 14.7 3.7 4.5 2.8 19.2 6.5 44.1 0.0 44.7 0.0 66.9 0.0 38.5 0.0 194.2 0.0 511.6 135.9 12.9 15.2 12.7 40.8 2.9 2.4 5.3 0.0 0.0 0.0 0.0 0.0 46.1 19.4 12.2 0.1 8.7 47.0 8.3 66.5 29.2 (2.2) 0.9 (2.7) 0.9 (4.9) 1.9 26.2 0.0 2.7 0.0 70.4 0.0 0.0 0.0 99.3 0.0 160.8 31.0 98.7 29.1 109.0 49.4 156.9 39.2 364.7 117.8 12.4 1.7 1.8 1.3 14.2 3.1 70.3 0.0 47.4 0.0 137.3 0.0 38.5 0.0 293.5 0.0 672.4 120.8 19.4 (0.7) 0.1 (6.5) 47.0 (4.5) 66.5 (11.6) (2.2) (2.0) (2.7) (1.5) (4.9) (3.4) 26.2 0.0 2.7 0.0 24.4% (2.4)% 0.1% (11.6)% 42.7% (10.2)% 22.3% (8.9)% (15.3)% (54.5)% (59.8)% (53.6)% (25.8)% (52.6)% 59.4% – 6.0% – 70.4 105.3% 0.0 0.0 0.0 99.3 0.0 160.8 (15.1) – 0.0% – 51.1% – 31.4% (11.1)% 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. F u r t h e r i n f o r m a t i o n 160 Reserves and resources Continued Hochschild Mining plc Annual Report & Accounts 2010 CHANGE IN ATTRIBUTABLE RESERVES AND RESOURCES Ag equivalent content (million ounces) Arcata (cid:3) Pallancata (cid:3) San José (cid:3) Main operations total (cid:3) Ares (cid:3) Moris (cid:3) Other operations total (cid:3) Azuca (cid:3) Crespo (cid:3) Inmaculada San Felipe (cid:3) Other total (cid:3) Total (cid:3) Category Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Resource Reserve Percentage attributable 100% 60% 51% 100% 100% 100% 100% 49% – 60%² 100% 100% December 2009 Att.¹ December 2010 Att.¹ Net difference % change 79.4 29.8 65.3 33.5 56.1 22.3 200.8 85.6 14.7 3.7 4.5 2.8 19.2 6.5 44.1 0.0 44.7 0.0 32.8 0.0 38.5 0.0 160.1 0.0 380.1 92.1 98.7 29.1 65.4 29.7 80.0 20.0 244.2 78.8 12.4 1.7 1.8 1.3 14.2 3.1 70.3 0.0 47.4 0.0 82.4 0.0 38.5 0.0 238.5 0.00 497.0 81.8 19.4 (0.7) 0.1 (3.9) 23.9 (2.3) 43.4 (6.9) (2.2) (2.0) (2.7) (1.5) (4.9) (3.5) 26.2 0.0 2.7 0.0 24.4% (2.4)% 0.1% (11.6)% 42.7% (10.2)% 21.6% (8.0)% (15.3)% (54.5)% (59.8)% (53.6)% (25.8)% (54.1)% 59.4% – 6.0% – 49.6 151.3% 0.0 0.0 0.0 78.4 0.0 116.9 (10.4) – 0.0% – 49.0% – 30.8% (11.3)% 1 Attributable reserves and resources based on the Group’s percentage ownership of its joint venture projects. 2 The Company increased its holdings in the Inmaculada project to 60% in 2010. Unlocking value through exploration Production 2010 TOTAL GROUP PRODUCTION1 Silver production (koz) Gold production (koz) Total silver equivalent (koz) Total gold equivalent (koz) Silver sold (koz) Gold sold (koz) Hochschild Mining plc Annual Report & Accounts 2010 161 Year ended 31 December 2010 Year ended 31 December 2009 % change 24,430 200.05 36,434 607.23 24,283 199.9 24,585 211.64 37,283 621.38 23,563 204.09 (1) (5) (2) (2) 3 (2) 1 Total production includes 100% of all production, including production attributable to joint venture partners at San José and Pallancata. ATTRIBUTABLE GROUP PRODUCTION1 Silver production (koz) Gold production (koz) Attrib. silver equivalent (koz) Attrib. gold equivalent (koz) Year ended 31 December 2010 Year ended 31 December 2009 % change 17,768 144.40 26,432 440.53 18,754 156.77 28,160 469.34 (5) (8) (6) (6) 1 Attributable production includes 100% of all production from Arcata, Ares and Moris, 60% from Pallancata and 51% from San José. PRODUCTION BY MINE Arcata Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Silver produced (koz) Gold produced (koz) Silver equivalent 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 equivalent produced (koz) Silver sold (koz) Gold sold (koz) Year ended 31 December 2010 Year ended 31 December 2009 645,974 643,059 439 1.40 8,099 25.83 9,649 8,095 24.95 503 1.56 9,542 28.64 11,261 9,138 27.17 Year ended 31 December 2010 Year ended 31 December 2009 301,726 341,273 92 3.58 822 786 32.53 2,738 810 32.70 96 4.17 947 900 42.59 3,455 873 41.82 % change 0 (13) (10) (15) (10) (14) (11) (8) % change (12) (4) (14) (13) (13) (24) (21) (7) (22) F u r t h e r i n f o r m a t i o n 162 Production Continued Pallancata1 Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Silver produced (koz) Gold produced (koz) Silver equivalent 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 equivalent produced (koz) Silver sold (koz) Gold sold (koz) 1 The Company has a 51% interest in San José. Moris Product Ore production (tonnes) Average head grade silver (g/t) Average head grade gold (g/t) Silver produced (koz) Gold produced (koz) Silver equivalent produced (koz) Silver sold (koz) Gold sold (koz) Hochschild Mining plc Annual Report & Accounts 2010 Year ended 31 December 2010 Year ended 31 December 2009 1,071,617 922,521 344 1.41 10,135 35.85 12,286 9,998 33.7 327 1.43 8,420 31.97 10,339 8,405 30.7 Year ended 31 December 2010 Year ended 31 December 2009 461,134 460,971 397 6.14 5,324 84.30 10,382 5,284 84.96 398 6.19 4,998 77.08 9,622 5,174 78.80 Year ended 31 December 2010 Year ended 31 December 2009 1,148,826 1,282,461 4.44 1.14 86.41 21.53 1,378 95.07 23.54 5.02 1.38 96.58 28.34 1,797 86.69 26.29 % change 16 5 (1) 20 12 19 19 10 % change 0 0 (1) 7 9 8 2 8 % change (10) (11) (17) (11) (24) (23) 10 (10) Unlocking value through exploration Glossary Hochschild Mining plc Annual Report & Accounts 2010 163 Ag Silver Adjusted EBITDA Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance costs and income tax plus depreciation 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 DNV Det Norske Veritas is an independent foundation with the purpose of safeguarding life, property and the environment 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 Effective Tax Rate Income tax expense as a percentage of profit from continuing operations before income tax 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 after 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 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 25p each in the Company Pb Lead 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 F u r t h e r i n f o r m a t i o n 164 Shareholder information Hochschild Mining plc Annual Report & Accounts 2010 Annual General Meeting (‘AGM’) The AGM will be held at 10am on 2 June 2011 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 Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU – By telephone If calling from the UK: 0871 664 0300 (Calls cost 10p per minute plus network extras, lines are open 8.30am – 5.30pm Mon to Fri) If calling from overseas: +44 20 8639 3399 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 Ex-dividend date Record date Deadline for return of currency election form Final dividend payable Other dates Annual General Meeting Half-yearly results announced 11 May 2011 13 May 2011 17 May 2011 7 June 2011 2 June 2011 August 2011 London Office and Registered Office address 46 Albemarle Street London W1S 4JL United Kingdom – By fax +44 (0)1484 600 911 Company Secretary R D Bhasin 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 17 May 2011. 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 17 May 2011. 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. 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. Designed and produced by Radley Yeldar www.ry.com Printed by the Midas Press This report is printed on stock which is certiﬁed as FSC Mixed Sources and is completely biodegradable and recyclable Hochschild Mining plc 46 Albemarle Street London W1S 4JL United Kingdom Tel: +44 (0) 207 907 2930 Fax: +44 (0) 207 907 2931 info@hocplc.com www.hochschildmining.com

Continue reading text version or see original annual report in PDF format above