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People:
Making the
difference
Hochschild Mining plc
Annual Report & Accounts 2011
People making the difference
Success can only be
achieved by having the
right quality of people
in place. This year’s
report highlights the
contribution of our
people to that success.
01
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Overview
A strong track record
Revenue $m
Cash flow from operating activities $m
Attributable net profit $m
988
752
464
166
540
434
305
07
08
09
10
11
21
07
79
08
304
201
82
95
53
16
09
10
11
07
08
09
10
11
+31%
+53%
+75%
Earnings per share $
Proposed total dividend $
Resource base Silver equivalent moz
0.49
0.09
535
459
0.27
0.28
0.17
0.05
0.06
0.05
0.04
0.04
342
250
208
07
08
09
10
11
07
08
09
10
11
07
08
09
10
11
+75%
+20%
+17%
Contents
Overview
01 A strong track record
02 Chairman’s statement
04 Our business today
06 Chief Executive’s review
Our people making the difference
Operating & exploration review
20 Market & geographic overview
22 2011 Overview
24 Main operations
27 Other operations
28 Advanced Projects
30 Exploration review
32 Company Makers
34 Medium Scale projects
Corporate responsibility
Letter from the Chairman
37
39 CR governance
41 Safety
42 Health & hygiene
43 Our people
44
47 Managing our environmental impact
Working together with local communities
Financial review & Risk management
50 Financial review
57 Risk management
Governance
60
Board of Directors &
Senior management
62 Directors’ report
65 Corporate governance report
74 Supplementary information
77 Directors’ remuneration report
88 Statement of Directors’ responsibilities
89
Independent auditor’s report
Financial statements
93
91 Consolidated income statement
Consolidated statement
92
of comprehensive income
Consolidated statement
of financial position
Consolidated statement
of cash flows
Consolidated statement
of changes in equity
94
95
96
Notes to the consolidated
financial statements
153 Parent company statement
of financial position
154 Parent company statement
of cash flows
155 Parent company statement
of changes in equity
156 Notes to the parent company
financial statements
Further information
169 Profit by operation
170 Reserves and resources
176 Production
178 Glossary
179 Shareholder information
02 Hochschild Mining plc
Annual Report & Accounts 2011
Overview
Chairman’s statement
Our management team has utilised 2011
to firmly embed the exploration strategy within
the Company.
2011 Overview
Hochschild Mining has once again delivered a resilient
performance in the wake of continuing global economic
crisis. Thanks to the dedication and skills of our whole
team, we have been able to meet expectations on our key
2011 objectives, including the completion of feasibility studies
for two of our Advanced Projects, the achievement of our
annual operating targets and the ongoing evolution of our
exploration based strategy. Importantly, we are also generating
further opportunities to add to our already considerable
growth plans as well as having the financial firepower to
execute on attractive prospects.
A strong precious metals market again played its part in
Hochschild’s record financial performance in 2011, allowing
us to significantly increase profits in the year whilst selectively
mining lower ore grades in order to enable us to produce
longer term stable future growth in uncertain markets.
Despite significant increases in cyclical costs such as royalties,
the Company recorded a considerable EBITDA increase
of 42% to $563 million on the back of revenue of almost
$1 billion. Earnings per share was up by 75% to 49 cents
and the Board is therefore pleased to recommend a 20%
increase in the total dividend for the year, to 6 cents per share,
which confirms the confidence we have in the business going
forward and the ongoing strength of our balance sheet.
Our management team has utilised 2011 to firmly embed the
exploration strategy within the Company. During the year,
Hochschild has completed over 315,000 metres of drilling
with this number expected to increase by approximately
5% in 2012, reflecting the increased exploration budget
of $90 million, representing another record for the
Company. Our team has also appointed key new exploration
managers as well as increased the number of geologists to 92.
This significant commitment has begun to bear fruit with the
Company further optimising the life-of-mine of our core assets
in 2011. In addition, we have swiftly brought two Advanced
Projects through the pipeline to feasibility and continue to
widen the number of drill targets and prospects, which in turn
is considerably strengthening the Hochschild project pipeline.
I firmly believe that this strategy will deliver profitable
long-term production growth to our shareholders.
Work in progress at Pallancata
Employees at the Arcata plant
A geologist at the Inmaculada Advanced Project
03
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Precious metals markets’ volatility became a more prominent
feature in 2011 than ever before with silver in particular
displaying very large swings in price. The high of almost
$50/oz was reached in May with investment demand
becoming the main driver, but by December, silver
prices had fallen by some 44% to below $30/oz again.
With temperamental commodity markets reflecting broader
global economic concerns, the mining sector in the UK
was also very volatile. However, we believe that long-term
fundamentals for gold and silver remain strong and are
confident that our business is well underpinned for the future.
Outlook
Over the next year, we expect to see the first crucial steps in the
construction phase of our two exciting projects at Inmaculada
and Crespo which have the potential to increase our silver
equivalent production by 50%, or 10 million profitable
ounces. The Board remains confident that Hochschild has the
financial flexibility to continue pursuing high return investment
opportunities whether in brownfield expansion at our existing
mines, value enhancing acquisitions or adding to our
exploration investment.
Corporate responsibility
I am proud to report that Hochschild Mining has continued
to make progress in the key area of Corporate Responsibility.
During 2011, the Group’s environmental management
systems at all active operations were ISO14001 accredited.
An enhanced Community Relations strategy was also
formulated, underpinning our collective commitment to
providing education as well as promoting health, nutrition and
sustainable development in our local communities. A number
of initiatives were launched during the year, most notably the
“Maestro Líder” (Leading Teacher) and “Médico de Cabecera”
(Travelling Doctor) programmes.
On the issue of safety, while a year-on-year reduction in
the Group’s accident frequency rate was achieved, it is with
deepest regret that we report three fatalities during 2011.
Operations were suspended immediately after each incident
while investigations were carried out. We ensured that any
resulting recommendations were immediately acted upon
and that the affected families were supported. Our ongoing
goal of zero fatalities remains our highest operational priority.
Board composition
During the year, there were a number of changes to the
Board. In light of Dionisio Romero’s decision to retire as a
Non-Executive Director at the AGM this May and Sir Malcolm
Field retiring at the end of 2012, we moved swiftly to appoint
Dr Graham Birch and Rupert Pennant-Rea to ensure the
continued independent presence on the Board. Both of these
Directors have brought with them extensive and relevant
experience in the natural resource industry. I would also like
to express my sincere gratitude to both Malcolm and Dionisio
for their counsel and invaluable contributions to the Company
since joining the Hochschild Board back in 2006.
On behalf of the Board, I would like to thank the entire
talented Hochschild team for another year of strong performance,
and our shareholders for your continued support.
Eduardo Hochschild
Executive Chairman
19 March 2012
04 Hochschild Mining plc
Annual Report & Accounts 2011
Overview
Our business today
1
2
Where we operate
We currently operate across five sites, comprising four underground mines, with three located in Peru and
one in southern Argentina, and one open pit mine in northern Mexico. We also have a substantial project
pipeline and an extensive exploration programme with projects in Peru, Argentina, Chile and Mexico.
Solid production performance
In 2011 we once again met our full year production target, producing 22.6 million attributable
silver equivalent ounces.
Revenue by-product
1. Silver
2. Gold
72%
28%
2
1
$988m
2011 attributable production
Silver equivalent moz
Resource base
Silver equivalent moz
25.6
26.1
28.2
26.4
22.6
342
250
208
535
459
07
08
09
10
11
07
08
09
10
11
3
Creating value in exploration
Exploration is a main source of profitable growth for the long-term.
Our 2012 exploration budget of $90 million is our largest ever.
Exploration budget
1. Greenfield
2. Brownfield
35%
30%
3. Advanced Projects 19%
4. Other
16%
1
4
3
$90m
Greenfield breakdown by country
1. Peru
51%
2. Chile
3. Argentina
4. Mexico
2
$32m
27%
11%
11%
3
1
4
2
Life-of-mine
9.7years
+11%
05
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We are a leading precious metals company
in the Americas, with almost 50 years’ experience
in the mining of precious metal deposits.
Solid asset base*
Current operations
1 Arcata
Peru
2 Pallancata**
Peru
3 Ares
Peru
Silver equivalent production
Capacity
Silver equivalent production
Capacity
Silver equivalent production
Capacity
4 San Jose**
Argentina
Silver equivalent production
Capacity
5 Moris
Mexico
Silver equivalent production
Capacity
Advanced Projects
6
Inmaculada**
Peru
7 Crespo
Peru
8 Azuca
Peru
Estimated silver equivalent
production p.a.
Estimated silver equivalent
production p.a.
Estimated silver equivalent
production p.a.
Extensive project pipeline
Greenfield projects
7.1 moz
1,750 tpd
10.8 moz
3,000 tpd
2.3 moz
940 tpd
10.7 moz
1,500 tpd
1.2 moz
3,000 tpd
12 moz
2.7 moz
3.5 moz
Peru
Ibel
Huacullo
Astana
Farallón
Josnitoro
Soranpampa
San Martin
Argentina
Mosquito
Pomona
Cuello Cuello
Coriwasi
Apacheta
Alpacocha (Cu)
Huachoja
Jasperoide (Cu)
Antay (Cu)
La Flora
Argenta
Mexico
Chile
Corazon de Tinieblas Mercurio
El Gachi/Moctezuma
Encrucijada
Victoria
Valeriano
San Antonio
La Falda
* 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”).
** The Company has a 60% interest in Pallancata.
** The Company has a 51% interest in San Jose.
** The Company has a 60% interest in Inmaculada.
2
6
78
1
3
5
Mexico
2
6
78
1
3
Peru
2
6
78
1
3
Chile
4
Argentina
06 Hochschild Mining plc
Annual Report & Accounts 2011
Overview
Chief Executive’s review
A strong set of full year results with 2011 proving to be
a record year for Hochschild, reflecting a solid operational
performance and reinforcing our organic growth strategy
and financial position.
I am pleased to announce another strong set of full year
results with 2011 proving to be a record year for Hochschild,
reflecting a solid operational performance and reinforcing
our organic growth strategy and financial position. We firmly
believe that the combination of our enviable operational,
exploration and project development skills, with our premium
geological land position spread across the Americas, is the key
to maximising long-term sustainable shareholder value.
Strategic progress
The first key pillar of our strategy encompasses our current
assets and ensuring their long-term sustainability. We have
already increased the life of these assets extensively since
our IPO in 2006, and in 2011 we continued this trend with
significant increases at all three main operations. Resource life
for the Company grew from 8.7 years in 2010 to 9.7 years in
2011 with a 20% increase in resource life at Arcata, a 7%
increase at Pallancata in Peru, and a 7% increase at the San
Jose mine in Argentina where we continue to find new veins
and extensions, thus increasing total resources at this exciting
property to 172.2 million silver equivalent ounces.
2011 was also a key year in the development of our
project pipeline, the second pillar of our strategy. One of its
cornerstones is our aim to ensure the smooth progress of
all our projects through their developmental stages. In this
regard, the delivery of two feasibility studies on our Inmaculada
and Crespo projects early in 2012 provided ample evidence
of Hochschild’s project management capability. These two
exciting opportunities, based in our southern Peru cluster,
give us an expected 50% uplift in our production base whilst
generating an attractive return even at conservative price
and resource assumptions.
Our most exciting asset is the 60% owned Inmaculada
project. This is set to start construction with total initial
capital expenditure of $315 million for a 3,500 tonne per day
underground operation with total average annual production
of 12 million silver equivalent ounces and a commissioning
date in the fourth quarter of 2013.
Total resources have now increased to almost 150 million silver
equivalent ounces. We are confident that these resources will
grow significantly from this excellent starting point in the same
manner as our other mines and see Inmaculada develop into
a major contributor for the Company.
In addition, Hochschild is pleased to see a positive result
from its 100% owned Crespo project which is set to add
another 2.7 million silver equivalent ounces from 2014 at an
initial capital cost of $111 million for a 6,850 tonne per day
operation. This open pit project is expected to have a low
unit cost per tonne, high gold recovery rates and, given its
proximity to Hochschild’s other operations in southern Peru,
will benefit from operational synergies. Current Inferred
resources at Crespo are likely to deliver more mineable
material for the project and the exploration team remains
positive about the geological potential of the surrounding areas.
We remain excited by the potential of the Azuca deposit,
especially with respect to the ongoing exploration of the newly
discovered higher grade Colombiana and Cimoide Vivian
veins. It is our intention to continue exploration work at the
project throughout 2012 in order to consolidate resources
and provide a more comprehensive picture of the complex
vein structures present in the area before moving the project
on to the feasibility study stage.
Exploration work continued in 2011, with a total of
315,373 metres of drilling completed. At our greenfield
targets, we had positive results from our Company Makers
pipeline at Victoria, Valeriano and Encrucijada in Chile,
Mercurio in Mexico and Soranpampa in Peru, as well as
strong progress at the Medium Scale Mosquito project
in Argentina. Overall, Hochschild has again reaffirmed its
exploration commitment with a $90 million budget for 2012,
the largest in the Company’s history, which will be invested in
our brownfield, Advanced Projects and greenfield exploration
programmes, which are expected to encompass drilling
campaigns in 26 different locations across the Americas.
07
• Improve productivity
• Brownfield exploration Optimise life-of-mine
• Greenfield Project pipeline Advanced Projects
• Early stage
• Highly accretive
• Geological potential
• Control
CreAte
shAreholder
vAlue
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Strategy key
Core
Assets
explor a t i o n
M&A
Production in 2011 of
22.6 million attributable silver
equivalent ounces comprised
of 15.0 million ounces of
silver and 127.3 thousand
ounces of gold.
Employees at Arcata
2011 Overview
Our operations once again met their annual targets
with production in 2011 of 22.6 million attributable silver
equivalent ounces, comprised of 15.0 million ounces of
silver and 127.3 thousand ounces of gold. San Jose continued
to deliver, with silver equivalent production up 3% on the
previous year – a highly creditable performance, with a
particularly strong second half. At Arcata and Pallancata,
we continued with our policy of adjusting the extracted
grade to ensure a consistent and sustainable level of long-term
production as well as taking the opportunity afforded by high
precious metal prices to process low grade material at both
mines. The high prices have also allowed our Ares mine in
southern Peru to continue operations throughout the year
and into 2012, whilst our Moris mine in Mexico contributed
just over one million silver equivalent ounces before its closure
late in the fourth quarter.
In 2011 we continued experiencing cyclical cost inflation
in line with the industry trend, primarily resulting from the
ongoing high commodity prices. In Peru, unit costs were up by
some 14% excluding royalties principally due to wage inflation
in the industry and a higher proportion of production from
narrower veins in the production mix at Pallancata and Arcata.
In Argentina, Hochschild continued to face the challenges
of ongoing high local inflation rates of some 25–30%, and
although unit costs (excluding royalties) at San Jose only
increased by 18%, this was principally due to a devaluation
of the local currency of 6%, as well as the extraction of low
cost superficial material located in new mine areas and also
improvements in operational processes.
We expect overall 2012 unit cost inflation in Argentina to
continue to be high, at around 25–30% for the same country
specific reasons mentioned above, whilst in Peru we have
forecasted an increase in unit costs of approximately 15%
excluding royalties and the increased refining cost due to the
effects of our dore project at Arcata. The main contributory
factors to this increase are anticipated to be expected local
industry inflation of 10% and the increasing number of
stopes at our main operations.
08 Hochschild Mining plc
Annual Report & Accounts 2011
Overview
Chief Executive’s review continued
The Company again achieved record results with revenue
of just under $1 billion, up some 31% on 2010, driven by
continuing strong precious metal prices, with the average
silver price for 2011 up 53% and the average gold price up
by 25%. EBITDA also rose sharply, by 42%, to $563 million
(2010: $398 million) with pre-exceptional EPS of $0.49 for
the full year, approximately 75% higher than 2010.
We finished 2011 with a continuing strong cash balance
of $627 million which together with our healthy operating
cash flow, having increased 53% to $464.1 million in 2011,
gives us the financial ability to embark on capital expenditure
programmes for our Advanced Projects, pursue our ambitious
exploration programme in 2012, continue investing in our
main operations, and monitor any potential value accretive
acquisitions to be assessed against our previously stated criteria.
We also have minority investments worth approximately
$350 million as at 31 December 2011, principally represented
by our 25.2% stake in Gold Resource Corporation.
Outlook
Hochschild’s production target for 2012 is 20.0 million
attributable silver equivalent ounces, which takes into account
the reduction of almost 300,000 silver equivalent ounces that
will now not be recovered at Arcata as a result of the
implementation of our dore project.
The 2012 production target consists of similar levels of
production at each of the core operations to those of 2011,
with anticipated further declining production at Ares
and Moris.
We have had a very busy start to 2012 with the completion
of the Inmaculada and Crespo feasibility studies and we are
excited that following the Board’s approval of these projects
and sanction of their capital expenditure requirements,
the key stages of project construction can begin in earnest.
Our strategy for this year will once again be to deliver on
our production target, execute the first stages of the above
mentioned project development and demonstrate consistent
progress on our ambitious exploration programme, supported
by its $90 million budget.
I am confident that Hochschild’s talented and experienced
team will continue to create opportunities for future value
generation and that realising our 2012 targets will provide
more evidence that we have the optimum strategy for
long-term growth.
Ignacio Bustamante
Chief Executive Officer
19 March 2012
A geologist at the Crespo
Advanced Project
Our people making the difference
09
The potential
of Hochschild
has never been
stronger. We outline
our strengths and the
talent of our people
on the following
pages...
10 Hochschild Mining plc
Annual Report & Accounts 2011
Nicasio Magaño
Aged 42
Mine Supervisor, Arcata
Nicasio is a Mine Supervisor at Arcata, our
flagship mine which has been in operation
since 1964. In 2011, Arcata produced
7.1 million silver equivalent ounces and
the life-of-mine was increased to 11.5 years.
We also completed the first stage of the
Arcata dore project and by the second half
of 2012, 100% of Arcata’s concentrate will
be converted into dore.
11
Employees at Pallancata
Years of
operational
expertise
We have almost 50 years of experience operating underground
narrow veined deposits. Our three main assets, Arcata, Pallancata
and San Jose are currently ranked amongst the 14 largest
primary silver mines globally and continue to deliver a solid
base of production.
We are focused on consistently improving the operational
productivity and efficiency of our operations and since our IPO
in 2006, we have doubled overall Group throughput capacity at our
operations and have achieved all of our annual production targets.
12 Hochschild Mining plc
Annual Report & Accounts 2011
Ernesto Calla
Hilario
Aged 34
Geologist, Pallancata
Ernesto is a geologist working at our 60%
owned Pallancata mine. Pallancata has been
in operation since 2007 and Hochschild
is the mine operator. In 2011, almost
51,000 metres of exploration drilling was
conducted at Pallancata and the life-of-
mine was increased to 7.4 years.
13
Employees operating
a drill rig at Azuca
We have an extensive pipeline of brownfield and greenfield
projects with drilling campaigns in 26 different locations across
four countries in the Americas, as well as over one million hectares
of premium geological land. Our record $90 million exploration
budget for 2012 demonstrates not only our strong strategic focus
on growth through exploration, but also our confidence in the
significant potential of our project pipeline.
In 2011 we drilled a total of 315,000 metres at our brownfield,
greenfield and copper projects and in 2012 the drilling campaign
of over 330,000 metres will be focused on exploration work
at our existing operations, our Advanced Projects and our
greenfield opportunities.
Focused
on exploration
14 Hochschild Mining plc
Annual Report & Accounts 2011
Joel Andia
Aged 28
Geologist, Inmaculada
Joel is a member of the team of geologists
based at our Inmaculada project. We recently
published positive results from the feasibility
study on Inmaculada, which is located close
to our existing operations in southern Peru.
We believe there is also considerable further
geological potential at the property which hosts
over 25 kilometres of gold/silver-bearing quartz
veins, most of which remain largely untested.
15
Geologists at Pallancata
Depth of
exploration skills
We have an unrivalled knowledge of the Americas, with a team
of over 90 geologists and exploration offices in Peru, Argentina,
Chile and Mexico.
We believe that our exploration team has the technical experience
and expertise required to deliver a steady stream of value accretive
project opportunities. Our exploration team all have proven
exploration and project development skills and are also continually
evaluating new opportunities.
We recognise the contribution our exploration team makes
to the long-term success of our business and have devised an
incentive programme in order to attract and retain our geologists,
with direct economic rewards for geological discoveries. We also
have education initiatives including partnerships with local and
international universities and a graduate trainee programme where
graduates from universities are trained and recruited by the Group.
16 Hochschild Mining plc
Annual Report & Accounts 2011
Natalie Carbonel
Aged 27
Business Development Analyst
Natalie is an Analyst working in the Business
Development team in Lima. This highly
qualified team has delivered several key
acquisitions and projects over the last few
years. The team can draw on a vast knowledge
of the Americas and the mining industry as a
whole, and continues to identify and evaluate
projects and acquisitions according to the
Group’s strict M&A criteria.
17
View of Crespo, one of
a number of properties
acquired in 2008 as part
of the Southwestern
Resources acquisition
Dedicated Business
Development team
Our Business Development team is based in Lima. The members
of the team are all highly qualified and follow a disciplined approach
to the assessment of acquisitions.
Our strong financial position not only supports our significant
exploration programme but also gives us the flexibility to capitalise
on acquisition opportunities that arise. The team has a clear
mandate to pursue opportunities that are early stage, with strong
geological potential, highly value accretive, but also with a clear
path to control.
18 Hochschild Mining plc
Annual Report & Accounts 2011
Domingo Herrera
Aged 62
Manager, Medical Services, Arcata
Domingo is one of the doctors based at Arcata.
Our operations are all in remote regions, where
we have almost 50 years’ experience of operating,
working alongside the local communities and
authorities. We have a significant number
of programmes in place to improve health
services and education facilities and to promote
infrastructure development. In addition, we
constantly monitor our operations to minimise
their impact on the environment and ensure the
sustainability of the land where we operate.
19
The Company’s mobile medical units
brought into use during the year
We are committed to ensuring a safe and healthy workplace for all
of our employees, to manage and minimise the environmental impact
of our operations and to encourage sustainability by respecting the
communities surrounding our operations.
We seek to comply with all relevant legislation and leading international
standards and encourage our employees to adopt the Group’s values
through the use of training and internal communications.
We strive to work together with our local communities and our
strategy to achieve this revolves around three key pillars, to improve
health and nutrition, to enhance the provision of education and
to promote sustainable economic development. We are committed
to establishing and maintaining constructive relationships with our
communities with the long-term aim of improving the quality of life.
We also endeavour to minimise the impact of our business on the
environment and to ensure the ongoing sustainability of the land
where we develop operations and activities.
Committed
to responsibility
20 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Market & geographic overview
2011 Market overview
Precious metal prices remained strong in 2011, driven
mainly by investment demand, as macroeconomic uncertainty
continued throughout the year. Both gold and silver achieved
record highs during the year, although prices were extremely
volatile during the second half.
2011 Silver and Gold performance (indexed)
Silver US$/Troy oz
Gold bullion US$/Troy oz
180
160
140
120
100
80
60
JAN 11
MAR 11
MAY 11
JUL 11
SEP 11
NOV 11
DEC 11
Geographic overview
Our strategy is focused in the Americas, a region with
enormous mineral potential and a long and supportive
history of mining.
Hochschild operates three of the 14 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 were the world’s two largest
producers of silver in 2010.
Country production rankings
Peru
Argentina
Mexico
Chile
* Forecast
2010 silver
ranking
2011 gold
ranking*
2
10
1
5
6
13
10
15
Sources: Bloomberg, Thomson Reuters GFMS, Silver Institute.
Gold summary
Overview
2011 was another strong year for gold prices which reached a
record high of $1,896.50/oz in September, with an average annual
price of $1,571.64/oz, up 28% year-on-year. Investment demand
was again the main factor behind gold’s overall price performance
in 2011, with strong jewellery demand, contained scrap levels and
a surge in official sector buying (to more than five times the 2010
figure) also contributing. These factors helped offset the significant
volatility in the gold price towards the end of the year.
Despite the strong price increase continuing until autumn,
jewellery demand fell by just 1.9% in 2011, underpinned by strong
demand from India and China. For the year as a whole, 2011 saw
robust investment inflows into the gold market in spite of periods
of large scale investor selling. Although down 7% year-on-year to
1,563 tonnes, by historical standards world investment demand
was still very high, at a record US$80 billion. There was also record
demand for physical bullion products in 2011, with growing
support from Asian markets. World physical bar investment is
estimated to have increased by 36% year-on-year, to 1,194 tonnes.
During the summer there was considerable buy-side interest in
the OTC (“over-the-counter”) and futures markets reflecting the
worsening debt problems in Europe and the US credit downgrade.
This was later offset by widespread investor selling in the final
quarter, resulting from profit taking, US dollar strength and
liquidity pressures.
Silver summary
Overview
Silver saw some significant price swings in 2011, closing the year at
$28/oz (10% down on end 2010), achieving an average annual price
of $35/oz. Investor activity was the main driver for the strong rise in
the price to a generational high at just over $48/oz in late April and
the subsequent sharp corrections in early May and late September.
Silver remains well underpinned due to its versatility, both with
its use in a wide variety of industrial applications, as well as its
investment appeal. In 2011 investment demand (including coins
and medals) is estimated to have set a new record high in value
terms, and despite net outflows in ETFs and COMEX, the demand
for physical silver increased considerably, with coin demand rising
by an estimated 25% to a new record level.
Total fabrication demand is forecast to have risen by an estimated
4% in 2011. Following its significant rise in 2010, growth in industrial
demand in 2011 is expected to have been more modest, at an
estimated 4%. Demand from other areas of fabrication was also
robust, with jewellery demand currently estimated to have risen by 1%,
partly as a result of substitution at the expense of gold. The long-term
decline in silverware and photographic demand continued in 2011,
reflecting high prices and the ongoing rise of digital photography.
Despite seeing considerable price volatility in the
second half, precious metal prices remained strong in
2011, underpinned by robust investor demand.
Gold summary
Silver summary
On the supply side, mine production recorded an all time high of
2,812 tonnes in 2011, an increase of 3.8% on 2010. This was offset
by an estimated 1.7% fall in global scrap supply. In 2011, following
more than a decade of consecutive de-hedging, 12 tonnes of net
producer hedging was recorded.
Gold supply 2011*
1. Mine production
2. Scrap supply
3. Net producer hedging
63.4%
36.3%
0.3%
Possible drivers for gold in 2012
• Ongoing robust purchases from the official sector and a forecast
moderate decline in scrap supply should offset a stronger US dollar,
lower jewellery demand and a small increase in mine supply
• Challenging macroeconomic environment to underpin
investment demand
• Further fiscal and monetary loosening by major governments
potentially creating inflationary pressure and persistent negative
real interest rates
• Further diversification of investment demand with continuing
portfolio asset allocation towards commodities
Gold demand 2011*
1. Jewellery
2. Other fabrication
44.6%
17.9%
3. Net official sector purchases 9.7%
4. Physical bar investment
26.9%
5. Implied net investment
0.9%
Total supply is estimated to have been marginally higher in 2011,
although the estimated 4% increase in mine production and almost
10% increase in scrap supply were offset by lower government sales,
down an estimated 78%, and producer hedging, down 30%.
Silver is exposed to the drivers for both precious and base
metals due to its unique industrial properties and its role as
a safe haven asset. In the near term, investor interest in silver
is forecast to remain strong and absorb the anticipated surplus
in supply, due to its increased usage in new applications,
higher offtake from emerging markets and continued global
macroeconomic concerns.
Silver supply 2011*
1. Mine production
2. Scrap supply
3. Producer hedging
4. Government sales
74%
22%
3%
1%
Possible drivers for silver in 2012
Gold demand 2011*
• Continued macroeconomic uncertainty providing further
1. Jewellery
44.6%
support to investment demand
17.9%
2. Other fabrication
6
1
3. Net official sector purchases 9.7%
• Silver’s link with gold as a safe haven asset
4. Physical bar investment
• Forecast supply surplus, although little threat to prices
5. Net producer de-hedging
from higher government sales or gains in scrap supply
26.9%
0%
Silver demand 2011*
1. Jewellery & silverware
2. Investment
3. Coins & medals
4. Industrial
5. Photography
20%
14%
12%
48%
6%
2
3
4
2
3
1
5
1
4
3
1
5
1
6. Implied net investment
0.9%
• Consumer substitution of gold for silver providing support
4
to jewellery demand
• Robust demand for coins from retail investors
3
2
4
* Estimate.
Sources: Bloomberg, Thomson Reuters GFMS, Silver Institute.
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Silver demand 2011e
1. Jewellery & Silverware
2. Investment
3. Coins & Medals
4. Industrial
5. Photography
2
4
2
3
5
1
20%
14%
12%
48%
6%
2
3
22 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
2011 Overview
Hochschild once again
met its full year production
target in 2011, producing
22.6 million attributable
silver equivalent ounces.
2011 Highlights
• Full year production of 22.6 million attributable silver
equivalent ounces, in line with target
• Feasibility studies delivered on Inmaculada and Crespo
projects; expected to add ten million attributable silver
equivalent ounces per year with production expected
to commence at both projects at the end of 2013
• First stage of Arcata dore project completed
Attributable silver production moz
Attributable gold production koz
Resource life-of-mine Years
18.8
17.8
16.9
201
13.6
15.0
153
157
9.7
8.7
144
127
7.1
5.5
5.8
07
08
09
10
11
07
08
09
10
11
07
08
09
10
11
+11%
Employees operating a drill rig
Mining works at Pallancata
23
Production
Hochschild once again met its full year production target
in 2011, producing 22.6 million attributable silver equivalent
ounces, comprised of 15.0 million ounces of silver and
127,287 ounces of gold. In 2011, San Jose continued to
deliver a strong performance. Lower production was reported
at Pallancata and Arcata as the Company took advantage
of high precious metals prices to process low grade material
and also continued to adjust extracted grades to provide
a sustainable level of long-term production and optimise
the resource life of its main operations.
The Company has announced a production target of
20.0 million attributable silver equivalent ounces for 2012.
Production at each of the Company’s main operations is
expected to be in line with 2011. As anticipated, production
at the ageing Ares mine will continue to decline, reflecting
lower tonnages and grades. Production at the Moris mine
in Mexico is not expected to be material.
Costs
In 2011, the Company reported a 14% increase in unit cost per
tonne excluding mine royalties at its main Peruvian operations
(Arcata and Pallancata), to $60.8 per tonne (2010: $53.2).
This increase was primarily due to a rise in labour costs
reflecting higher precious metal prices, higher mining costs
resulting from an increase in mined areas and a higher
proportion of production from narrower veins.
In Argentina, unit cost per tonne excluding royalties increased
by 18% to $169.6 per tonne (2010: $144.1) mainly as a result
of local inflation impacting labour and materials costs and a
higher consumption of plant reagents which in turn provided
improved metallurgical recoveries (by approximately 5%).
Local inflation was partially offset by local currency
devaluation, lower mine development and the extraction
of superficial low grade material (Saavedra).
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View of the Selene plant
24 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Main operations
Arcata
Peru
6,081 koz silver
17.38 koz gold
7,124 koz silver equivalent
Resource life
The resource life of Arcata stands at 11.5 years as at
31 December 2011, up 20%, from 9.6 years in 2010, following
an intensive drill campaign focused on the Baja, Marion,
Blanca, Amparo, Lucrecia and Tunel 4 veins. In total, 94,656
metres of diamond drilling was completed during the year
(2010: 76,506 metres) with significant intercepts including1:
• Marion DDH-028 3.03m at 3.88 g/t Au and 1,008 g/t Ag
DDH-099 1.90m at 5.18 g/t Au and 1,704 g/t Ag
DDH-057 2.35m at 4.08 g/t Au and 1,183 g/t Ag
• Amparo DDH-935 2.97m at 3.29 g/t Au and 1,736 g/t Ag
DDH-039 3.36m at 2.06 g/t Au and 751 g/t Ag
• Blanca DDH-079 1.17m at 8.35 g/t Au and 3,171 g/t Ag
DDH-914 0.85m at 4.28 g/t Au and 2,579 g/t Ag
• Baja DDH-250 1.09m at 5.19 g/t Au and 706 g/t Ag
In 2012, the exploration drilling campaign of 62,756 metres
will focus on the targeting of higher grade structures and
increasing the mine resource base.
Arcata: Peru
Production and sales
Arcata is located in the Department of Arequipa in southern
Peru. It is a 100% owned underground operation that
commenced production in 1964.
During 2011, the Company continued to adjust the
extraction grades at Arcata towards the average reserve grade
level in order to ensure a consistent and sustainable level
of production. Full year silver equivalent production of
7.1 million ounces was 26% lower than 2010 (9.6 million ounces).
The Company took advantage of strong metal prices to
process waste material from previous campaigns (see table
below on Macarena Waste Dam Deposit). This material,
whilst increasing overall annual treated tonnage by 7%
to 687,966 tonnes (2010: 645,974 tonnes), was processed
at a decreased average silver grade of 95 g/t. In addition,
in 2011 the Company mined in the lower grade border
areas with associated narrower veins and increased dilution.
This additional material was not part of Arcata’s resource base.
In Q4 2011, the first stage of the project to convert 40% of
Arcata’s concentrate into dore was successfully completed.
The second stage of the project will be completed in H2
2012 and subsequently 100% of Arcata’s concentrate will be
converted into dore. As a result of the metallurgical recoveries
involved in the process, there will be an estimated reduction
in production in 2012 of 291,000 silver equivalent ounces.
Total investment for the project is approximately $14 million
and the Company believes that this will be a highly profitable
project as the resulting decrease in refining fees, commercial
discounts and associated selling expenses will more than offset
the treatment costs associated with the process.
Costs
Unit cost per tonne, excluding royalties, increased by 8% to
$70.2 (2010: $65.0). Including royalties, the increase in 2011
was also 8% at $77.0 per tonne (2010: $71.1). Key drivers were
a rise in the number of contractors employed in the mine due
to the increased number of stopes, higher wage costs in line
with industry inflation and higher diesel prices. These effects
were partly offset by energy cost savings achieved following
price renegotiations and by economies of scale resulting
from the increase in treated tonnage.
In 2011, the silver/gold concentrate from Arcata was sold
to Cormin, Korea Zinc Co., Ltd and MRI Trading Ag. 10%
of Arcata’s production was processed into dore; all of which
was sold to Johnson Matthey in 2011.
1 Please note that all mineralised intersections in this
release are quoted as down-hole lengths, not true widths.
Employees at the Arcata plant
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Pallancata: Peru
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 in which Hochschild controls 60% and is the
mine operator. Ore from Pallancata is transported 22 kilometres
to the Selene plant for processing.
In 2011, full year production at Pallancata was 10.8 million
silver equivalent ounces (2010: 12.3 million), a decrease
of 12%. Although treated tonnage remained broadly flat
compared to 2010, there was a fall in grades reflecting higher
dilution from narrower veins, as well as the Company’s decision
to take advantage of the prevailing high precious metals
price environment to process some lower grade economic
material extracted from the borders of the main Pallancata
vein. This additional material was not part of Pallancata’s
resource base.
Costs
Excluding mine royalties, unit cost per tonne increased by
18%, to $54.5 per tonne (2010: $46.2). Including royalties,
the increase in 2011 was 17%, to $60.4 per tonne (2010: $51.8).
This rise was principally due to increased wage costs resulting
from industry inflation.
View of the camp at Pallancata
Pallancata
Peru
8,767 koz silver
33.88 koz gold
10,800 koz silver equivalent
In addition, the Company incurred higher mine service
costs (transportation, energy and equipment hire) reflecting
increased diesel prices and the development of new mine
areas. A number of cost initiatives partially offset these factors,
including a change to the mine backfill process leading to
lower cement consumption, as well as cost efficiencies in
explosives consumption.
In 2011, the silver/gold concentrate from Pallancata was sold
to Teck Metals Ltd., Aurubis and LS-Nikko Copper.
Resource life
The resource life of the Pallancata operation stands at 7.4 years
as at 31 December 2011, up 7% compared to 2010 (6.9 years).
During 2011, a total of 50,748 metres of diamond drilling was
carried out over the course of the year (2010: 46,547 metres),
mainly focused on the San Javier, Virgen del Carmen, Rina,
Luisa, Pallancata West and Huararani veins with intercepts
including1:
• Luisa DLLU-A08 9.0m at 1.61 g/t Au and 301 g/t Ag
3.25m at 4.89 g/t Au and 1,382 g/t Ag
DLLU-015 8.4m at 2.79 g/t Au and 565 g/t Ag
DLLU-A01 0.99m at 40.66 g/t Au and 670 g/t Ag
• Pallancata West DLPL-A796 4.16m at 6.08 g/t Au
and 1,484 g/t Ag
• Yanina DLVC-010 0.77m at 6.10 g/t Au and 1,300 g/t Ag
• Rina DLRI-A21 1.72m at 6.12 g/t Au and 1,614 g/t Ag
DLRI-A40 10.36m at 2.76 g/t Au and 812 g/t Ag
• Huararani DLPL-A745 4.4m at 18.45 g/t Au and 954 g/t Ag
The 2012 exploration programme at Pallancata will target new
mineralised structures to the north, west and south of the main
operation area, with 59,140 metres of drilling planned.
1 Please note that all mineralised intersections in this
release are quoted as down-hole lengths, not true widths.
26 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Main operations continued
San Jose: Argentina
Production and sales
The San Jose silver/gold mine is located in Argentina, in the
province of Santa Cruz, 1,750 kilometres south-southwest of
Buenos Aires. San Jose commenced production in 2007 and
is a joint venture with McEwen Mining Inc (formerly Minera
Andes Inc.). Hochschild controls 51% of the joint venture
and is the mine operator.
San Jose delivered a robust performance in 2011, with
silver equivalent production up 3% to 10.7 million ounces
(2010: 10.4 million ounces). This was mainly a result of an
anticipated increase in silver grades, as well as operational
efficiencies that led to an increase in recovery rates to 89%
for gold and 86% for silver (an increase of approximately
5% for both gold and silver compared to 2010). Silver grades
rose by 12% year-on-year and silver production by 10% to
5.9 million ounces (2010: 5.3 million ounces). In line with
the mine plan, the average gold head grade decreased by
5% and gold production by 4% to 80.95 thousand ounces
(2010: 84.30 thousand ounces).
On 4 May 2011, following a 15 day production stoppage at the
operation, the Group successfully concluded negotiations with
the AOMA union (Argentine Mining Labour Association).
Costs
Unit cost per tonne, excluding royalties, increased by 18% to
$169.6 (2010: $144.1). Including royalties, the increase in 2011
was 19%, at $181.7 per tonne (2010: $152.3). Local inflation
in Argentina continues to run at between 25% and 30% and
consequently the key driver of the rise in costs was wage cost
inflation. A higher consumption of reagents also contributed
to the increase in costs although this was offset by a significant
improvement in recoveries. The high local inflation also
impacted materials and supplies but was partly offset by a 6%
devaluation of the Argentinian peso, lower mine development,
the extraction of low cost, low grade, superficial material
located in new mine areas (Saavedra) as well as efficiencies
gained from improving operational processes (maintenance
and other support processes).
San Jose
Argentina
5,870 koz silver
80.95 koz gold
10,727 koz silver equivalent
The Company expects cost increases in 2012 to be in the range
of 25–30%, in line with the above mentioned local inflation.
In 2011, the dore produced at San Jose was sold to Argor
Heraeus S.A. and Johnson Matthey Inc. The concentrate
produced at the operation was sold to Teck Metals Ltd.,
Aurubis and LS-Nikko Copper.
Resource life
Following an intensive drill campaign in 2011, the Company
increased the resource life of the San Jose property by 7%,
to 12.2 years (as at 31 December 2011). A significant portion
of the San Jose property continues to be open at depth
and laterally.
After a successful drilling campaign in the first half of 2011,
the second half of the year was dedicated to completing
geophysical and magnetometry work in order to identify new
targets at the property. This work was successfully completed
and provided areas of potential that were targeted in the
Q4 drilling campaign and continuing into 2012. During
the year, 55,678 metres of diamond drilling was conducted
(2010: 53,692 metres), focused on the Luli, Susana, Orión
and Pilar veins with significant intercepts including1:
• Luli SJM-157 1.28m at 20.11 g/t Au and 1,409 g/t Ag
SJD-1015 2.00m at 45.51 g/t Au and 4,257 g/t Ag
• Susana SJD-1020 2.15m at 54.84 g/t Au and 4,949 g/t Ag
SJD-1033 2.50m at 11.43 g/t Au and 1,105 g/t Ag
• Pilar SJD-996 17.17m at 11.33 g/t Au and 436 g/t Ag
SJD-992 17.72m at 6.28 g/t Au and 356 g/t Ag
In 2012, the exploration programme includes a 93,320 metre
drilling campaign (110,583 metres including infill drilling)
that will evaluate extensions of already known mineralised
structures and also the targeting of new veins.
Employees at the San Jose mine
1 Please note that all mineralised intersections in this
release are quoted as down-hole lengths, not true widths.
27
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Other operations
Ares
Peru
581 koz silver
29.03 koz gold
2,323 koz silver equivalent
Moris
Mexico
64 koz silver
19.26 koz gold
1,220 koz silver equivalent
Ares: Peru
Moris: Mexico
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. The Ares mine
continued to operate for the full year, albeit at a lower
level, producing 2.3 million silver equivalent ounces
(2010: 2.7 million silver equivalent ounces).
Production and sales
The 100% owned Moris mine, is an open pit mine and is
located in the district of Chihuahua, Mexico. Mine production
ceased at Moris in September 2011, although continued
leaching of the pads produced further ounces towards the
end of the year. Full year production was 1.2 million silver
equivalent ounces (2010: 1.4 million ounces).
Although production at Ares was expected to end in 2011,
the Company continues to extract mineral from new veins
and production will continue in 2012. Management also
continues to monitor the grade and cost profile of the
operation to ensure that it is in line with the Company’s
policy of producing profitable ounces. A new exploration
programme for Ares is currently being developed for 2012,
with the aim of identifying new resources.
100% of Ares’ production is processed into dore, all of which
was sold to Johnson Matthey in 2011.
Moris is currently in the final stage of the pads’ cyanidation
process although exploration continues in the area and the
Company has been able to identify new exploration targets
at Moris with the goal of identifying new resources.
In 2011, the gold/silver dore produced at Moris was sold
to Johnson Matthey.
View of the plant at Moris
View of the Ares mine
28 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Advanced Projects
The Company has three Advanced Projects: Inmaculada,
Crespo and Azuca. The Company recently announced
the results of feasibility studies, conducted by Ausenco,
an independent consultant, on Inmaculada and Crespo.
These projects are expected to contribute an average
attributable annual production of ten million silver equivalent
ounces, increasing current production levels by 50%.
Both projects are due to be commissioned in Q4 2013 and
have an initial combined capital cost estimated at $426 million
($335 million attributable to Hochschild).
At Azuca, the Company has delayed the feasibility study to
continue exploration work at the project throughout 2012 in
order to consolidate resources and provide a more comprehensive
picture of the complex vein structures in the area.
Inmaculada
Crespo
Azuca
Inmaculada: Peru
Inmaculada is a 20,000 hectare gold-silver project located in
the Company’s existing operational cluster in southern Peru
and 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, International Minerals Corporation (“IMZ”).
The project is now set to start construction, with total initial
capital expenditure of $315 million for a 3,500 tonne per
day (“tpd”) underground operation with average annual
production of 12 million silver equivalent ounces (seven
million attributable ounces), and is due to be commissioned
in Q4 2013. The Company is also progressing with the
exploration programme at the property which consists of
40 mining concessions with resources which are currently
estimated at a total of 150 million silver equivalent ounces.
Changes from the 2010 scoping study resulting from the
feasibility study process include: an update of the mineral
resource; the use of only Measured & Indicated resources as
the basis for the initial reserves; a change in the metallurgical
process from flotation to leaching with the resulting change
from a concentrate to dore as the final product; and an
Inmaculada estimated timeline
2012
Q1
Q2
Q3
Q4
2013
Q1
Q2
Q3
Q4
Procurement
Engineering
Permitting process
Mine development
Process plant construction
Start of production
increase in the plant capacity from 3,000 tpd to 3,500 tpd.
In addition, as a result of feasibility level geotechnical studies,
the rock quality was determined to be poorer than anticipated
which has affected dilution, mine capex and mining costs.
All of these factors were incorporated in the new capex,
cost and Net Present Value (“NPV”) figures presented in
the feasibility study results.
The feasibility study was conducted using only measured and
indicated resources from the Angela vein. Summary results
(on a 100% basis, applying a 1.5 g/t gold equivalent cut-off
grade) are as follows:
• Measured & Indicated resources: 7.07 mt at an average grade
of 4.07 g/t gold and 144 g/t silver containing approximately
925,100 ounces of gold and 32.8 million ounces of silver
• Inferred resources of 4.94 mt at an average grade of 3.91 g/t
gold and 152 g/t silver containing approximately 620,000
ounces of gold and 24.2 million ounces of silver
• Estimated mineral reserves (at a cut-off grade of 2.3 g/t gold
equivalent): 7.80 mt at an average grade of 3.37g/t gold and
120 g/t silver containing approximately 845,000 ounces of
gold and 30.1 million ounces of silver
The project has been shown to be profitable even under
conservative gold and silver price assumptions. The single,
wide vein will also allow for lower mining costs and a
metallurgical process with estimated recovery rates of 95.6%
for gold and 90.6% for silver. The project’s proximity to the
Company’s existing operations also offers logistical synergies
and reduces execution risk. The principal execution risks
facing the Inmaculada project are possible disruptions to the
project schedule resulting from social or political instability
and the project’s dependence on third party supplies
of electricity.
The feasibility study results confirmed that the project provides
strong returns based on the existing reserve base. However,
Hochschild is confident that the mineable resource base will
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be expanded by upgrading the inferred mineral resources in
the South West and North East extensions of the Angela vein.
Current project economics do not factor in almost five million
tonnes of inferred resource containing over 60 million silver
equivalent ounces which could almost double the life-of-mine.
In addition, there is further geological potential at the
Inmaculada property which hosts over 25 kilometres
of gold/silver-bearing quartz veins of the low sulphidation
type veins which remain largely untested.
In 2011, exploration drilling at Inmaculada totalled
25,341 metres and in 2012, the drilling programme
of 54,650 metres will focus on further exploration of
the Angela vein and other known veins in the district.
Crespo: Peru
Crespo is 100% owned by Hochschild and is located in
the Company’s existing operating cluster in southern Peru.
Crespo is also set to begin construction, with total initial capital
expenditure of $111 million for a 6,850 tpd operation with
an average annual production of 2.7 million silver equivalent
ounces from 2014. This will be a relatively simple open pit
project with high gold recovery rates, and again, will benefit
from operational synergies due to its proximity to the
Company’s existing operations. The principal execution
risks facing the Crespo project are possible disruptions to the
project schedule resulting from social or political instability and
the project’s dependence on third-party supplies of electricity.
Changes from the January 2011 scoping study resulting from
the feasibility study process include: an update of the mineral
resource; an increase in the plant capacity from 5,650 tpd
to 6,850 tpd; and a change in the source of power, to a
25 kilometres 60 KV transmission line connecting the Arcata
operation to Crespo. Significant metallurgical testing was also
carried out in order to review the overall process and optimise
recoveries.
These updates were all incorporated in the new capex, cost
and NPV figures presented in the feasibility study results.
Crespo estimated timeline
2013
Q1
Q2
Q3
Q4
2012
Q1
Q2
Q3
Q4
Procurement
Engineering
Permitting process
Road haul
Process plant construction
Start of production
The updated resource estimate for Crespo replaced the
previous estimate published in the scoping study and
represented an increase in Measured & Indicated gold
equivalent resources of 58% (304,000 ounces). Measured &
Indicated resources now total 23.4 million tonnes at 0.45 g/t
of gold and 39 g/t of silver containing 340,000 ounces of gold
and 29.2 million ounces of silver.
Ore reserves, calculated by Ausenco, total 20.48 million tonnes
at 0.46 g/t of gold and 39 g/t of silver with a cut-off grade of
0.33 g/t gold equivalent and metals prices of $1,300/ounce
gold and $23/ounce silver.
The Crespo feasibility study results do not factor in almost
3.8 million tonnes of in-pit inferred resource, containing
6.6 million silver equivalent ounces with the potential to add
almost 18% of mineable material at no further mining cost
to the Company. There is also further geological upside at
the Queshca gold target, to the north of the current feasibility
study resource base. In addition, a drilling gap exists between
Crespo and Queshca and encouraging geological evidence
would suggest further potential for economic mineralisation.
The 2012 drill programme of 5,500 metres is focused on
converting Inferred resources to the Indicated resource
category and to increase the resource base and to continue
exploring the Queshca target.
Azuca: Peru
The 100% owned Azuca project is also located in the
Company’s southern Peru operating cluster. In January 2012,
the Company took the decision to delay the feasibility study
at Azuca and continue exploration work at the project
throughout 2012 in order to consolidate resources and to
provide a more comprehensive picture of the dispersed vein
structures present in the area.
Moreover, the Company believes that the geological potential
of the Azuca property may produce richer structures that could
further support the investment required to develop the asset
but could alter the design and location of future mine and
plant infrastructure, tailings ponds and other key equipment.
The Hochschild Board has therefore approved an exploration
programme for Azuca in 2012.
As of December 2011, the Azuca project has Measured &
Indicated resources totalling 7.05 million tonnes at 0.77 g/t
of gold and 188 g/t of silver containing 173,500 ounces of gold
and 42.7 million ounces of silver.
Exploration at the site is ongoing, with promising higher grade
intercepts suggesting the presence of new higher grade veins.
The 2012 drilling programme will be focused on identifying
further extensions of the Vivian-Yanamayo, Colombiana and
Azuca West veins, with a drilling programme of 28,000 metres
expected to be carried out in these new areas.
30 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Exploration review
2011 Highlights
• $71 million invested in exploration in 2011; 33% brownfield,
15% Advanced Projects and 36% greenfield1
• Resource life up 11% to 9.7 years
• Total resources up 17% to 535 million silver
equivalent ounces2
• Increase in ‘Company Maker’ pipeline from eight to 13 projects
• Record 2012 exploration budget of $90 million;
30% brownfield, 19% Advanced Projects, 35% greenfield,
others and support 12% and technical support 4%
• 330,804 metres of drilling to be undertaken in 2012
We firmly believe that the
combination of our enviable
operational, exploration
and project development skills,
with our premium geological
land position spread across
the Americas, is key
to maximising long-term
sustainable shareholder value.
Overview
Hochschild’s commitment to its exploration strategy has
been reaffirmed with a 29% increase in the exploration
budget for 2012 to $90 million, (from $70 million in 2010),
the largest exploration budget ever for the Company.
In 2011, investment in exploration totalled $71 million and
315,373 metres of drilling was completed at the Company’s
brownfield, Advanced Projects, greenfield and copper
projects. The 2012 budget, representing 330,804 metres,
will be split between exploration work at the Company’s
existing operations, the Advanced Projects and greenfield
opportunities in Peru, Argentina, Mexico and Chile.
In 2011, the exploration programme delivered positive results,
especially in respect to its key aims of increasing the resource
life of the Company’s core operations and expanding its
project pipeline which now includes 13 “Company Makers”
and 13 “Medium Scale” projects.
In 2012, exploration work at the Company’s core
operations will be mainly focused on improving resource
quality. The main objective of exploration work at the
Advanced Projects will be to incorporate additional resources
at Inmaculada and Crespo, and at Azuca, to concentrate on
the exploration of high quality resources that better support
a significant investment. Exploration at the Company Maker
projects will include continued drilling and further analysis.
At the Company’s Medium Scale projects, work will continue
to develop those high-quality, early stage projects that have
the potential to move through the pipeline to production.
Work will also continue at the Company’s copper projects and
on the Company’s generative programme to conduct further
exploration on the Company’s extensive land package of
premium properties in four key countries. In 2011, the
number of geologists employed by the Company was 92.
Geological samples at Pallancata
Assay testing
1 Amount disclosed refers to expenditure from the Group’s exploration budget and does
not include expenditure from the operational budget.
2 Total resources here exclude base metal resources.
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Greenfield exploration
Approximately 36% of the 2011 exploration budget in
2011 was invested in the Company’s greenfield programme,
and in 2012, the proportion will be 35%. In 2011, a total
of 41,546 metres were drilled as part of the greenfield
exploration programme and in 2012, this is expected
to increase to 47,500 metres.
Brownfield exploration
In 2011, approximately 33% of the exploration budget was
invested in brownfield drilling in the areas immediately
surrounding Hochschild’s three main operations. As a
result, there was an 11% increase in resource life to
9.7 years (2010: 8.7 years).
The Company takes a very conservative approach to resource
delineation and applies the same cut-off grades to reserves
and resources. As a result, the Company has a high rate
of conversion from resources to reserves.
See the full Reserves
and resources tables
See pages 171 to 175
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Ares: Peru
Arcata: Peru
Pallancata: Peru
San Jose: Argentina
Moris: Mexico
Inmaculada: Peru
Crespo: Peru
Azuca: Peru
KEy tARGEtS
Mosquito: Argentina
La Flora: Argentina
Argenta: Argentina
Jasperoide (Cu): Peru
Growth Pyramid
CuRREnt
OPERAtIOnS
3
3
3
3
3
ADVAnCED
PROJECtS
7
7
7
7
7
KEy tARGEtS
Encrucijada: Chile
Victoria: Chile
Valeriano: Chile
Soranpampa: Peru
Mercurio: Mexico
Apacheta: Peru
Alpacocha (Cu): Peru
KEy PROSPECtS
Huachoja: Peru
Coriwasi: Peru
Josnitoro: Peru
Antay (Cu): Peru
Corazon de Tinieblas: Mexico
La Falda: Chile
KEy
Current operations
Advanced Projects
Greenfield projects
Company
Makers
DRIll
tARGEtS
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3
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PROSPECtS
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7
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7
KEy PROSPECtS
Pomona: Argentina
Astana: Peru
Farallón: Peru
Ibel: Peru
San Martin: Peru
San Antonio: Chile
El Gachi/Moctezuma: Mexico
Cuello Cuello: Peru
Huacullo: Peru
lAnD PACKAGE
>1 MILLION HECTARES GENERATIVE
29% increase in exploration budget versus 2011
32 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Company Makers
Overview
The Company currently has 13 potential “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 2011, $12.4 million
was invested in finding and developing such deposits and
the 2012 budget has increased to $15.8 million.
Mercurio
Mexico
78
2
Coriwasi
6
1
3
Peru
Apacheta
Huachoja
Soranpampa
Victoria
Chile
Encrucijada
La Falda
Valeriano
Victoria: Chile
The Victoria project in northern Chile is 60% owned by
Hochschild, with the remaining 40% held by Iron Creek
Capital. Exploration work is delivering positive results at the
property which covers 46,100 hectares of continuous strike
length at the highly productive Domeyko Fault Zone. In 2011,
7,359 metres of drilling was completed. Exploration focused
on the porphyry potential of the property and work was
completed on a number of targets. The Picaron target was
drill tested and significant alteration and anomalous copper
mineralisation was encountered, proving it to be a true copper
porphyry system. The resource is open and may increase in
grade and thickness at depth. Selected intercepts from these
exploration programmes include1:
• VPI-DD-11-003 From 224.0–265.0m depth –
41.0m at 1,293 ppm Cu
• VPI-DD-11-003 From 316.0–350.0m depth –
34.6m at 869 ppm Cu, 15.6 ppm Mo
• VPI-DD-11-003 From 357.0–368.0m depth –
11.0m at 2,102 ppm Cu, 27.8 ppm Mo and 0.1 g/t Au
• VPI-RC-11-010 From 18.0–32.0m depth –
14.0m at 0.39% Cu and 0.43% Mn
Includes: 6.0m at 0.53% Cu and 0.62% Mn
The drilling campaign of 6,800 metres in 2012 will include
offset drilling of the recently reported intercepts in and around
the Picaron target as well as continued definition drilling of the
exotic copper oxide deposit. A data compilation and surface
exploration programme will also be carried out over the entire
Victoria property in 2012 and the drilling of defined targets
will subsequently take place in the second half of the year.
Valeriano: Chile
The 100% owned Valeriano property in Chile is located
27 kilometres north of Barrick Gold Corporation’s Pascua
Lama project, in close proximity to the border with Argentina,
and covers an area of 3,750 hectares. The property hosts both
high-sulphidation as well as porphyry style disseminated gold
mineralisation. The property has been explored by a number
of mining companies in the past, including Phelps Dodge
(1989–1991) and Barrick (1995–1997), both of which
completed drill campaigns totalling 12,575 metres.
No significant exploration had been undertaken
at the property since 1997.
Hochschild commenced drilling at Valeriano in October 2011
and at the end of the year, 2,302 metres had been drilled,
with anomalous gold and molybdenum intercepts reported.
1 Please note that all mineralised intersections in this release
are quoted as down-hole lengths, not true widths.
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Further detailed geological work has identified targets in
and adjacent to the primary tested target. Positive intercepts
reported included:
• VALDD11-001 From 245.12–252.8m depth –
7.68m at 0.75% Cu and 0.08 g/t Au
• VALDD11-002 From 572.0–606.4m depth –
34.4m at 0.19% Cu and 116.24 ppm Mo
Includes 6m at 0.19 g/t Au
In 2012, the 2,500 metre drilling programme will continue the
drill testing of the target at depth during the first half of the
year, with follow up drilling and drill testing of the near surface
high sulphidation target planned for the second half.
Encrucijada: Chile
At the 51% owned Encrucijada property in Chile, 1,397 metres
were drilled in 2011. Preliminary results indicated a true porphyry
copper – gold system, with individual intercepts of anomalous
gold and silver up to 0.26 g/t and 95 g/t respectively. Positive
drilling results included the following intercepts1:
• END11-026 From 0–603m depth – 603m at 670ppm Cu
Includes: 0–68m depth – 68m at 0.12% Cu
54–66m depth – 12m at 0.20% Cu
382–404m depth – 22m at 0.13% Cu
In 2012, the exploration programme and 2,000 metre drilling
campaign at Encrucijada will continue the offset drilling
of results reported in 2011 and will also include additional
geophysical interpretation and targeting of the porphyry style
mineralisation below the San Bernardo tourmaline breccias
and dome complex, and in the surrounding area.
Mercurio: Mexico
Mercurio is a 100% owned 36,388 hectare property in Mexico,
located between two high grade mines, Sombrerete and Fresnillo.
In 2011, 7,735 metres of drilling was completed; results to date
indicate strong base metal, as well as moderate silver mineralisation,
associated with a large vein system similar to Fresnillo.
Drilling results included1:
• Hole 21 From 338.55–341.9m depth –
35m at 128.6 g/t Ag, 1.95% Zn, 0.66% Pb and 0.16% Cu
• Hole 24 From 186.56–189.66m depth –
3.1m at 75 g/t Ag, 7.9% Zn, 6.45% Pb and 0.5% Cu
• Hole 29 From 368.35–374.25m depth –
5.9m at 115 g/t Ag, 8.5% Zn, 0.67% Pb and 0.6% Cu
In 2012 the Company plans to drill an additional 8,000 metres at
Mercurio, around recently reported intercepts and will continue
exploration activities, including drilling on adjacent targets.
1 Please note that all mineralised intersections in this release
are quoted as down-hole lengths, not true widths.
Apacheta: Peru
At the 100% owned Apacheta project in Peru, 3,044 metres
of drilling was completed in 2011 and the project moved up
the project pipeline from prospect to drill target. The initial
drilling programme tested high sulphidation and porphyry
targets identified in the 2010 exploration programme.
Drilling intercepted strongly altered rock with anomalous
trace element geochemistry. In 2012 the 7,700 metre drilling
campaign will complete the initial exploration programme
at the Apacheta 1 and 2 targets and further targets will be
defined by a surface sampling programme.
Soranpampa: Peru
At the 100% owned Soranpampa project in Peru, 2,896 metres
of drilling was carried out in 2011. The first phase of exploration
was completed, with anomalous gold and molybdenum
intercepts reported. Further detailed geophysical work has
identified targets in and adjacent to the primary target already
tested. Positive intercepts included1:
• DDHPA1104 From 356.4–374.0m depth –
17.6m at 0.15% Mo
• DDHPA1109 From 332.0–362.3m depth –
30.3m at 0.15 g/t Au
In 2012, the 2,500 metres drilling programme will focus on
targets defined by the IP geophysical survey.
Other Company Maker projects
Coriwasi: Peru
This is a 9,800 hectare high sulphidation epithermal and porphyry
copper-gold type target in northern Peru optioned from a
private party. The Company is in the process of completing
the relevant permits and approvals process for the project.
Huachoja: Peru
This is a 3,000 hectare, high sulphidation epithermal target
in southern Peru optioned from Teck Peru SA. A surface
mapping and sampling programme will be completed in the
first half of 2012 in order to select targets for drilling. An initial
1,500 metres drill programme will then be carried out in the
second half of the year to test identified targets.
la Falda: Chile
The La Falda property in northern Chile, is located close to
the Company’s other projects in the area and was acquired in
December 2011 as an earn-in project. The target is a porphyry
gold-copper system. The Company has completed the permits
and approvals process and will look to assign the necessary
exploration budget for the project in order to commence
a drilling campaign.
34 Hochschild Mining plc
Annual Report & Accounts 2011
Operating & exploration review
Medium Scale projects
Argenta: Argentina
At the 100% owned Argenta project in Argentina, 853 metres
were drilled in 2011 to test the known vein system which
reports strongly anomalous gold and silver mineralisation
at surface and in drill hole. Assay results are being analysed
before a drilling programme is put in place for 2012.
Astana/Farallón: Peru
Astana is a 100% owned project located in the Company’s
southern Peru cluster, with high sulphidation of disseminated
gold/silver mineralisation. Historical drilling at superficial
levels reported anomalous results in gold and silver associated
to pyrite with values of 200 to 390 g/t Ag eq.
Farallón is a 100% owned low sulphidation silver veins system,
located 1.5 kilometres to the east of Astana. Previous drilling
at superficial levels reported anomalous results in gold, silver,
lead and zinc. Work conducted in 2011 was focused on
attaining the relevant government and community permits
and approvals for both projects. The community permit has
been received, and in 2012 the exploration programme will
include a 1,106 metre drilling campaign. Exploration activity
will be carried out at Farallón, as well as the testing of
anomalies in the Astana area.
San Martin: Peru
In 2011, work at the San Martin project in Peru was focused
on obtaining the relevant government and community permits
and approvals. The community permit has been received,
and in 2012 the 1,800 metre drilling campaign will focus on
defining potential mineralisation following previous drilling
campaigns that intercepted high quality mineralisation.
Overview
The Company’s project pipeline also contains various
Medium Scale properties in the prospects and drill target
categories. These projects each have the potential to
contribute 5–10 million silver equivalent ounces of
production per year and tend to be low sulphidation
epithermal gold/silver type deposits with varying base
metal content and are typically mined underground.
In 2011, $7.9 million was assigned to finding and developing
Medium Scale projects, and in 2012 the Company plans
to invest $7.0 million in this category. Positive results were
reported at a number of the Company’s Medium Scale
projects in 2011 and a number of properties entered the
pipeline. These include the Pomona project in Argentina,
the San Antonio project in Chile, and the Huacullo and
Cuello Cuello properties in Peru.
Mosquito: Argentina
Two rounds of drilling were completed at the 100%
owned Mosquito property in Argentina in 2011. A total
of 8,495 metres was drilled, testing over 12 different vein
targets. The majority of the drilling did not intercept any
anomalous vein mineralisation. In 2012 the 2,000 metre
drilling programme will include offset drilling in and
around the most anomalous intercepts reported to date.
These intercepts are along the extension of the Cerro Morro
(Extorre) vein deposit and positive results in 2011 included1:
• MQD11-15 From 149.8–152.4m depth –
2.6m at 3.07 g/t Au and 64 g/t Ag
• MQD11-16 From 128.25–128.71m depth –
0.46m at 0.56 g/t Au and 64 g/t Ag
la Flora: Argentina
At the La Flora project in Argentina, two large vein systems
have been identified since drilling commenced in H2 2010.
In 2011, a total of 1,812 metres was drilled at La Flora and
a number of vein targets were tested. Drilling was successful
in intercepting anomalous gold and silver mineralisation.
Positive intercepts included1:
• LFD11-019 From 0.0–3.0m depth –
3m at 0.96 g/t Au and 3.2 g/t Ag
• LFD11-019 From 11.0–19.3m depth –
8.3m at 1.48 g/t Au and 8.6 g/t Ag
In 2012, the exploration programme and 4,000 metre drilling
campaign at La Flora will include a detailed mapping and
sampling programme around the anomalous surface samples
and drill hole intercepts identified in 2011. An IP geophysical
survey will also be completed and identified targets will be
subsequently drilled.
1 Please note that all mineralised intersections in this
release are quoted as down-hole lengths, not true widths.
A drill rig in operation at the
Mosquito property in Argentina
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Other Medium Scale projects
Huacullo: Peru
At the Huacullo project in Peru, the Company is in the process
of completing the relevant government and community
permits and approvals process. In 2012 the 485 metre drilling
campaign and exploration programme will test potential
economic mineralisation in low to intermediate sulphidation
veins previously drilled by other companies.
Jasperoide: Peru
In 2011, the exploration programme at Jasperoide included
detailed geological mapping on the Huinihuini Mountain area
of interest and in the surrounding area, and a 3,726 metre
drilling campaign with 20 drill holes. The results of the drilling
campaign indicate Inferred Resources for a cut-off with 0.2%
Cu: 12.19 mt with 1.32 % Cu, 0.32 g/t Au. Positive intercepts
included1:
Ibel: Peru
At the Ibel project in Peru, in 2011 work focused on the
completion of the relevant government and community
permits and approval process. In 2012 the 445 metre drilling
campaign at Ibel will test potential economic mineralisation
in low to intermediate sulphidation veins and hydrothermal
breccias located in sedimentary rocks.
San Antonio: Chile
A mapping and sampling programme to define drill targets
is in progress at the San Antonio project in Chile, and drilling
should commence in the second quarter of 2012.
Cuello Cuello: Peru
At the Cuello Cuello project in Peru, the relevant government
and community permits and approvals were received in
December 2011. In 2012 the 1,179 metre drilling campaign
that will test potential economic silver-gold mineralisation
in a high sulphidation epithermal prospect will commence
in the second quarter.
Pomona: Argentina
In 2011, an initial field review was carried out at the Pomona
project in Argentina. In 2012 the Company will conduct
detailed mapping and sampling and IP geophysical survey
programmes in order to define targets for drilling.
Copper projects
Following the acquisition of Southwestern Resources in 2008,
the Company currently holds a number of copper projects
located in the southern Andes in Peru, within a highly
prospective area for copper deposits. The Company has
committed 6% of the total 2012 budget and a dedicated
exploration team to drilling at the properties in order to
establish potential value.
• JA-001 From 86.0–160.0m depth –
74.0m at 1.54% Cu and 0.20 g/t Au
• JA-003 From 57.9–208.5m depth –
150.6m at 1.19% Cu and 0.46 g/t Au
• JA-013 From 0.0–184.0m depth –
184.0m at 0.65% Cu and 0.20 g/t Au
Includes: From 141.8–158.0m depth –
16.2m at 2.90% Cu and 0.61 g/t Au
In 2012, a second drilling campaign of 3,500 metres will focus
on the already identified mineralised zone and surrounding
area to locate new skarn blankets and to test for a potential
associated porphyritic system.
Alpacocha: Peru
In 2011, 408 metres were drilled at the Alpacocha copper
project. Exploration was focused mainly on the Paraiso target,
a porphyry-skarn type deposit, where two areas of interest
were identified, Paraiso West and Paraiso East. The drilling
programme in 2012 will increase significantly, to 3,000 metres
and will focus on the Paraiso target (East and West), where
geological mapping, sampling and geophysics will also
be completed.
Antay: Peru
At the 100% owned Antay copper project, the Company
is in the process of obtaining the necessary access permits
for the project.
Generative
The Company holds over one million hectares of prime
land in key geological regions across four countries and has
committed 3% of the total 2012 budget to conduct further
exploration in these premium areas.
1 Please note that all mineralised intersections in this
release are quoted as down-hole lengths, not true widths.
36 Hochschild Mining plc
Annual Report & Accounts 2011
We respect
the wellbeing
of our employees,
the environment
and the communities
where we operate.
37
Corporate responsibility
Letter from the Chairman
Our business success is due to our approach
of integrating the many aspects of corporate
responsibility into the Group’s decision-making.
$7.7mAmount spent in 2011 on social
and community welfare
activities
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Employees at Pallancata
Having completed my first year as Chairman of the Corporate Social
Responsibility Committee, I am pleased to introduce the Group’s 2011
Corporate Responsibility Report.
Since its inception, Hochschild Mining has taken great pride in managing
its business in a way that ensures returns not only to shareholders, but to
all stakeholders, including its employees and the communities surrounding
our operations, and with due regard to the impact of our activities on
the environment.
Over time, Hochschild Mining has earned a reputation for translating
these values into action as we firmly believe that our business success is due
to our approach of integrating the many aspects of corporate responsibility
into the Group’s decision-making.
Facilitating this process are teams of dedicated professionals who ensure
that the many risks we face in our industry are identified and controlled
by standards and procedures, supported by proven management systems.
We rely on the goodwill of the members of the communities located close
to our assets to be able to operate, whether in early stage exploration or
the construction or operation of an active mine. We therefore consider
it imperative that local communities are closely involved in our planning
processes in order to address their needs and take account of their concerns.
The communities and stakeholders in general are justifiably concerned with
the impact of our business on the environment. I am proud that we have invested
in world class management information systems to ensure that we meet all targets
with respect to air and water quality and the efficient use of natural resources.
Despite our ongoing commitment, it is with deep regret that I report that
we had three fatalities at our operations during 2011. In our view, every fatality
is avoidable and we remain determined in our pursuit of our zero fatality target.
We will continue to monitor, review and enhance our controls and also provide
the necessary training. We provide further details on page 41 of this report.
Within this report, we seek to highlight the initiatives we have in place to understand
our stakeholders, and how we use this insight to inform our approach to many
of the issues discussed, from safety to community engagement.
38 Hochschild Mining plc
Annual Report & Accounts 2011
Corporate responsibility
Letter from the Chairman continued
External recognition
The Group is proud of the progress made in the area of CSR reporting since our IPO
in 2006. In recognition of this, the 2010 CSR Report featured in the shortlist for the
Best Practice Awards 2011 drawn up by the UK Investor Relations Society.
This year we plan to join a select group of companies in Peru aiming to enhance their
capabilities of monitoring and reporting on CSR matters through the Socially Responsible
Company accreditation, granted by “Peru 2021”. This non-profit organisation is certified
by the Global Reporting Initiative and seeks to promote corporate social responsibility
as a sound business management discipline to facilitate sustainable development in Peru.
I would like to express my gratitude to my colleagues across the Group for their
continued efforts as we progressively build on our reporting framework and initiatives
in this crucial area.
Eduardo Hochschild
Executive Chairman
& Chairman of the CSR Committee
Members of the Caraibamba District
community taking part in the “Miners’ Day”
celebrations at Selene
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We prioritise these three areas in terms of resource
allocation, with respect to governance, policy development
and performance measurement. In our 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
Management of Corporate Responsibility
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 Corporate Responsibility 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. Eduardo
Hochschild has Board-level responsibility for CSR issues.
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 also attended by
members of the Group’s Legal and HR functions.
Whilst each area has its dedicated area of focus, they often
collaborate with each other as required, for example in the
provision of health services to the communities.
CR governance
Our fundamental
Group principles include
a commitment to safety,
health and environmental
protection and respect for
the community.
What is Hochschild Mining’s approach
to 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
CR Governance structure
Board of Directors
CSR Committee
Working Group
Community
Relations
Environment
Health &
hygiene
Safety
hr
And
legAl
40 Hochschild Mining plc
Annual Report & Accounts 2011
Corporate responsibility
CR governance continued
terms of Reference of the CSR Committee
Under its terms of reference, the CSR Committee is tasked with:
the CSR Committee’s work in 2011
During the year, the CSR Committee:
• Evaluating the effectiveness of the Group’s policies and
systems for identifying and managing health, safety and
environmental risks within the Group’s operations
• Assessing the policies and systems within the Group for
ensuring compliance with health, safety and environmental
regulatory requirements
• Assessing the performance of the Group with regard to the
impact of health, safety, environmental and community
relations decisions and actions upon employees,
communities and other third parties. It also assesses the
impact of such decisions and actions on the reputation
of the Group
• Receiving reports from management concerning all fatalities
and serious accidents within the Group and actions taken
by management following each incident
• Evaluating and overseeing, on behalf of the Board, the
quality and integrity of any reporting to external stakeholders
concerning health, safety, environmental and community
relations issues
• Reviewing the results of independent audits commissioned
of the Group’s performance in regard to health, safety,
environmental or community relations matters, reviewing
any strategies and action plans developed by management
in response to issues raised and, where appropriate making
recommendations to the Board concerning the same
• Reviewed the investigations into the three fatalities that
occurred during the year and the action plans formulated by
management to implement the associated recommendations
• Approved the 2010 Corporate Responsibility Report
• Monitored the execution of the yearly plan in each of the
four key areas of focus
• Considered the ongoing progress of the implementation
of a number of internationally accredited management
information systems to control and monitor CSR related risks
• Monitored the status of the Group-wide initiatives launched
to raise the profile of safe working practices to assist with
accident prevention
• Considered updates from the work done across the Group
to manage community and labour relations
In addition, in November 2011, the full Board received a
presentation on the new areas of focus of the Group’s
Community Relations’ strategy (see box on page 44).
Reporting
Where Group-wide information is not available, performance
indicators are provided in respect of the Peruvian operations,
which represent approximately 70% of the Group’s
attributable production.
Employees at Arcata
Read more about how we mitigate
social and environmental risks
to our business
See page 59
Our commitment to Corporate Responsibility
is reflected in our Executive Remuneration
policy. See the Directors’ Remuneration Report
for more details
See page 80
41
Safety
the Hochschild approach to safety
Mining has an inherently high risk profile and we therefore
consider safety to be our highest priority. The Board and
management are committed to ensuring employee safety
is an integral part of measuring the successful implementation
of corporate strategy.
The Group regrets that there were three fatalities during
the year. In the first incident, an assistant to a scoop operator
at the San Jose operation was fatally injured after falling down
an ore pass. The second fatality occurred after an electric shock
was sustained by one of the Group’s electricians during routine
maintenance at the Selene plant. The third incident took place
at the Group’s Pallancata operation where a maintenance
supervisor sustained fatal injuries from a fall in the process
of laying a cable.
Circumstances leading to these tragic events have been
investigated by management, reported to the Board and 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 carry out safety briefings.
Our achievements in 2011
• The Arcata and Selene units obtained OHSAS 18001: 2001
accreditation
• 240 innovative safety ideas were submitted by employees
in the second running of the Luis Hochschild Safety Award.
The top 10 suggestions were selected for implementation
across the Group by each mining unit
• Implementation of the “Fatal Risk Control” software in
partnership with Expectra, a South African based consultancy,
which will enable the Group to develop a clear Organisational
Safety Strategy based on international best practice
• The Det Norske Veritas (“DNV”) safety management
system was implemented to Level 2 at the Azuca, Crespo
and Inmaculada projects, as certified by the Group’s
internal audit function
• All personnel at the Peruvian operating units attended
five mandatory safety training courses
• Employees in the emergency brigades at the operations
received training to intermediate level
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2011 Performance
target
8% reduction in LTIFR
In relation to the DNV
Management Information
System, to achieve:
– Level 5 at Ares
– Level 6 at San Jose
– Level 7 at Arcata and
Pallancata
To continue offering
monthly safety awards
To achieve OHSAS 18001
accreditation at Pallancata
and San Jose and recertify
Ares, Arcata, and
the Selene Plant as
OHSAS 18001 compliant
Commentary
Status
✗
A reduction of only 2%
was achieved
✓ In addition to achieving
our targets for the year,
the Group was able to
obtain Level 2 as certified
by the Group’s Internal
Audit function, at the
Group’s Advanced Projects
✓
Partial Arcata and Selene were
certified OHSAS 18001
compliant by the leading
certification company, SGS
To provide Stage 2 training
to emergency crews
✓
Safety indicators
Fatal accidents
Lost time accidents1
LTIFR2
Accident Severity Index3
Accidentability rate4
2011
2010
2009
3
81
3.63
910
3.30
2
66
3.70
777
2.88
2
79
5.22
1,485
7.76
1 Accidents leading to an absence of one day or more.
2 Calculated as total number of accidents per million labour hours.
3 Calculated as total number of days lost per million labour hours.
4 Calculated as LTIFR x Accident Severity divided by 1,000.
2012 targets
• A 6% reduction in LTIFR
• The Group seeks to achieve the following with respect
to the DNV safety management system:
– Maintain and further develop current levels of
implementation at Peruvian and Argentinian units
– Level 3 at the Inmaculada Project
• Launching a safety campaign highlighting the potential
impact on family life
• To evaluate the effectiveness of the “Fatal Risk Control”
software at the Pallancata unit with a view to implementation
at other Operating units
• To provide training to the Group’s emergency brigades
to advanced level
42 Hochschild Mining plc
Annual Report & Accounts 2011
Corporate responsibility
Health & hygiene
the Hochschild approach to health & hygiene
Underlining the importance we place on our people and their
wellbeing, the Group’s Health & Hygiene team is tasked with
providing an integrated approach to employee welfare.
The Hygiene team was successfully integrated into the Health
team during the year and they have established themselves as
key contributors in improving the quality of life at work and
preventing incidences of occupational illness.
The team also comprises members with responsibility for
occupational psychology.
• In relation to Hygiene, 2011 saw the roll-out of services across
all operations and also at the Advanced Projects; Inmaculada,
Crespo and Azuca
• The Occupational Psychology team embedded processes
within the Peruvian and Argentinian operations, and further
extended its reach to the Advanced Projects
• As for Community Relations support, we updated the design
of the mobile medical unit and two new units with revised
specifications were presented to the regional authorities (see
the Community Relations section for further information)
2011 Performance
target
Status
Commentary
Complete implementation
of the Health & Hygiene
SAP module in Peru
and Argentina
Make further progress to
include Hygiene-related
initiatives within the existing
Health team
Build upon the promising
start made by the Wellbeing
Programme in 2009 and to
consider implementation
in Argentina
Partial
Completed in Peru in
October 2011 with
Argentina scheduled
for completion in 2012
✓ A number of initiatives
were launched during
the year including the
provision of training
and periodic inspections,
risk assessments and
hazard identification
✓ Various activities were
undertaken during the
year to promote good
mental health including:
specialist evaluations
of drivers and operators
of critical machinery
post-incident
assessments and
scheduled health checks
Health indicators
Average number of
medical attendances
at Peruvian operations
and at San Jose,
per month
Average number
of work-related
incidences requiring
medical attention at
Peruvian operations
and at San Jose,
per month
Average number of
occupational health
examinations at the
Group’s wholly-owned
Peruvian operations
and Moris, per month
2012 targets
2011
2010
2009
2008
2007
3,065
2,961
2,690
2,851
2,505
32
25.75
24.5
n/a
n/a
396
237
406
238
224
• Complete the uploading of data onto the Health & Hygiene
SAP module
• To establish a programme of monitoring occupational illness
for research purposes and ultimately improving the provision
of our services
• To develop the psychology programme for our units
and Advanced Projects
Our achievements in 2011
During the year:
• With regards to Healthcare Services, we developed
educational programmes on disease prevention and
worked in conjunction with our safety colleagues to:
– Improve our emergency response capacity through
training and the acquisition of equipment
– Review the accident rating procedure to ensure our
ongoing compliance with technical and legal standards
• With regard to Occupational Health, we improved the health
examination process for those joining the Group and the
related insurance procedures. By doing so, our people are
significantly protected from the moment they start their
career with us
43
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Our people
the Hochschild approach to our people
Training and development
The quality of our people is key to the success of the business
in achieving its strategic objectives and we therefore seek
to attract and retain the best people. The Group’s HR
team offers various incentives to ensure that our people
contribute to the Group’s success which include the
provision of competitive remuneration, a positive working
environment (measured by the Organisational Climate
Survey) and ongoing professional development.
Group values and labour relations
One of the primary responsibilities of the HR team is to
ensure the clear ongoing communication of the Group’s
corporate values: Integrity, Teamwork, Quality and Excellence,
Responsibility and Commitment to our People. These values
are embodied in our Code of Conduct which, amongst
other things, sets out our commitment to the fair treatment
of all employees and the right to be free of harassment
or intimidation in the workplace. We recognise the core
labour rights principles and, in this respect, support the
right to freedom of association and collective bargaining.
Approximately 59% of our total workforce are represented
by trade unions or similar bodies.
2011 Performance
target
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
Status
✓
✓
✓
✓
Our achievements in 2011
The activities undertaken by the HR team during 2011
described below, provide an indication of how they have
sought to accomplish their mission.
Developing our people
The second leadership workshop for senior management
took place in Lima facilitated by IAE Business School.
For operational mid-management, the “Developing Leaders”
programme was launched in Peru and Argentina, and for
administrative managers, the first workshop of the leadership
programme entitled “Managerial Skills” was delivered also in
conjunction with IAE Business School.
The exploration team continued with a programme entitled
“High Performance Team”.
Managing our talent
During the year, the key position holders were identified
as part of the Group’s Talent Inventory Review (“TIR”).
Tailored development plans for each individual have been
agreed and, in 2012, there will be a focus on implementation
with resources specifically allocated for that purpose.
Creating a better place to work
Based on the Organisational Climate Survey of 2010, action
plans to improve the working environment were designed
and 363 actions were implemented across the Group.
These included actions to improve internal communications
at one of the Group’s offices and, at another office, to
encourage team spirit and a sense of collaboration with
the Group as a whole.
The next survey is scheduled to be carried out later this year.
Hochschild values
During 2011, a programme was launched which sought
to embed the Group’s core corporate values through training,
briefings and team events. In 2012, the programme will also
incorporate active participation by managers with a focus on
enhancing personal performance in line with these values.
People indicators
General
2011
2010
2009
Average number of group employees
6,395
5,776
4,969
training
Average number of hours of training
undertaken per employee in Peru
Percentage of workforce trained during
the year in Peru
49.42
17.83
14.03
90%
92%
94%
labour relations
Number of production days lost
as a result of industrial unrest
2012 targets
28
1
40.5
• Implement the development plans designed as part of
the TIR
• Continue with the entire leadership programme at all
levels of management
• Start the second stage of the “Developing Leaders”
programme for mid-management in Peru and Argentina
• Achieve a three point increase in the Organisational Climate
Survey against the results of the last survey commissioned
in 2010
• Establish a global recruitment strategy
44 Hochschild Mining plc
Annual Report & Accounts 2011
Corporate responsibility
Working together with
local communities
the Hochschild approach to working with our communities
We have, since the Group’s early days, shaped our community-
oriented activities to establish positive relationships with the
local communities and to contribute to their development.
We try to do this by applying the following principles:
Revised Community
Relations strategy
• Foster mutual respect and co-existence with local communities
the Group’s CR vision is:
• Achieve mutually beneficial agreements
• Improve the quality of life of community residents
• Improve the health, education and nutrition of local
community members
• Encourage good relationships and co-ordination with
stakeholders to promote sustainable development
Community Relations strategic review
The Group reviewed its Community Relations (‘CR’)strategy
during the year, amidst a constantly evolving landscape.
The review resulted in the formulation of a strategy that
ensures the Community Relations team, its practices and its
long-term objectives have adapted to meet the new challenges
and, more importantly, to meet the standards expected of a
responsible mining company (see opposite).
To be a role model corporation that promotes sustainable
development in its areas of influence and assures social
and economic wellbeing for all its stakeholders.
the Group’s CR mission is:
To work together with our surrounding communities and the State
to improve health, nutrition, and the education of the population
and promote their development through sustainable projects.
In order to deliver its corporate vision, the Group has
indentified its primary Area of Influence as the areas
surrounding its southern Peruvian operations covering
the regions of Cusco, Apurimac, Ayacucho and Arequipa.
In addition to providing resources to meet the communities’
needs locally, the Group has identified towns that benefit
from existing infrastructure and that can act as host locations
for the various services to be provided by the Group.
These “Intermediate Cities” are well positioned to offer better
access to health services and opportunities for education.
The Group is currently working on the Development Plans
for each of the Intermediate Cities with services to commence
in 2012/2013.
Employees from Pallancata
competing in a football tournament
Arcata employees and community members
participating in one of the events organised
by the Group to mark World Environment Day
45
2011 Performance
target
Ongoing target
Status
Commentary
Zero “Loss of Production days” resulting from community
conflicts.
✗
One production day was lost at the Selene plant.
Specific targets
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 development plans were updated to prioritise projects
that can be supported by the Regional and Local Government
(Provincial and District) in Apurimac
✓ In implementing our Médico de Cabecera programme (see Case
Study below) we co-ordinated with health authorities to improve
the provision of State Healthcare (SIS) in Arequipa, and Apurimac.
The Health Authority of Arequipa acknowledged the contribution
of our service in extending coverage of SIS. In education, progress
was made with an initial training programme for teachers through
the Maestro LÍder Programme (see Case Study on page 46)
✓ Amongst other things, co-operation agreements were signed with
the communities of Pampamarca and Iscahuaca (located close
to the Group’s Selene mine) and the Regional Government for
the joint funding and technical support for projects selected
by the communities.
✓ Educational institutions have been identified and implementation
plans are being developed to provide services within close
proximity to the communities.
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Official launch event of the programme
attended by Company representatives and
members of the Medical team
Médico de Cabecera
travelling Doctor Programme
During the year, Hochschild Mining launched the Médico
de Cabecera programme with the aim of taking health
services to the rural communities; initially to those located
close to the Group’s Pallancata and Ares mines. Through the
scheme, the Group provides direct healthcare services, as
appropriate and general health advice and co-ordinates
health awareness campaigns.
The Group has worked in partnership with regional authorities
to link the services with the national health network to ensure
complete coverage under the national health system, SIS.
46 Hochschild Mining plc
Annual Report & Accounts 2011
Corporate responsibility
Working together with local communities continued
Our achievements in 2011
We made significant progress during the year as
described below.
2012 targets
• Zero “Loss of Production” days arising as a result of
community conflicts
• We demonstrated our commitment to follow through
• To conclude all agreements envisaged in the mutually
with our promises to our communities by:
approved annual plan
– Designing a system to monitor compliance with our
commitments to the community and which is subject
to monthly review
• To make a measurable contribution to improvements
in the quality of life of the communities living close to
the Group’s operations
– Establishing Framework Agreements with communities
to consolidate commitments acquired over time which
set a clear route for our long-term relationship with
the communities
• We refocused our medium and long-term projects by:
– Focusing on categories of beneficiaries, such as:
schoolchildren, with an emphasis on supporting students
and teachers, and high school students progressing to
higher education
• We provided employment opportunities to Community
Members by:
– Implementing an agreement with the communities
close to Arcata whereby the Group sponsored the
training of community members by the renowned
mining technical institute, Cetemin. On completion
of the course, participants were offered the opportunity
to take up employment with the Group
• We promoted sustainable development through numerous
means by:
– Supporting members of the Chuqñihuaqui community
located close to the Arcata operating unit to establish
a Community Company which subsequently provided
dumper truck services to the Group for the transportation
of material
– The continued commitment of financial and technical
resources to Alpaca and trout breeding programmes,
the main economic activities in the Peruvian highlands
– Our support for the local Development Agency of Perito
Moreno, the closest town to our San Jose operations
in Argentina. Working with governmental authorities
(INTA) we have provided advice on agricultural practices
and the marketing of handmade crafts made by local
artisanal producers
Community Relations indicators
2011
2010
2009
2008
Community investment
$7.7m $6.7m $6.0m $4.6m
Production days lost as a result
of community conflict
1
0
1.5
0
Maestro Líder
teacher leader Programme
Maestro Líder is a programme developed by the Group to train
teachers based in schools within the areas surrounding the
Group’s operations in Peru. In conjunction with prominent
educational organisations, the Group held week long training
sessions focused on enhancing teaching skills in order to
improve student learning.
Over 300 teachers from elementary and high schools
participated in the programme which was delivered across
three locations; Lima, Cusco and Arequipa, and each teacher
received a certificate in the areas of teaching literacy, the use
of Information Technology and management.
Each participant also received a laptop at the end of the course
for use as a tool in their ongoing endeavours.
Participants in the Maestro Líder
programme held in Lima
47
Managing our
environmental impact
the Hochschild approach to environmental management
We are committed to minimising the environmental impact
of our business and to facilitate the ongoing sustainability
of the land where we develop operations and activities.
In addition, as the most valuable resource, water usage and
discharge are subject to strict protocols and procedures in
order to comply with local and international regulations.
2011 Performance
target
Group Compliance Performance Indicator above 80%
(see box on page 48)
Obtain ISO14001 certification for Ares, Arcata, Selene,
Pallancata and San Jose
In order to support our efforts, we are committed to using
international best practice. The ISO14001 certification
obtained for our five operations demonstrate our efforts in
delivering these high standards to all of our main operations.
Submit Crespo and Inmaculada Environmental
impact assessments*
Update mine closure plans for Ares, Arcata, Selene
and Pallancata
Status
✓
✓
✓
✓
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* This target has been restated to exclude Azuca due to the business decision to delay
the Feasibility Study at the project. Further details can be found in the Operating and
exploration review.
Environmental indicators
Average monthly fresh water
consumption per metric tonne
of treated ore (cubic metres)
Average monthly electricity
consumption per metric tonne
of treated ore (Kw-h)
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
2011
0.24
2010
0.21
2009
0.63
53.29
57.75
53.32
1.29
0.97
1.23
11.30
12.47
10.31
0
0
0
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)
32,424
30,628
29,668
69%
32%
27%
37,979
37,538
35,606
Figures relate to the Group’s mines in Ares, Arcata, Selene, Pallancata and San Jose
unless otherwise stated.
The structure of the environmental team was revised
during the year to ensure sufficient support was provided
to the exploration and projects team and thereby ensures
our involvement from the inception of a project through
to mine closure.
Hochschild Environmental team
Corporate Environmental manager
Environmental
Chief for
Exploration
Environmental
Superintendent
for Projects
Environmental
Superintendent
for Operations
Environmental
Superintendent
for Closure and
Rehabilitation
Through this structure, dedicated personnel in the
environmental team provide the following services:
• Operations: Implementing standards, procedures and
best practice
• Permitting and new projects: assuring compliance with local
and international regulations along the mine life cycle
• Social work: Communications, training, support
and facilitating participation of communities in
environmental works
• Explorations: Implementing environmental controls
in greenfield and brownfield projects
• Closure: Rehabilitation and remediation of disturbed
areas where mining activity has ceased
The Environmental department works together with the
operational teams, community relations and the legal function
in the application for, and ongoing compliance with mining
permits, thereby assuring continuity of operations.
48 Hochschild Mining plc
Annual Report & Accounts 2011
Corporate responsibility
Managing our environmental impact continued
Our achievements in 2011
• Implementation of ISO14001 compliant environmental
management systems at the Group’s operations at Ares,
Arcata, Selene, Pallancata and San Jose
• Environmental impact studies (“EIS”) for Inmaculada and
Crespo submitted to Peruvian Energy and Mines Ministry
according to the operational plan
• Environmental permitting performed in connection with
scheduled expansion programmes and in the planning of
new infrastructure projects, such as mine capacity increases
and the construction of a new tailings dam
Compliance performance
indicators (CPI)
Environmental CPIs are the internally designed measures
to evaluate the environmental performance of each
function and allows us to identify strengths and weaknesses
of environmental management.
The CPIs operate under the principle that everybody has
a role to play in responsible environmental management.
• Commencing the mine closure and rehabilitation for the
CPIs have four evaluation criteria:
Moris mine in Mexico according to the internal plan
• General update of mine closure provisions, reviewing
activities and changes in costs for the different countries
• Group-wide initiatives to raise the general awareness
of environmental issues amongst employees
2012 targets
• Group Compliance Performance Indicator above 89%
(see box opposite)
• Maintain ISO14001 certification for Ares, Arcata, Selene,
Pallancata and San Jose
• Approval of Crespo and Inmaculada EISs in the last quarter
of 2012
• Inspections and monitoring: to identify sub-standard
conditions and opportunities for improvement
• Environmental quality: a pro-active measure to ensure
that all discharges to the environment are within
acceptable limits
• Environmental goal and targets: to monitor the
accomplishment of the corporate strategic plan
• Environmental management: documents control
of standards, procedures, records, etc
View of the area surrounding Inmaculada
The Group’s management systems
are internationally accredited
49
The business has a
robust management
structure, is in
sound financial
health, and has a
committed approach
to governance.
50 Hochschild Mining plc
Annual Report & Accounts 2011
Financial review & Risk management
Financial review
Revenue $m
Adjusted EBITDA $m
Cash flow from operating activities $m
988
752
540
434
305
398
250
148
142
07
08
09
10
11
07
08
09
10
11
563
464
304
201
21
07
79
08
09
10
11
Silver cash costs $/oz Ag co-product
Net Revenue1
$000 unless otherwise indicated
year ended
31 Dec 2011
Gold cash costs $/oz Au co-product
752,322
987,662
Year ended
31 Dec 2010 % change
+31%
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
Earnings per share $
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
0.28
of the Group and to facilitate comparison with prior years.
0.49
0.27
7.4
5.5
Revenue
0.05
0.17
09
07
Gross revenue
08
10
08
Gross revenue from continuing operations increased 30%
to $1,043.7 million in 2011 (2010: $802.7 million) driven
by higher metal prices during the year which offset lower
Group production.
+75%
11
07
Silver
Gross revenue from silver increased 37% in 2011 to
$755.8 million (2010: $549.7 million) as a result of higher
prices. The total amount of silver ounces sold in 2011
decreased to 21,792 koz (2010: 24,283 koz) mainly due
to lower year-on-year production.
Gold
Gross revenue from gold increased 14% in 2011 to
$287.8 million (2010: $253.0 million) also as a result of
higher prices. The total amount of gold ounces sold in 2011
decreased to 182.0 koz (2010: 199.9 koz) mainly due to lower
year-on-year production.
Gross average realised sales prices
The following table provides figures for average realised prices
and ounces sold for 2011 and 2010:
Attributable silver production (koz)
12.0
14,980
Attributable gold production (koz)
504
127
488
Cash costs ($/oz Ag co-product)2
8.7
7.3
Cash costs ($/oz Au co-product)2
300
11.96
561
17,768
504
144
8.74
504
Adjusted EBITDA3
563,403
397,731
Profit from continuing operations 268,919
158,830
31
561
(16)
(12)
37
11
42
69
Profit from continuing operations
(post exceptional)
11
07
10
09
272,338
08
09
216,665
10
11
26
Earnings per share
(pre exceptional)
Earnings per share
(post exceptional)
Cash flow from
operating activities4
$0.49
$0.28
$0.50
$0.46
464,110
304,232
Resource life-of-mine (years)
9.7
8.7
75
9
53
11
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 Jose. 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 net finance
income/(cost), foreign exchange loss 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.
Revenue $m
Adjusted EBITDA $m
Cash flow from operating activities $m
51
988
752
540
434
305
398
250
148
142
07
08
09
10
11
07
08
09
10
11
+31%
563
464
304
201
21
07
79
08
09
10
11
Earnings per share $
Silver cash costs $/oz Ag co-product
Gold cash costs $/oz Au co-product
0.49
12.0
504
488
504
561
8.7
7.4
7.3
5.5
300
0.27
0.28
0.17
0.05
07
08
09
10
11
07
08
09
10
11
07
08
09
10
11
Average realised prices
+75%
Revenue by mine
year ended
31 Dec 2011
Year ended
31 Dec 2010
$000 unless otherwise indicated
Silver ounces sold (koz)
21,792
24,283
Arcata
Avg. realised silver price ($/oz)
Gold ounces sold (koz)
Avg. realised gold price ($/oz)
34.7
182.0
1,582
22.6
199.9
1,266
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 2011, the Group recorded commercial discounts of
$56.0 million (2010: $50.5 million). The ratio of commercial
discounts to gross revenue in 2011 decreased to 5%
(2010: 6%).
Net revenue
Net revenue increased by 31% to $987.7 million
(2010: $752.3 million), comprising silver revenue
of $708.3 million and gold revenue of $279.2 million.
In 2011 silver accounted for 72% and gold 28% of the
Company’s consolidated net revenue compared to 68%
and 32% respectively in 2010.
Ares
Selene
Pallancata
San Jose
Moris
Gold revenue
Arcata
Ares
Selene
Pallancata
San Jose
Moris
Commercial discounts
net gold revenue
Other revenue1
net revenue
35
69
17
15
39
15
17
year ended
31 Dec 2011
Year ended
31 Dec 2010
% change
207,429
173,942
21,168
16,586
19
28
–
13
(100)
316,344
208,579
2,273
233,789
123,393
1,946
26,449
46,929
–
31,264
40,239
2
(100)
54,437
43,712
129,994
108,849
30,025
(8,584)
28,953
(9,079)
279,250
243,940
84
105
987,662
752,322
25
19
4
(5)
14
(20)
31
Commercial discounts
(47,465)
(41,392)
net silver revenue
708,328
508,277
1 Other revenue includes revenue from (i) the sale of energy in Peru and,
(ii) administrative services in Mexico.
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52 Hochschild Mining plc
Annual Report & Accounts 2011
Financial review & Risk management
Financial review continued
Costs
Total pre-exceptional cost of sales increased 17% to
$404.3 million in 2011 (2010: $345.7 million) mainly as a
result of the increase in the direct production cost of 16% to
$261.2 million (2010: $225.2 million). The direct production
cost increment occurred mainly in mine costs as a result of
an increase in the number of stopes mined. Direct costs also
increased due to inflation in labour, supplies and oil prices in
Peru and Argentina. Depreciation cost was $103.7 million in
2011 (2010: $101.6 million), other items costs which principally
includes workers’ profit sharing, were $32.4 million in
2011 (2010: $22.6 million) and change in inventories was
$6.9 million in 2011 (2010: $(3.7) million).
Unit cost per tonne
The Company reported an overall increase in unit cost
per tonne at its main operations of 16% in 2011 to $95.32
(2010: $82.3).
Unit cost per tonne by operation (including royalties)*
Operating unit ($/tonne)
Main operations
Peru
Arcata
Pallancata
Argentina
San Jose
Others
Ares
Moris
total Company
year ended
31 Dec 2011
Year ended
31 Dec 2010
% change
91.4
67.1
77.0
60.4
181.7
181.7
53.1
120.6
17.9
79.1
78.8
59.0
71.1
51.8
152.3
152.3
35.1
107.5
16.3
61.3
16
14
8
17
19
19
51
12
10
29
* Unit cost per tonne is calculated by dividing mine and geology costs by extracted
tonnage and plant and other costs by treated tonnage.
Unit cost per tonne by operation (excluding royalties)*
Operating unit ($/tonne)
Main operations
Peru
Arcata
Pallancata
Argentina
San Jose
Others
Ares
Moris
total Company
unit cost per
tonne 2011
Unit cost per
tonne 2010
% change
83.8
60.8
70.2
54.5
169.6
169.6
52.1
118.0
17.9
73.5
72.5
53.2
65.0
46.2
144.1
144.1
34.3
103.6
16.3
57.2
16
14
8
18
18
18
52
14
10
28
* Unit cost per tonne is calculated by dividing mine and geology costs by extracted
tonnage and plant and other costs by treated tonnage.
Cash costs
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 $9.3 to $13.0 per ounce and from
$535 to $613 per ounce, respectively. Silver and gold cash
costs from main operations (Arcata, Pallancata and San Jose)
increased from $8.7 to $12.0 per ounce and from $504 to
$561 per ounce, respectively. The increase in silver cash costs
resulted from higher production costs and grade declines at
both main Peruvian operations due to the incorporation of
lower grade material. In addition, cash costs also increased due
to higher precious metal prices causing rises in workers profit
sharing contributions, higher commercial discounts and
increased export taxes at San Jose.
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 $4.9 per silver ounce (2010: $3.0 per silver ounce) and
($1,987) per gold ounce (2010: ($1,153) per gold ounce).
53
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In addition, the Group capitalises part of its brownfield
exploration, which mostly relates to costs incurred converting
potential resource to the Inferred or Measured & Indicated
category. In 2011, the Group capitalised $13.2 million relating
to brownfield exploration compared to $12.0 million in 2010,
bringing the total investment in exploration for 2011 to
$60.6 million (2010: $53.5 million). In addition, $10.1 million
was invested in the Company’s Advanced Projects.
Furthermore, in 2011, in line with the Company’s strategy
to further develop its production assets, capital expenditure
on Advanced Projects and current operations included an
additional $14 million to convert Inferred resources into
Measured & Indicated resources.
Selling expenses
Selling expenses increased to $39.0 million (2010: $26.9 million)
mainly as a result of export duties at San Jose, 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 dore).
Other income/expenses
Other income before exceptional items was $7.1 million
(2010: $5.6 million), mainly reflecting a $3.3 million export tax
credit in Argentina. Other expenses before exceptional items
reached $15.8 million (2010: $11.0 million), the principal
component being an increase in mine closure provisions
of $8.2 million due to the revision of the mine closure plans
in all units.
Profit from continuing operations
Profit from continuing operations before exceptional items,
net finance costs and income tax increased to $424.0 million
(2010: $266.6 million) as a result of the factors detailed above.
Adjusted EBItDA
Adjusted EBITDA increased by 42% over the period to
$563.4 million (2010: $397.7 million) driven primarily by
higher silver and gold prices.
Adjusted EBITDA is calculated as profit from continuing
operations before net finance income/(cost), foreign
exchange loss and income tax plus depreciation and
exploration expenses other than personnel and other
exploration related fixed expenses.
Cash cost reconciliation*
$000 unless otherwise indicated
Group cash cost
(+) Cost of sales
year ended
31 Dec 2011
Year ended
31 Dec 2010 % change
394,225
323,560
22
404,291
345,667
(-) Depreciation in cost of sales
(105,085)
(99,498)
(+) Selling expenses
(+) Commercial deductions
Gold
Silver
Revenue
Gold
Silver
Others
Ounces sold
Gold
Silver
Group cash cost ($/oz)
Co-product Au
Co-product Ag
By-product Au
By-product Ag
38,970
56,049
8,584
26,920
50,471
9,079
47,465
41,392
987,662
752,322
279,250
243,940
708,328
508,277
6
45
11
(5)
15
31
14
39
84
105
(20)
21,974
23,702
182
196
21,792
23,506
613
13.0
535
9.30
(1,987)
(1,153)
4.88
3.00
(7)
(7)
(7)
15
40
72
63
* Cash costs are calculated to include cost of sales, treatment charges, and selling
expenses before exceptional items less depreciation included in cost of sales.
Cash costs are calculated based on pre-exceptional figures.
Co-product cash cost per ounce is the cash cost allocated to the
primary metal (allocation based on proportion of revenue),
divided by the ounces sold of the primary metal. By-product
cash cost per ounce is the total cash cost minus revenue and
commercial discounts of the by-product divided by the ounces
sold of the primary metal.
Administrative expenses
Administrative expenses before exceptional items decreased
by 3% to $64.4 million (2010: $66.2 million) mainly due to
a lower provision for the Long Term Incentive Plan and the
elimination of the Voluntary Contribution to the Peruvian
Government following a revision to the tax regime in Peru.
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 14% to
$47.3 million in 2011 (2010: $41.5 million). Further detail on
the exploration programme can be found in the exploration
section on page 15.
54 Hochschild Mining plc
Annual Report & Accounts 2011
Financial review & Risk management
Financial review continued
Adjusted EBITDA
$000 unless otherwise indicated
Profit from continuing
operations before exceptional
items, net finance cost, foreign
exchange loss and income tax
year ended
31 Dec 2011
Year ended
31 Dec 2010
% change
423,973
266,626
59
Operating margin
43%
35%
Depreciation and amortisation
in cost of sales
Depreciation and amortisation
in administrative expenses
Exploration expenses
Personnel and other
exploration related
fixed expenses
Adjusted EBITDA
105,085
99,498
1,903
47,336
2,048
41,537
(14,894)
(11,978)
563,403
397,731
6
(7)
14
(24)
42
Adjusted EBITDA margin
57%
53%
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 $11.7 million in 2011
(2010: ($4.6) million), a result of the gain in the value of the
Group’s holding of Gold Resource Corp’s common shares.
Finance income
Finance income before exceptional items increased by 15%
to $4.7 million (2010: $4.1 million) mainly due to the increase
of interest received on time deposits.
Finance costs
Finance costs decreased by 28% to $21.3 million in 2011
(2010: $29.5 million). Interest costs decreased to $15.3 million
in 2011 (2010: $17.3 million). In addition, finance costs in
2010 included a $7.6 million loss on Zero Cost Collar
derivative contracts.
In January 2011 Hochschild repaid in full its syndicated bank
loan facility. The Group has no outstanding positions on
currency or commodity hedges.
Foreign exchange losses
The Group recognised a foreign exchange loss of $1.6 million
(2010: $0.03 million gain) as a result of transactions in
currencies other than the functional currency.
Income tax
The Group’s pre-exceptional effective tax rate increased
to 35.6% in 2011 (2010: 32.9%). This increase is mainly
explained by three new taxes introduced in Peru in Q4 2011,
the New Mining Royalty (“NMR”), the Special Mining Tax
(“SMT”) and the Special Mining Assessment (“SMA”); detailed
information on these taxes (collectively referred to as the
“New Taxes”) is provided below. In addition, in 2011
Hochschild recognised the impact of a withholding tax
related to dividends declared from the operating companies
to the UK parent company.
Overview of the New Taxes
The application of the New Taxes is dependent on the
presence or otherwise of a tax stability agreement with
the Peruvian Government. These taxes replace a royalty,
(the “Former Royalty”) and a Voluntary Contribution (the
“Voluntary Contribution”). The Voluntary Contribution was
calculated using a formula which, in the case of Hochschild,
is approximate to 1.25% of Net Income.
NMR
The NMR applies to operating assets without stability
agreements. It differs from the Former Royalty by changing the
basis of calculation from sales to operating income. The NMR
is calculated by applying a progressive scale of rates that range
from 1% to 12% depending on the level of operating margin.
A minimum amount of NMR is payable equivalent to 1%
of Revenue. The Former Royalty was accounted for in the
Cost of Sales line but the NMR will be accounted for in the
Income Tax line.
SMT
The SMT is a new tax, also payable by mining companies with
respect to operating assets without stability agreements, and is
calculated on the same basis as the NMR. The rate of the SMT
ranges from 2% to 8.4% depending on the level of operating
margin. Unlike the NMR however, there is no minimum tax
payable. The SMT is accounted for in the Income Tax line.
SMA
The SMA is an assessment raised on mining companies
with respect to operating assets with stability agreements, to
calculate an amount payable to the State on a voluntary basis.
The rate used to calculate the assessment ranges from 4%
to 13.12% of operating income, depending on the level
of operating margin. The SMA is calculated on operating
income after the deduction of payments due under the
Former Royalty, which continues to be payable.
Hochschild does not have a stability agreement in place for
Ares or Pallancata, and is therefore required to pay the NMR
and the SMT in respect of those assets. The same will also apply
for mines operated by the Company in Peru in the future
(for example Inmaculada and Crespo).
55
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In the case of Arcata, having reported to the Government
that it waived its tax stability agreement in June 2009, the
Company is required to pay the SMT. However the Peruvian
Government is yet to confirm the waiver of the stability
agreement. Therefore, Arcata will continue to pay the Former
Royalty (which is accounted for in the Cost of Sales line).
The NMR and SMT payments will be deductable for the
calculation of workers’ profit share and Income Tax.
Exceptional items
Exceptional items in 2011 totalled $3.4 million after tax
(2010: ($57.8 million). This mainly comprises:
Positive exceptional items
Main items
Reversal/(Impairment
and write-off of assets)
(net)
$000
1,210
Finance income
5,989
Description of main items
Corresponds to the reversal
of the write-off recorded
in 2010 related to the
100% dore project at the
San Jose mine.
Corresponds to the gain of
$6,386,000 on the sale of the
residual stake in Lake Shore
Gold, net of the loss
generated by the sale of
Golden Minerals Company
shares of $397,000.
Negative exceptional items
Main items
Other expenses
Share of post-tax losses
of associates and joint
ventures accounted
under equity method
Loss from changes in
the fair value of financial
instruments
$000
(1,408)
(261)
Description of main items
The provision of termination
benefits due to workers as a
result of the closure of the
Moris mine.
Loss resulting from
dilution of holding in
Gold Resource Corp.
(2,111) Mainly corresponds to the fair
value adjustment of the
warrants in Golden Minerals
Company and Iron Creek
Capital Corp of $1,563,000
and $139,000 respectively.
In addition, this amount
includes the impairment of
Brionor Resources and
Empire Petroleum Corp of
$380,000 and $50,000
respectively.
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
year ended
31 Dec 2011
Year ended
31 Dec 2010
Change
464,110
304,232 159,878
(139,898)
198,963 (338,861)
(221,901)
(55,010)
(166,891)
102,311
448,185 (345,874)
Operating cash flow increased 53% to $464.1 million from
$304.2 million in 2010, mainly due to higher metal prices.
Net cash from investing activities decreased to $(139.9) million
in 2011 from $199.0 million in 2010, primarily due to the
reduction in the Company’s holding in Lake Shore Gold
during 2010 and planned increases in capital expenditure
commitments during 2011 including the costs associated
with progressing the Advanced Projects through to feasibility.
Finally, cash from financing activities decreased to $(221.9)
million from $(55.0) million in 2010, primarily as a result of
the prepayment of the syndicated loan ($114.3 million), and
incremental dividend payments to Hochschild Mining plc
shareholders ($13.5 million in 2011 compared to $20.3 million
in 2010) and to IMZ, the Group’s joint venture partner in
Pallancata ($26.0 million in 2011 compared to $54.0 million
in 2010). As a result, total cash generated decreased from
$448.2 million in 2010 to $102.3 million in 2011
($346 million difference).
Working capital
$000
Trade and other receivables
Inventories
Net other financial assets/(liabilities)
year ended
31 Dec 2011
Year ended
31 Dec 2010
175,672
182,752
53,032
(12,803)
55,130
18,732
Net Income tax receivable/(payable)
(23,859)
(10,977)
Trade and other payables and provisions
(259,907)
(246,781)
Working capital
(67,865)
(1,144)
The Group’s working capital position decreased to $(67.8) million
in 2011 from $(1.1) million in 2010 primarily due to a decline of
$31.5 million that resulted in a net other financial liability position
in 2011, driven by a change in the value of embedded derivatives.
The decrease was also a result of a higher net income tax position
in 2011 compared to 2010 reflecting higher commodity prices,
and higher trade and other payables and provisions in 2011
compared to 2010, due to higher workers profit sharing and
mine closure provisions.
56 Hochschild Mining plc
Annual Report & Accounts 2011
Financial review & Risk management
Financial review continued
net cash
$000
Cash and cash equivalents
Long-term borrowings
Short-term borrowings*
Net cash
year ended
31 Dec 2011
Year ended
31 Dec 2010
627,481
525,482
(104,866)
(248,380)
(46,334)
(69,272)
476,281
207,830
* Includes pre-shipment loans which were previously reported under working capital.
The Group reported net cash of $476.3 million as at
31 December 2011 (2010: $207.8 million). This was primarily
driven by the increase in cash and cash equivalents from operating
activities (of $102.0 million) and the decrease in long-term and
short-term borrowings. In January 2011, the Group paid down
full its syndicated loan facility of $114.3 million.
In October 2011, the Group’s 51% owned Joint Venture entity
in Argentina repaid the entire outstanding principal and
accrued interest on its shareholder and project finance
loans. Hochschild received net proceeds of approximately
$96 million from this repayment, consisting of approximately
$66 million from the repayment of the project finance loan
and approximately $30 million from the shareholder loan.
Hochschild’s joint venture partner, McEwen Mining Inc
(formerly named Minera Andes Inc), received net proceeds
of approximately $29 million from this repayment.
The Company’s Convertible Bond has a conversion price
(before adjustment for the recommended dividend) of £3.94
and allows the Company to force conversion of the bonds at
any time after 20 October 2012 if, on each of at least 20 dealing
days out of 30 consecutive dealing days, the Company’s share
price exceeds 130% of the conversion price (currently £5.12).
Capital expenditure¹
2011 capital expenditure of $217.9 million (2010: $156.5 million)
includes operating capex of $141.4 million, capitalised
exploration costs of $13.2 million in respect of the Group’s
operating mines, $61.3 million capitalised in respect of Advanced
Projects (Inmaculada, Crespo and Azuca) and administrative
capex of $2.0 million.
Capital expenditure at Pallancata rose by $12.4 million in 2011
due to higher mine development costs reflecting an increase
in mined areas developed, and higher mine contractors’ rates.
The construction of a new tailings dam and higher equipment
costs also contributed to the rise.
Capital expenditure at San Jose increased by $7.8 million in
2011, reflecting local inflation in mine development costs.
Dividends
The Directors recommend a final dividend of $0.03 per
ordinary share which, subject to shareholder approval at the
2012 AGM, will be paid on 29 May 2012 to those shareholders
appearing on the register on 4 May 2012. If approved, this will
result in a total dividend for the year of $0.06 per share.
Dividends are declared in US dollars. Unless a shareholder
elects to receive dividends in US dollars, they will be paid in
pound 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
2012
2 May
4 May
9 May
29 May
$000
Arcata
Ares
Selene
Pallancata
San Jose
Moris
Inmaculada
Crespo
Azuca
Other
total2
year ended
31 Dec 2011
Year ended
31 Dec 2010
33,040
30,230
2,673
4,570
50,489
62,994
555
19,447
10,232
31,641
2,306
5,422
5,839
38,116
55,183
2,728
–
2,738
13,741
2,486
217,947
156,483
1 Includes additions in property, plant and equipment and evaluation and exploration
assets (confirmation of resources) and excludes increases in the closure of mine assets.
2 Additions of $90.6 million in respect of the acquisition of Inmaculada is not reflected in
this table.
57
Risk management
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
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 70 and 71. The key business risks affecting the Group
are set out in the table below. The steps taken by the Group
to mitigate these risks, where possible, are also described.
Financial risks
Type of risk
Description of risk
Mitigating steps
Commodity price
Adverse movements in precious metals’ prices could have
a material impact on the Group’s results of operations
Counterparty
credit risk
Loss of revenue resulting from defaulting customers
The Group may lose financial resources through the
failure of financial institutions
liquidity
The Group may be unable to raise funds to meet its
financial commitments as they fall due
Foreign currency
Given the combination of US dollar denominated sales
and certain costs denominated in local currencies,
adverse foreign currency movements may impact the
Group’s results
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Derivative facilities have been negotiated with major
banking institutions to facilitate hedging activity as and
when considered appropriate.
To mitigate the impact of this risk, and other risks which
could potentially impact the Group’s results of operations, the
Company continuously focuses on reducing costs and expenses
and maintains a low leverage policy thus maintaining the lowest
level of fixed commitments possible.
The Company has invested during 2011, and continues to
invest, in increasing its dore capabilities, significantly reducing
its exposure to counterparty risk (since the sale of dore, as
opposed to concentrates, is settled almost immediately).
The Group’s sales contracts for concentrate incorporate various
protection measures including (i) inbuilt provision for advance
payment or the delay in transferring title of goods sold in the
event of non-payment, and (ii) the requirement to provide
parent company guarantees where possible. In addition, the
Group implements risk profiling to appraise key and new
customers. The Group’s diversified customer base further
mitigates the risk of default.
The Company has elected a small number of top tier financial
counterparties with whom to invest excess cash. Management
and the Board have defined limits for the amount of exposure to
each counterparty based on a credit risk assessment. The Board
receives regular reports on the management of cash and, in
particular, oversees the implementation of procedures to
monitor counterparty risk.
Notwithstanding the strength of the Company’s balance sheet,
the Board and senior management continually monitor the
Group’s requirements for short- and medium-term liquidity.
The Company maintains strong banking relationships and access
to credit lines to ensure an appropriate level of financing.
Local currency exposures may be partially mitigated by offsetting
variances in revenues due to silver and gold price movements.
However, management periodically reviews the profitability of
every operation, which may be impacted by foreign currency
movements, to ensure their positive cash flow generation.
58 Hochschild Mining plc
Annual Report & Accounts 2011
Financial review & Risk management
Risk management continued
Operational risks
Type of risk
Costs
Description of risk
Mitigating steps
Increase in production costs could impact on the
Group’s profitability
Business
interruption
Assets used in operations may break down and insurance
policies may not cover against all forms of risks due to
certain exclusions and limitations
Reserve
and resource
replacement
The Group’s future profitability and operating margins
depend upon its ability to replenish reserves with
geological characteristics to enable mining at
competitive costs. Reserves stated in this Annual Report
are estimates
Personnel
(i) Loss of key senior management and personnel
including highly skilled engineers and geologists;
(ii) the lack of availability of individuals with relevant
mining experience in the vicinity of the Group’s
operations, particularly when neighbouring projects
commence operations; and
(iii) failure to maintain good labour relations with
workers and/or unions which may result in work
slowdown, stoppage or strike
As stated in the Operating Review there has been cost inflation
during the year across the mining industry and the Group seeks
to mitigate the impact of this by entering into long-term supply
contracts, where possible. Costs are monitored by management
on a monthly basis.
The Group has combined property damage and business
interruption insurance policies for all operations, and adequacy
of coverage is regularly reviewed with appointed advisers.
Management reporting systems have been implemented to
ensure that an appropriate level of inventory of critical parts is
maintained. Adequate preventative maintenance programmes,
supported by the SAP Maintenance Module, are in place in the
operating units. Annual inspections by insurance brokers and
insurers take place and recommendations are addressed in order
to mitigate operational risks. Contingent power supplies are
provided at each of the Group’s operations.
The Group allocated $70 million in 2011 to fund its exploration
and geology activities. The 2012 budget has been increased
to $90 million.
Specific initiatives have been, and continue to be taken to retain
and incentivise the Group’s Geologists (see Mitigating Steps for
Personnel-related risks below for further information).
The Group has an annual drilling plan which is revised on a
monthly basis with exploration targets continually evaluated
and new targets incorporated. In parallel, the Group’s Business
Development function continually evaluates acquisition and
joint-venture opportunities.
(i) The Group seeks to provide competitive compensation
arrangements and develop well-defined career plans for
positions of strategic importance through the Group’s Talent
Inventory Review. With respect to incentives, in addition to the
launch of a Long Term Incentive Plan, during 2011 the Group
designed and implemented the Exploration Incentive Plan
which provides additional rewards for geologists based on
the mineral content of a given project;
(ii) and (iii), a labour relations strategy focusing on working
conditions, management style, development opportunities,
motivation and communication has been developed to ensure
that employees’ needs are identified and met. Regular meetings
are held with workers and unions to ensure a full and accurate
understanding of matters of concern and requirements.
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Macroeconomic risks
Type of risk
Description of risk
Mitigating steps
Political, legal
and regulatory
Costs associated with ensuring compliance with all
relevant laws and regulations are substantial.
Furthermore, changes in the legal or regulatory landscape
including increases in taxes and/or royalties could 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
2011 saw new administrations take office in Peru and Argentina
which resulted in a number of legislative developments
impacting on mining companies.
The Group has local teams to monitor constantly and react, as
necessary, to policy changes. It also seeks to participate actively in
legislative consultations either directly or through participation
in trade associations.
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.
Corporate responsibility risks
Type of risk
Description of risk
Mitigating steps
Health and safety
Environmental
Group employees working in the mines may be exposed to
health and safety risks. Failure to manage these risks may
result in accidents, a work slowdown, stoppage or strike
and/or may damage the reputation of the Group and
hence its ability to operate
During the year, the Group attained Level 7 of the DNV safety
management information system at Arcata and Pallancata and
Level 6 at San Jose.
A number of initiatives were taken during 2011 further
reinforcing the Group’s commitment to safety.
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
Community Relations Communities living in the areas surrounding Hochschild’s
operations may oppose the activities carried out by the
Group at existing mines or, with respect to development
projects and prospects, may invoke their rights to be
consulted under new laws enacted during the year.
These actions may result in longer lead times and
additional costs in bringing assets into production and
lead to an adverse impact on the Group’s ability to obtain
the relevant permissions for current or future projects.
The Group has a dedicated team of professionals with
an allocated budget for environmental management.
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.
Our operations are ISO14001 certified.
During the year, the Group has restructured its Community
Relations (“CR”) department to facilitate an ongoing dialogue
with local communities. A specific CR strategy focusing on
Education, Health & Nutrition, and Sustainable Development
was designed, with associated action plans. Furthermore, the
Group maintains a database of all agreements with communities
to ensure that all social commitments are met.
Specific initiatives during the year include the “Maestro Líder”
campaign, a training programme for community teachers, and
“Médico de Cabecera”, a programme taking healthcare to the
rural populations.
Further information on financial risks can be found in note 36 to the Consolidated Financial Statements.
Details on the Group’s activities in Corporate Social Responsibility can be found in the Corporate Responsibility Report
on pages 37 to 48.
60 Hochschild Mining plc
Annual Report & Accounts 2011
Governance
Board of Directors
& Senior management
Board of Directors
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 TECSUP, the Sociedad Nacional
de Minería y Petróleo and the Conferencia Episcopal Peruana.
In addition, Eduardo serves as Chairman of the Board of the
Universidad de Ingeniería y Tecnología.
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 & Special Adviser
to the Chairman and Senior Management
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 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 and is a
Non-Executive Director of a number of companies including Gold
Fields Limited.
Sir Malcolm Field Senior Independent 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 as has held non-executive directorships with
numerous companies, including Scottish and Newcastle plc and
Evolution Beeson Gregory.
Dr Graham Birch Non-Executive Director
Dr Graham Birch joined the Board on 1 July 2011. Prior to his
retirement in 2009, Dr Birch was a Director of BlackRock Commodities
Investment Trust plc and manager of BlackRock’s World Mining Trust
and Gold and General Unit Trust. Previously he worked at Kleinwort
Benson Securities and Ord Minnett/Fleming Ord Minnett before
joining Mercury Asset Management in 1993, where he launched a
number of mining and natural resources funds. In 1997, Mercury
Asset Management was acquired by Merrill Lynch Investment Managers
which was itself eventually acquired by BlackRock in 2006. Graham has a
PhD in mining geology from Imperial College, London and is currently
Senior Non-Executive Director of Petropavlovsk PLC, Vice Chairman of
Rothamsted Research and is also a Non-Executive Director of the asset
management company, ETF Securities.
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 and
Deputy Chairman of Bunge Limited and Mutual Investment Limited.
In addition, Jorge is a Director of Dufry South America S.A. of Rio de
Janeiro and President of the Bunge and Born Charitable Foundation.
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Board of Directors
Senior management
non-Executive Directors
nigel Moore Non-Executive Director
Nigel Moore joined the Board in 2006. He is a Chartered Accountant
and currently serves as Chairman of The TEG Group PLC and as a
Non-Executive Director of The Vitec Group plc, JKX Oil & Gas plc
and Ascent Resources plc. 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.
Rupert Pennant-Rea Non-Executive Director
Rupert Pennant-Rea joined the Board on 1 September 2011. He is
Chairman of Henderson Group plc and of the Economist Group
and is a Non-Executive Director of Go-Ahead Group plc and Gold
Fields Limited (South Africa). He was Deputy Governor of the Bank
of England from 1993 to 1995, prior to which he spent 16 years with
The Economist, where he was editor from 1986 to 1993. Rupert served
on the Board of First Quantum Minerals Limited between 2001 and
2011 and various other companies including British American Tobacco
p.l.c. (between 1998 and 2007), Rio Narcea Gold Mines, Ltd (between
2003 and 2007), Sherritt International Corporation (between 1995 and
2008), Acuity VCT Plc (between 2001 and 2011) and Acuity Growth
VCT Plc (between 2004 and 2011).
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 Unipart Group
of Companies UK, GP Investments Ltd and Dinamia SCR S.A.
He was a director of European Goldfields Limited until its acquisition
by Eldorado Gold Corporation in February 2012. 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.
César Aguirre Vice President, Exploration & Geology
César Aguirre joined Hochschild Mining as VP of Exploration &
Geology in April 2011. César has over 20 years’ experience in
exploration and project management in South America, principally in
Peru, Argentina and Chile. Prior to joining Hochschild, he worked for
Newcrest Mining, Yanacocha, Noranda Inc. and Barrick Gold Corp.
César holds a BSc in Geological Engineering from the Universidad
Nacional de Ingeniería and an MSc in Economic Geology from the
University of Tasmania.
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.
Ramón Barúa Chief Financial Officer
Ramón Barúa was appointed CFO of Hochschild Mining on
1 June 2010. Prior to his appointment, he served as CEO of Fosfatos
del Pacifico S.A, 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.
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 Ingeniería, 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.
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 practice 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.
62
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Annual Report & Accounts 2011
Governance
Directors’ report
The Directors have pleasure in presenting their report
for the year ended 31 December 2011.
Principal activities
Hochschild is a leading precious metals company with a
primary focus on the exploration, mining, processing
and sale of silver and gold.
Information incorporated by reference
This Directors’ Report should be read in conjunction
with the following parts of the Annual Report which
are incorporated by reference to satisfy the relevant
disclosure requirements.
Business Review
The information required to be disclosed in the Business
Review can be located as summarised below.
Business Review contents
Section
Pages
Requirement
Chairman’s
statement
2 and 3
Main trends and factors
likely to affect the Group
Chief Executive’s
review
6 to 8
Market &
geographic
overview
20 and 21
Operating &
exploration review
22 to 35
Financial review
Corporate
responsibility
50 to 56
37 to 48
Review of performance
(with KPIs), development of
the Group’s business, year-
end position and prospects
Information on employees,
environmental and social
matters
Risk management
57 to 59
Principal risks and
uncertainties
Corporate Governance Statement
The requirements for a Corporate Governance Statement
are fulfilled by the Corporate Governance report on
pages 65 to 76.
Results and dividend
The Group’s adjusted EBITDA1 for the year amounted to
$563.4 million (2010: $397.7 million). Revenue for the year
was $987.7 million (2010: $752.3 million) and attributable
profit to equity shareholders after tax (before exceptional
items) was $165.9 million (2010: $94.9 million).
An interim dividend of $0.03 per share was paid to
shareholders of the Company on 22 September 2011.
The Directors recommend the payment of a final dividend
of $0.03 per share (2010: $0.03 per share). Subject to
shareholders approving this recommendation at the
forthcoming Annual General Meeting (“AGM”), the
dividend will be paid in UK pound sterling on 29 May 2012
to shareholders on the register at the close of business
on 4 May 2012. Shareholders may elect to receive their
dividend in US dollars. The US dollar dividend will be
converted into UK pound sterling at the exchange rate
prevailing at the time of payment.
1 Calculated as profit from continuing operations before net finance income/(cost), foreign
exchange loss and income tax plus depreciation and exploration expenses other than
personnel and other exploration related fixed expenses.
The trustee of the Hochschild Mining Employee Share
Trust (“the Employee Trust”) has waived dividends
declared by the Company after 20 June 2011 on shares
held by the Employee Trust.
Directors
The names and biographical details of the Directors serving
at the date of this report are given on pages 60 and 61.
All Directors were in office for the duration of the year under
review except for Graham Birch and Rupert Pennant-Rea
who were appointed by the Board on 1 July 2011 and
1 September 2011 respectively.
With the exception of Dionisio Romero who will be retiring
at the forthcoming Annual General Meeting, each of
the Directors will be retiring and seeking re-election by
shareholders in line with the recommendation of the
UK Corporate Governance Code.
Directors’ interests
Details of the interests of the Directors in the Company’s
shares are shown below:
Eduardo Hochschild1
Roberto Dañino2
Ignacio Bustamante
Sir Malcolm Field
Graham Birch3
Jorge Born Jr.
Nigel Moore
Rupert Pennant-Rea4
Dionisio Romero
Fred Vinton
Ordinary
shares as at
31 December 2011
Ordinary
shares as at
1 January 2011 or
date of appointment,
if later
182,415,206
182,415,206
200,000
500,000
14,054
14,285
0
0
14,285
7,000
0
14,285
0
0
14,285
7,000
100,000
100,000
25,000
0
1 Eduardo Hochschild holds an indirect interest in the Company through an intermediate
holding company which he controls and which owns the entire issued share capital
of Pelham Investment Corporation which, in turn, owns shares in the Company.
2 Roberto Dañino’s interest is held by Navajo International Holdings Ltd.
3 Graham Birch was appointed a Director of the Company on 1 July 2011.
4 Rupert Pennant-Rea was appointed a Director of the Company on 1 September 2011.
In addition, Fred Vinton has 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 2011 to 19 March 2012.
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,
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.
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Further details on the Relationship Agreement with regards
to the conduct of the Major Shareholder are set out in the
Corporate Governance report on page 66 and with regards
to the right to appoint Directors to the Board are set out
on page 68.
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 2011, the Company had an average of
31 days’ purchases owed to trade creditors (2010: 24 days).
Political and charitable donations
The Company does not make political donations.
During the year, the Group expended $7.7 million
(2010: $6.7 million) on social and community welfare
activities surrounding its mining units.
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 140 and 141.
Essential contractual and other arrangements
The Directors consider that the following are the
contractual and other arrangements with customers,
suppliers or contracts 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 governmental authorities in the jurisdictions of the
Group’s operations; and
•(cid:3) the collective agreements with trade unions in respect
of the workers at the Group’s mines in Peru.
Policy on financial risk management
The Company’s objectives and policies on financial risk
management can be found in note 36 to the Consolidated
financial statements. Information on the Company’s
exposures to foreign currency, commodity prices, credit,
equity, liquidity, interest rate and capital risks can be found
in this note.
Directors’ and officers’ liability insurance
Since Directors are increasingly being added as defendants
in legal actions against companies, the Board believes that
the risk of Directors being placed at significant personal
financial risk is increasing. The Board also believes that
the provision of appropriate indemnities and the funding
of Directors’ defence costs as permitted by legislation are
reasonable protections for the Directors and are important
to ensure that the Company continues to be able to attract
and retain the highest calibre individuals as Directors.
Accordingly, the Articles contain a provision whereby each
of the Directors is indemnified by the Company in respect
of liability in relation to: (i) any negligence, default, breach
of duty or breach of trust relating to the Company or any
associated company; (ii) execution of their duties as
Directors of the Company; and (iii) the activities of the
Company or any associated company as trustee of an
occupational pension scheme. For these purposes,
associated company has the meaning given to it by section
256 of the Companies Act 2006.
However, a Director will not be indemnified for any liability
incurred by him to the Company or Group companies;
any criminal or regulatory fines; the costs of defending
any criminal proceedings in which he is convicted; or the
costs of defending any civil proceedings brought by
the Company in which judgement is given against him.
The Company has purchased and maintains liability
insurance for its Directors and officers as permitted
by section 233 of the Companies Act 2006.
Conflicts of interest
The Companies Act 2006 allows Directors of public
companies to authorise conflicts and potential conflicts
of interest of directors where the Company’s Articles of
Association contain a provision to that effect. Shareholders
approved amendments to the Company’s Articles of
Association at the AGM held on 9 May 2008 which included
provisions giving the Directors authority to authorise
matters which may result in the Directors breaching
their duty to avoid a conflict of interest.
The Board has established effective procedures to enable
the Directors to notify the Company of any actual or
potential conflict situations and for those situations to
be reviewed and, if appropriate, to be authorised by the
Board, subject to any conditions that may be considered
appropriate. 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
This Annual Report provides details of the Company’s
business activities, its financial position and a description
of the Company’s objectives, policies and processes for
managing its capital; its financial risk management
objectives; details of its financial instruments and hedging
activities; and its exposures to credit and liquidity risks.
The Company benefits from considerable financial
resources and long-term relationships with a number of
customers and suppliers across different geographic areas.
These factors, together with the general macroeconomic
outlook which supports gold and silver prices, provide the
Directors with reassurance that the Company is well placed
to manage its business risks successfully.
Having regard to the Financial Reporting Council’s
document entitled “Going Concern and Liquidity Risk:
Guidance for Directors of UK Companies 2009”, the
Directors have considered five year cash flow forecasts
presented by management which, amongst other things,
reflect the financial requirements of the Group’s significant
capital projects including the Inmaculada and Crespo
64
Hochschild Mining plc
Annual Report & Accounts 2011
Governance
Directors’ report continued
projects, and the Arcata dore project. Consequently,
the Directors have arrived at a reasonable expectation
that the Company has adequate resources to continue
in operational existence for the foreseeable future.
Thus they continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
AGM
The sixth AGM of the Company will be held at
10 am on 23 May 2012 at the offices of Linklaters LLP.
The shareholder circular incorporating the Notice of
AGM will be sent separately to shareholders or, for those
who have elected to receive electronic communications,
will be available for viewing at www.hochschildmining.com
The shareholder circular contains details on the business
to be considered at the meeting.
Auditors
A resolution to reappoint Ernst & Young LLP as auditors
will be put to shareholders at the forthcoming AGM.
Statement on disclosure of information to auditors
Having made enquiries of fellow Directors and of the
Company’s auditors, each Director confirms that to the
best of his knowledge and belief, there is no relevant audit
information of which the Company’s auditors are unaware.
Furthermore, each Director has taken all the steps that he
ought to have taken as a Director in order to make himself
aware of any relevant audit information and to establish
that the Company’s auditors are aware of that information.
This confirmation is given, and should be interpreted, in
accordance with the provisions of section 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.
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 pages 60 and 61 of this
Annual Report.
On behalf of the Board
Raj Bhasin
Company Secretary
19 March 2012
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Corporate governance report
Your Board considers that high standards
of corporate governance are essential elements
of preserving and enhancing shareholder value.
Dear Shareholder
Your Board believes that the Company’s participation in an established
investment market carries significant responsibility to manage the Company
transparently and in a manner appropriate to a successful business.
2011 has seen continued progress in the ongoing development and evolution
of the corporate governance framework at Hochschild Mining.
We are delighted that as part of the Board succession process, we were
able to welcome Dr Graham Birch and Rupert Pennant-Rea to the Board as
independent Non-Executive Directors. They each bring with them a wealth of
mining and markets’ experience and they have already established themselves
as valued additions to the Board.
In the past we have seen significant improvements made to Board processes
and Board composition as a result of the internally led annual Board
evaluation assessment. This year has been no different. During 2011, the
recommendations arising from the 2010 assessment were implemented which
led to, amongst other things, my assuming the Chairmanship of the Group’s
CSR Committee, and improvements in Board reporting. Further details on the
evaluation process can be found on pages 68 and 69.
The year also saw the implementation of the UK Bribery Act. This provided
an opportunity for management to reiterate to our key stakeholders, our core
values of working honestly, openly and with transparency.
A review of our policies and procedures resulted in a refreshed Group
Code of Conduct which sets out the values expected to be upheld by our key
stakeholders, supplemented by a tailored Anti-bribery policy to reinforce our
commitment to ethical working practices. Responsibility for ongoing review
in this area has been delegated to the Audit Committee.
As Chairman, it is incumbent upon me to promote standards of good
corporate governance which are embodied in the UK Corporate Governance
Code which we report against for the first time.
I am delighted to be able to introduce and endorse this Corporate
Governance Report with the hope that it provides you with an insight into
the approach taken by the Board and its Committees in discharging their
governance responsibilities.
Eduardo Hochschild
Executive Chairman
19 March 2012
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Governance
Corporate governance report continued
Introduction and statement of compliance
This report, together with the Directors’ Remuneration
Report, sets out how the Company has applied the Main
Principles set out in the UK Corporate Governance Code
(“the Code”) a copy of which is available on the website of
the Financial Reporting Council at www.frc.org.uk
Disclosures to be included in the Corporate Governance
Report in relation to share structure, shareholder
agreements and the Company’s constitutional provisions
pursuant to the Disclosure and Transparency Rules are
provided in the Supplementary Information section on
pages 74 to 76.
The Board confirms that in respect of the year ended
31 December 2011, the Group has complied with the
provisions contained in Section 1 of the Code except that a
significant part of the Executive Chairman’s remuneration
is not performance-related.
As previously disclosed, the remuneration arrangements
for the Executive Chairman were reviewed in early 2010.
In agreeing the structure, the Board felt that the
arrangements should reflect the importance of the
Chairman’s 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 Group by providing adequate financial and human
resources and an appropriate system of financial control
to ensure these resources are fully monitored and utilised.
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.
Composition
As at the date of this report, the Board comprises two
Executive Directors; the Chairman and the Chief Executive
Officer, and eight Non-Executive Directors.
Chairman and Chief Executive
The Company is jointly led by the Executive Chairman,
Eduardo Hochschild, and the Chief Executive Officer,
Ignacio Bustamante.
The document which sets out the division of responsibilities
between the Chairman and the CEO was reviewed during
the year and has been approved by the Board.
The Chairman and the Chief Executive Officer are
collectively responsible for the formulation of the vision
and long-term corporate strategy of the Group the approval
of which is a matter for the Board.
The Chief Executive Officer is responsible for leading an
executive team in the day-to-day management of the
Group’s business.
Whilst the Chairman is not considered to be independent,
the Board is satisfied that given its structure, decisions
can be made without any one Director exercising undue
influence. This sentiment has been reiterated by the views
expressed by Directors during the annual Board Evaluation
process undertaken in 2011.
Additional safeguards come in the form of the Relationship
Agreement entered into by Eduardo Hochschild, Pelham
Investment Corporation (“the Major Shareholder”) and
the Company prior to the IPO in November 2006, which
seeks 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.
Furthermore, 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.
Senior Independent Director
Sir Malcolm Field acts as Senior Independent Director
and, as such, acts as a sounding board for the Chairman as
necessary. Sir Malcolm is also available to meet with major
shareholders if their concerns have not been resolved by
the executive management team.
Non-Executive Directors
Each of the Company’s Non-Executive Directors hold,
or have held, senior positions in the corporate sector
and bring their experience and independent perspective
to enhance the Board’s capacity to help develop proposals
on strategy and to oversee and grow the operations within
a sound framework of corporate governance.
Details on the tenure of appointment of Non-Executive
Directors are provided in the Directors’ Remuneration
Report.
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Independence of the Non-Executive Directors
The Board considers that, excepting Roberto Dañino in
light of his previous role as an Executive Director of the
Company and his ongoing role as Special Adviser to the
Chairman and senior management team, all of the Non-
Executive Directors are independent of the Company.
In reaching this conclusion, the Board took into account
the following circumstances which were not considered
to be of a nature to materially interfere with the exercise
of the relevant director’s independent judgement:
•(cid:3) Dionisio Romero’s involvement with TECSUP
(a not-for-profit educational institution established
by the Hochschild Group) and his former position
as Chairman of Banco Credito del Peru, an occasional
provider of short-term finance to the Group;
•(cid:3) Dr Graham Birch’s previous positions, until January 2009,
as Director of BlackRock Commodities Investment Trust
plc, and manager of Blackrock’s World Mining Trust
and Gold and General Unit Trust given Blackrock’s status
as one of the Company’s largest shareholders, and that
Dr Birch and Sir Malcolm Field both serve on the Board
of Petropavlovsk PLC; and
•(cid:3) that Roberto Dañino and Rupert Pennant-Rea both serve
on the Board of Gold Fields Limited.
Board Meetings held in 2011
Four meetings of the Board were held during the
year, attendance at which has been summarised in the
following table:
Maximum possible
attendance
Actual
attendance
Eduardo Hochschild
Roberto Dañino
Ignacio Bustamante
Sir Malcolm Field
Dr Graham Birch1
Jorge Born Jr.
Nigel Moore
Rupert Pennant-Rea2
Dionisio Romero
Fred Vinton
4
4
4
4
2
4
4
1
4
4
4
4
4
4
2
4
4
1
3
3
1 Dr Graham Birch was appointed a Director of the Company on 1 July 2011
2 Rupert Pennant-Rea was appointed a Director of the Company on 1 September 2011
Directors receive a full pack of papers for consideration at
least five working days in advance of each Board meeting
and, in the event that a Director is unable to attend,
comments are fed back to the Chairman who seeks to
ensure that all views are represented on any given matter.
Senior executives of the organisation are invited to attend
board meetings and to make presentations on their areas
of responsibility.
Principal matters considered by the Board during 2011
include:
Financial
•(cid:3) the 2010 Annual Report and the 2011 Half-Yearly Report;
•(cid:3) Dividend, Cash Management and Hedging policies;
•(cid:3) the 2012 Budget.
Strategy
•(cid:3) the Group’s long-term strategic plan.
Business Performance
•(cid:3) status of the Group’s portfolio of assets;
•(cid:3) progress of the feasibility studies for the Group’s
Advanced Projects;
•(cid:3) presentations on a number of corporate
development initiatives;
•(cid:3) a presentation on the Group’s IT infrastructure.
Governance/Risk
•(cid:3) the strategic risks faced by the Group;
•(cid:3) the impact on the Group of the Bribery Act 2010 and
consideration, and subsequent adoption of, a revised
Group Code of Conduct and Anti-Bribery Policy;
•(cid:3) the annual review of Directors’ conflicts of interest
and assessment of independence of each of the
Non-Executive Directors;
•(cid:3) update on the implementation of the 2010 Board
Evaluation recommendations and the outcome of the
2011 Board Evaluation process;
•(cid:3) the appointments of Dr Graham Birch and
Rupert Pennant-Rea as Non-Executive Directors.
Health & Safety, Environmental & Community Relations
•(cid:3) detailed reports on the 3 fatalities occurring during the
year, and the remedial steps taken; and
•(cid:3) the Group’s Community Relations strategy.
In between Board Meetings, Directors are kept abreast
of latest developments through monthly reports on
the Company’s operations, exploration activity and
financial situation.
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Governance
Corporate governance report continued
Appointments and re-election of Directors
Board nominations are recommended to the Board by the
Nominations Committee which met during the year under
review to consider the appointments of Dr Graham Birch
and Rupert Pennant-Rea as Non-Executive Directors of
the Company.
The Code recommends that directors of FTSE 350
companies seek re-election by shareholders on an annual
basis, a practice that was adopted by the Company last year.
Biographical details of the Directors are given on pages 60
and 61.
Under the terms of the Relationship 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.
Board development
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. This is achieved
through various means.
Induction
New Board appointees are offered the opportunity to meet
with key management personnel and the Company’s
principal advisers as well as undertake visits to the Group’s
operations. This process is currently being reviewed to
ensure the provision of a comprehensive and structured
introduction to the Group.
Briefings
The Directors receive regular briefings from the Company
Secretary on their responsibilities as Directors of a UK listed
company and on relevant developments in the corporate
governance landscape. In addition, the Chairman has made
arrangements to ensure that the Directors have ongoing
access to the Company’s officers and advisers.
2011 San Jose site visit
During the year, a site visit to the Group’s joint venture in
Argentina was organised. Directors received presentations
from the General Manager of the operations, and had the
opportunity to meet with personnel on-site.
Advice
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.
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.
Board evaluation
The Board is committed to the process of self evaluation
as a means of continually improving its efficiency.
Implementation of 2010 Board evaluation
During the year, a number of steps were taken by the Board
or the management team, as appropriate, to implement
the recommendations arising from the 2010 Board
Evaluation process.
In summary these actions included:
•(cid:3) the search for a Non-Executive Director with a mining
or geological background, which resulted in the
appointment, during the year, of Dr Graham Birch;
•(cid:3) the design and roll-out of the Talent Inventory Review
which identifies and documents the training and
development needs of key senior management
position holders;
•(cid:3) presentations to the Board on the Group’s IT
organisation and infrastructure, and tax strategy;
•(cid:3) revisions to the format of the monthly management
accounts to accommodate specific information requests
from the Board;
•(cid:3) the inclusion of standing reports to the Board on Cash
and Debt Management; and
•(cid:3) a Board visit to the Group’s joint venture operations
in southern Argentina.
2011 Board evaluation
In keeping with past practice, the 2011 Board Evaluation
process was undertaken through one-to-one interviews
conducted by the Senior Independent Director assisted
by the Company Secretary. Given the timing of his
appointment to the Board, Rupert Pennant-Rea did
not participate in the exercise.
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The interviews were structured to elicit Directors’ views
on a number of subject areas (see box below).
2011 Board Evaluation – Areas of focus
External Board evaluation
The Board notes the recommendation of the Code to
undertake an externally facilitated evaluation at least once
every three years.
The Board
•(cid:3) Composition, focusing in particular on:
–(cid:3)Whether the profile of the Board is aligned with the medium-term
strategic plan
–(cid:3)The role and contribution of the Non-Executive Directors
•(cid:3) Board process
•(cid:3) Succession Planning
•(cid:3) Risk Management and Governance
The Committees
•(cid:3) Composition and overall workings
•(cid:3) Discussion on specific aspects of the principal Board Committees
The Chairman
With particular focus on:
•(cid:3) his ability to lead the Board
•(cid:3) facilitating open discussion
•(cid:3) interaction with shareholders
In addition to the above, Directors were requested to
provide feedback on the performance of their fellow
Board members.
The Board acknowledges the benefits of an external
evaluation which will be commissioned by 2013.
The Board’s committees
The Board has delegated authority to the following
standing committees.
Audit Committee
•(cid:3) Nigel Moore (Committee Chairman)
•(cid:3) Dr Graham Birch (Non-Executive Director)
•(cid:3) Sir Malcolm Field (Non-Executive Director)
•(cid:3) Fred Vinton (Non-Executive Director)
Remuneration Committee
•(cid:3) Sir Malcolm Field (Committee Chairman)
•(cid:3) Jorge Born Jr. (Non-Executive Director)
•(cid:3) Nigel Moore (Non-Executive Director)
•(cid:3) Rupert Pennant-Rea (Non-Executive Director)
Nominations Committee
•(cid:3) Eduardo Hochschild (Committee Chairman)
•(cid:3) Sir Malcolm Field (Non-Executive Director)
•(cid:3) Dionisio Romero (Non-Executive Director)
see page 70
see page 72
see page 72
see page 72
The findings relating to the evaluation of the Board and the
Committees were considered collectively by the Chairman
and the Senior Independent Director, and the resulting
recommendations were discussed and, where appropriate,
approved by the Board.
Corporate Social Responsibility
Committee
•(cid:3) Eduardo Hochschild (Committee Chairman)
•(cid:3) Sir Malcolm Field (Non-Executive Director)
•(cid:3) Roberto Dañino (Non-Executive Director)
The terms of reference for each Board committee
is available for inspection on the Company’s website
at www.hochschildmining.com
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The outcome of the Chairman’s performance evaluation
was collated by the Senior Independent Director and
considered by the Non-Executive Directors collectively
before being relayed to the Chairman.
The principal recommendations arising from the year’s
Board Evaluation process are:
•(cid:3) enhancements to the annual strategic review;
•(cid:3) the opportunity to speak with experts in the field
of Community Relations in Latin America given
its strategic importance;
•(cid:3) a more active role to be taken on by the Nominations
Committee with particular focus on succession planning;
•(cid:3) improvements in the linkages between the Board
committees and the Board; and
•(cid:3) the need for additional update meetings during the year
to take place between the four scheduled Board meetings.
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Governance
Corporate governance report continued
Report of the Audit Committee
Terms of reference
The key responsibilities of the Audit Committee are 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) oversight of the internal audit function and review
of its annual work plan;
•(cid:3) oversee the relationship with the Company’s external
auditors; and
•(cid:3) review the effectiveness of the external audit process.
In advance of the implementation of the Bribery Act 2010
during the year, the terms of reference of the Audit
Committee were extended thereby enabling it to review,
on behalf of the Board, the Company’s procedures for
detecting fraud and the Company’s systems and controls
for the prevention of bribery, and to receive reports on
non-compliance.
Membership
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 who acts as Audit Committee Chairman for
a number of other listed companies. Further details are
given in Mr Moore’s biography on page 61.
The other members of the Audit Committee are
Sir Malcolm Field, Fred Vinton and Dr Graham Birch who
was appointed to the Committee following his appointment
to the Board on 1 July 2011.
All Committee members are considered to be independent
Directors.
Attendees
The lead partner of the external auditors, Ernst & Young
LLP, the Chairman of the Company, the Chief Executive
Officer, the Chief Financial Officer and the Head of
Internal Audit attend each Audit Committee meeting
by invitation.
The Company Secretary acts as Secretary to the Committee.
Activity during the year
During the year under review, there were four meetings of
the Audit Committee which were attended by all serving
members with the exception that Fred Vinton was unable
to attend one meeting.
The following matters featured among those considered by
the Committee during the year:
•(cid:3) Financial reporting – The 2010 Annual Report and
Accounts and the 2011 Half-Yearly Report were reviewed
by the Committee 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) Audit plans – In line with its usual practice, the Committee
considered reports from the external auditors on the
scope and structure of the forthcoming review of the
half-yearly results and audit of the annual results.
•(cid:3) Risk management – Consideration of Risk Management
assessments which incorporate a risk matrix detailing
(i) the most significant risks facing the Group; (ii) an
evaluation reflecting the likelihood of the occurrence
of the risk and the extent of the potential impact on
the Group, and (iii) commentary on the steps taken
to manage each specific risk. See pages 57 to 59 for a
description of the principal risks and uncertainties faced
by the Group.
•(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 – Through the processes described on
the following page, the Audit Committee reviewed the
adequacy of the Group’s internal control environment
and risk management systems.
•(cid:3) Whistleblowing – The Audit Committee reviewed the
adequacy of the Group’s Whistleblowing Policy which
was subsequently circulated across the organisation as
part of the Group’s procedures to combat fraud and
bribery (see section below with respect to activities
undertaken in connection with the UK Bribery Act).
•(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, reviewed and agreed
audit fees and evaluated the auditors’ performance.
•(cid:3) Bribery Act – Under its extended terms of reference,
the Audit Committee reviewed the actions taken by
management as a result of the implementation of the
UK Bribery Act 2010. Furthermore, the Committee has
instigated a timetable of reports during the current year
to ensure continuous review, monitoring and follow-up.
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The Committee Chairman routinely meets with the
external auditors in the absence of executive management.
During the year, the Committee members held meetings
with the external auditors without executive management
to discuss matters relating to the 2010 annual audit and the
2011 half-yearly report.
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.
Auditor independence
The Audit Committee continues to oversee the
implementation of specific policies designed to safeguard
the independence and objectivity of the auditors which
includes the Group’s policy on the provision of non-
audit services.
Policy on the use of Auditors for non-audit services
This policy lists 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.
Safeguards
Additional safeguards to ensure auditor objectivity and
independence include:
•(cid:3) any permitted assignment over $100,000 may only be
awarded after competitive tender;
•(cid:3) six monthly reports to the Audit Committee from
the auditors analysing the fees for non-audit services
rendered; and
•(cid:3) an annual assessment, by the Committee, of the auditors’
objectivity and independence in light of all relationships
between the Company and the audit firm.
2011 Audit and non-audit fees
Details on fees paid to the external auditors are provided
in note 31 to the Consolidated financial statements.
Internal control and risk management
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. Notwithstanding
this delegation of authority, the Board continues to
monitor the strategic risks to which the Company
is exposed.
The process used by the Audit Committee to assess
the effectiveness of risk management and internal control
systems includes:
•(cid:3) 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
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.
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 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.
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Governance
Corporate governance report continued
Corporate Social Responsibility Committee
Terms of reference
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.
Membership
The Committee is chaired by Eduardo Hochschild and
counts Sir Malcolm Field and Roberto Dañino as its
other members.
The CEO and VP of Operations attend each CSR
Committee meeting by invitation.
The Company Secretary acts as Secretary to the Committee.
Activity during the year
The Committee held four meetings during the year, each
of which was fully attended except that Roberto Dañino was
unable to attend one meeting.
Details relating to the CSR Committee and the Group’s
activities in this area are set out in the Corporate
Responsibility report on pages 37 to 48.
Remuneration Committee
Details on the composition and activities of the
Remuneration Committee are set out in the Directors’
Remuneration Report on pages 78 to 87.
Nominations Committee
Terms of reference
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 seeking candidates for appointment to the Board,
regard is given to relevant experience and the skills
required to complete the composition of a balanced Board.
The benefits of Board diversity, including gender diversity,
are acknowledged by the Directors, however, decisions on
appointments to the Board will continue to be taken on
merit. For this reason, the Board does not consider the
setting of specific measurable targets to be appropriate.
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.
Membership
The members of the Nominations Committee are
Eduardo Hochschild (Chairman), Sir Malcolm Field and
Dionisio Romero.
The Company Secretary acts as Secretary to the Committee.
Activity during the year
The Committee met four times during the year in
connection with the appointments of Dr Graham Birch
and Rupert Pennant-Rea to the Board as Non-Executive
Directors (“the Appointments”).
All meetings were attended by all members with the
exception that Dionisio Romero was unable to attend one
meeting and therefore relayed in advance his approval to
the matter in question.
The Appointments proceeded on the basis of the
candidates’ proven and sought-after experience having
served on the Boards of other UK listed mining companies.
In addition, following the 2010 Board Evaluation process,
as the holder of a Doctorate in Mining Geology,
Dr Graham Birch’s profile was considered particularly
suited to a position on the Board.
For these reasons, open advertising and external search
consultancies were not considered necessary in connection
with the Appointments.
Areas of focus in 2012
As previously mentioned, one of the recommendations
of the 2011 Board Evaluation process was that the
Nominations Committee should play a more active role
with particular focus on succession planning.
Consequently, the Nominations Committee met
subsequent to the financial year-end and has timetabled
meetings during the year specifically to consider succession
planning with respect to the Non-Executive Directors and
members of senior management.
Principal Shareholder Contacts
The Chairman, Deputy Chairman, Chief Executive Officer
and the Chief Financial Officer are available to discuss the
concerns of major shareholders. Alternatively, shareholders
may discuss any matters of concern with Sir Malcolm Field,
as the Company’s Senior Independent Director.
The Chairman and the Chief Executive Officer in
particular are responsible for discussing strategy with the
Company’s shareholders and conveying their views to the
other members of the Board.
2011 AGM
Notice of the 2011 AGM was circulated to all shareholders
at least 20 working days prior to the meeting and the
Chairmen of the Board Committees were available at the
meeting to answer questions. A poll vote was taken on
each of the resolutions put to shareholders with results
announced shortly after the meeting and published on the
Company’s website.
Further information on matters of particular interest to
investors is available on page 179 and on the Company’s
website at www.hochschildmining.com
Shareholder relations
Overview
The Company is fully committed to achieving an excellent
relationship with shareholders.
Responsibility for communications with shareholders
on strategy and business performance rests with the
Chief Executive Officer, the Chief Financial Officer
and the Head of Investor Relations. Communications
with shareholders with respect to the administration of
shareholdings and matters of governance are co-ordinated
by the Company Secretary.
Shareholder contact in 2011
The following table summarises the principal means by
which management communicated with investors during
the year:
Date
Event
January,
April, July,
October
Conference Calls following the Quarterly
Production Reports (and Interim Management
Statements, when appropriate)
February
Extraordinary General Meeting to approve the
disposal of the Group’s residual holding in Lake
Shore Gold Corporation
Consultation by the Remuneration Committee
Chairman with major shareholders on the
proposed CEO LTIP
March
2011 Annual Results presentation
UK, European and North American Roadshow
June
Annual General Meeting
August
2011 Half-Yearly results presentation
September UK, European and North American Roadshow
In addition, an extensive Investor Relations schedule
resulted in management holding over 150 investor meetings
as well as presenting at 10 sector specific conferences in
Canada, the US, Europe and South America.
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Governance
Supplementary information
Introduction
References in this section 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 in this section to “the Companies Act” are
to the Companies Act 2006.
Share capital
Issued share capital
The issued share capital of the Company as at 1 January
2011 was 338,085,226 ordinary shares of 25 pence each.
No shares were issued by the Company during the year
to 31 December 2011.
The Hochschild Mining Employee Share Trust (“the
Trust”) is an employee share trust established during the
year to hold ordinary shares of the Company on trust for
the benefit of employees within the Group. The Trustee
of the Trust has absolute discretion to vote or abstain
from voting in relation to the ordinary shares held by it
from time to time and in doing so may take into account
the interests of current and future beneficiaries and
other considerations.
Substantial shareholdings
As at 31 December 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:
Number of
ordinary shares
Percentage
of voting rights
(indirect)
Percentage
of voting rights
(direct)
Eduardo Hochschild 182,415,206
Vanguard Group Inc.
37,291,964
53.96%
11.03%
Prudential plc Group
of Companies*
Blackrock Global
Funds**
Altima Global Special
Situations Master
Fund Limited
22,277,961
0.18%
6.41%
15,442,182
4.57%
12,003,175
3.55%
n/a
*
In addition to the holding disclosed above, Prudential plc Group of Companies has
notified the Company of an interest in 931,666 ordinary shares through a holding of the
Company’s Convertible Bonds
** In addition to the holding disclosed above, Blackrock Global Funds has notified the
Company of an interest in 1,579,236 ordinary shares through a holding of the Company’s
Convertible Bonds
The Company has not been notified of any changes in the
above interests as at 19 March 2012.
Current share repurchase authority
The Company obtained shareholder approval at
the AGM held in June 2011 for the repurchase of up to
33,808,522 ordinary shares which represents 10% of
the Company’s current issued share capital (“the 2011
Authority”). Whilst no purchases were made by the
Company pursuant to the 2011 Authority, it is intended
that shareholder consent will be sought on similar terms
at this year’s AGM when the 2011 Authority expires.
Additional share capital information
This section provides additional information as at
31 December 2011.
(a) Structure of share capital
The Company has a single class of share capital which
is divided into ordinary shares of 25 pence 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.
(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.
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•(cid:3) 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
associates 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.
(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 or
her if any call or other sum then payable by him or her 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 or she 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.
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.
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 million
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.
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Governance
Supplementary information continued
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.
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.
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 minimum price which must
be paid for such shares is specified in the relevant
shareholder resolution.
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.
Summary of constitutional and other provisions
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
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.
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Directors’ remuneration report
Hochschild seeks to achieve a level of
remuneration that is both fair and an incentive
to achieve value-enhancing performance.
Introduction by the Chairman of the Remuneration Committee
I am pleased to present the Directors’ Remuneration Report for the year ending
31 December 2011.
My fellow members of the Committee and I do not underestimate the level of
responsibility in ensuring that we oversee the implementation of a remuneration
policy that rewards fairly and incentivises for good performance. Whilst 2011 was
dominated by continued weakness in the global economy, the Company has
achieved its key operational objectives of meeting its annual production target,
significantly increasing life-of-mine and, securing future value drivers through the
delivery of two key feasibility studies.
Having been impressed by the Chief Executive Officer’s performance since his
appointment in April 2010, it became clear to the Board that Ignacio Bustamante
would play a critical role in securing the Group’s future success. For this reason, and
mindful of the intense competition amongst international mining companies to
recruit talented senior executives, the Committee designed an Enhanced Long Term
Incentive Plan which would pay out over up to six years which was approved by
shareholders at the 2011 Annual General Meeting.
The issue of executive remuneration has fallen increasingly under the spotlight
and justifiably, Remuneration Committees are having to consider the design and
operation of their bonus plans and long-term incentive arrangements. I can report
that trends in these areas have been continually monitored by the Committee.
Driven by a desire to ensure fair remuneration which motivates and ensures
alignment with shareholders’ interests, we have maintained claw backs in two
principal elements of executive remuneration; the Annual Bonus Plan and the Long
Term Incentive Plan. Furthermore, during the year, the Committee has reviewed the
market trends with respect to performance conditions incorporated within long
term plans and as a result, we intend to supplement the current sole performance
condition which we believe will make the plan more robust. Further details can be
found on page 83 of this report.
We have also endeavoured to make this report clearer through more focused
disclosure and, for the first time, by highlighting the alignment of our
Remuneration Policy with our strategic objectives.
I hope you find this report informative.
Sir Malcolm Field
Chairman of the Remuneration Committee
19 March 2012
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Governance
Directors’ remuneration report continued
Overview
Introduction
This Directors’ Remuneration Report sets out information on the remuneration of the Directors of Hochschild Mining plc
for the year ended 31 December 2011. 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 tables in the sections entitled ‘Director’s LTIP awards’ and ‘Director’s
Enhanced LTIP award’ and the table on Directors’ total remuneration and accompanying notes has been audited by Ernst
& Young LLP as they contain the information upon which the auditors are required to report to the Company’s
shareholders.
Remuneration Committee
Membership
The Remuneration Committee is chaired by Sir Malcolm Field and its other members are Jorge Born Jr., Nigel Moore
and Rupert Pennant-Rea who joined the Committee on his appointment to the Board on 1 September 2011. All of the
members of the Remuneration Committee are independent Non-Executive Directors.
The composition of the Remuneration Committee and its terms of reference comply with the provisions of the
UK Corporate Governance 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 his own remuneration arrangements are considered by the Committee.
The Committee’s terms of reference
The duties of the Remuneration Committee are to determine and agree with the Board the broad policy for the
remuneration of the Executive Directors, the 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.
Meetings
The Committee held three meetings during the year under review at which all serving members were in attendance.
Activity during the year
During the year, the Committee:
•(cid:3) considered and consulted with shareholders on the vesting of the 2008 LTIP Awards;
•(cid:3) having obtained the approval of shareholders at the last Annual General Meeting to the CEO Enhanced LTIP,
approved the grant of an award of Conditional Shares to the CEO under the plan (see page 84 for further details);
•(cid:3) considered the performance of the Executive Directors in office during 2010 and approved the associated
bonus payments;
•(cid:3) considered the performance conditions to be attached to the 2011 LTIP Awards;
•(cid:3) approved the 2010 Directors’ Remuneration Report;
•(cid:3) adopted the rules of the Exploration Incentive Plan to incentivise the Group’s team of geologists;
•(cid:3) considered a provisional assessment of the CEO’s performance against his 2011 objectives; and
•(cid:3) considered an interim assessment of the Company’s Total Shareholder Return performance for the purposes of the 2010
and 2011 LTIP grants.
Advisers
The Remuneration Committee was advised during the year on remuneration matters generally by Kepler Associates who
were appointed by the Committee and who did not provide any other services to the Group during the year.
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Policy
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, operational and other relevant 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.
An additional incentive was designed during the year specifically for the Chief Executive Officer, the CEO Enhanced LTIP,
which was put to, and approved by, shareholders at the 2011 Annual General Meeting.
The Committee takes into consideration the remuneration arrangements for the wider employee population in making
its decisions on remuneration for senior executives however, it is acknowledged that such decisions are driven by specific
considerations not least, the global demand for talent.
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 have been set to ensure that the majority of
remuneration is performance-based, except in relation to the Executive Chairman whose remuneration arrangements
were revised in early 2010 to exclude all performance related elements given his majority shareholding and strategic
role with the Group.
Executive Director Pay Mix (% of total remuneration)
LTIP
Bonus
Pension
Salary
Target
Maximum
100
90
80
70
60
50
40
30
20
10
0
Eduardo Hochschild
Ignacio Bustamante
Eduardo Hochschild
Ignacio Bustamante
Variable proportion:
0%
65%
0%
82%
Components of fixed pay for the Executive Directors for the year ended 31 December 2011 are detailed in the
following table.
Director
Eduardo Hochschild1
Ignacio Bustamante2
Base salary
US$000
1,100
450
Pension supplement
US$000
200
0
Total
US$000
1,300
450
1 Eduardo Hochschild has a service contract with Hochschild Mining plc and Compañía Minera Ares S.A.C. (“Ares”), a Group subsidiary. Salary paid by Ares 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 650) but excludes legal profit sharing.
2 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 650).
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Governance
Directors’ remuneration report continued
Alignment of remuneration policy with the Group’s strategic objectives
The Committee considers that the Remuneration Policy it seeks to apply to Executive Directors and senior management
should be aligned with the long-term interests of shareholders and furthermore, should facilitate the achievement of key
strategic objectives. The table below indicates how this alignment is achieved.
Strategic Objectives for Growth
Annual Bonus
Long Term Incentive Plans
Maximising Core Assets
– Extend Life-of-Mine
– Optimise production
Exploration
Developing a pipeline of high
quality projects
Mergers & Acquisitions
To seek early stage value accretive
opportunities with strong
geological potential with a clear
path to control
With a commitment to
Corporate Responsibility
Resource Life-of-Mine targets
Numerous measures focusing on the delivery
of sustainable production targets and levels
of profitability (primarily through EBITDA)
and control of cash costs
Targets set key milestones to be achieved with
respect to the Group’s Advanced Projects and
their progress towards production
Non-Financial objectives requiring support for
the Group’s greenfields exploration programme
Underpinned by relative Total Shareholder
Return, the Long Term Incentive Plans
indirectly reward sustained increases in
operational performance over three year
periods (or in the case of the CEO Enhanced
LTIP, over four, five and six year periods)
Non-Financial objectives set requiring the
identification and execution of M&A opportunities
Stretching targets seeking to achieve a reduction
in the Group’s accident frequency rate
Clawback provision entitles the
Remuneration Committee to either refuse
or reduce payment on the occurrence of an
adverse event related to health & safety,
the environment or community relations
Our people
Ensuring the continued service of
key position holders and their
professional development
Non-Financial objectives on the implementation of
the Group’s key management succession tool, the
Talent Inventory Review
Given their time horizons, the Long Term
Incentive Plans act as key tools in retaining
plan participants
Aligning remuneration with strategy is considered to be a crucial element in constructing remuneration packages that
reward fairly. For this reason, the rationale explained in the above table is reflected in the remuneration of management
below Board level.
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Elements of remuneration
Base salaries
Payment of base salaries
Eduardo Hochschild has service contracts with Hochschild Mining plc and Compañía Minera Ares S.A.C. (“Ares”),
a Group subsidiary. Under these arrangements, one-fifth of his base salary is paid by the Company and fourfifths
is 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.
2011 Salary review
As reported in last year’s Remuneration Report, following a review of the CEO’s remuneration in late 2010, the
Committee increased Mr Bustamante’s salary from $370,000 to $450,000 with effect from 1 January 2011. This decision was
taken in light of the fierce competition amongst international mining companies to secure the employment of talented
senior executives. As previously reported, even at this revised level, Mr Bustamante’s salary remains significantly below
median for comparable roles at other mining companies of similar size.
2012 Salary review
A salary review by the Remuneration Committee has concluded that, in the normal course, no salary increases will be
awarded to the Executive Directors for 2012.
Subsequent to the year end, the Committee approved a proposal prompted by a recent and sustained strengthening of
the Peruvian Nuevo Sol against the US dollar, to re-denominate the salaries of a number of senior employees, including
the Chief Executive Officer who is based in Peru, from US dollars to Peruvian Nuevo Soles. As a result, it was agreed
that, with effect from 1 March 2012, Ignacio Bustamante’s base salary shall be PEN 1,312,200 which incorporates an 8%
increase relative to his US dollar denominated 2011 salary, to compensate for the appreciation of the Peruvian currency
and the increase in living costs.
Short-term incentives
Overview
The Remuneration Committee is responsible for setting the objectives for 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.
Adjustments to reflect underlying business performance
In line with the Committee’s usual practice, a review of the quality of earnings is conducted which may result in
adjustments to reported profit to arrive at a level of profit for bonus payouts. This ensures that bonus payments are not
impacted by unbudgeted non-recurring or one-off items, or circumstances outside of management’s control such as
increased commodity prices that could distort the overall quality of earnings.
2011 Bonus award
Ignacio Bustamante, being the only Executive Director entitled to an annual bonus, has a maximum bonus opportunity
of 125% of salary.
A summary of the objectives set for Ignacio Bustamante for the year and performance against them is given below:
•(cid:3) achieving annual production of 22.5 moz which was within the range of targets set;
•(cid:3) maintaining adjusted cash cost of $10.3/Ag Eq Oz in line with the lowest of the targets set;
•(cid:3) achieving adjusted EBITDA of $315 million which was in the middle of the range set for the year;
•(cid:3) assuring future growth of the business by increasing resource life-of-mine and advancing the Group’s greenfield
exploration programme, in respect of which the highest target was exceeded;
•(cid:3) finalising the feasibility studies in respect of two of the Group’s Advanced Projects (the third, with respect to Azuca,
having been delayed by the Board);
•(cid:3) contribution to the completion of the Group’s Talent Inventory Review, which documents development and succession
plans for the most senior employees; and
•(cid:3) an accident frequency rate for the year of 3.63 which was within the range set for the year.
In light of the performance against his specified objectives, and taking his very strong personal performance during the
year into account, the Remuneration Committee has approved the maximum level of annual bonus payable (equivalent
to 125% of Mr Bustamante’s salary).
2012 Bonus award
With respect to 2012, the Committee has approved objectives for Mr Bustamante which will continue to reward the
achievement of a wide range of targets relating to business growth, profitability, corporate responsibility and leadership.
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Governance
Directors’ remuneration report continued
Pensions, statutory profit sharing and benefits-in-kind
The Group does not provide pension benefits to the Executive Directors however, in respect of the year under review,
it did pay Eduardo Hochschild a cash supplement of $200,000 in lieu of pension. 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.
The Group provides the Executive Directors with medical insurance and allowances for the use of a car and driver,
and personal security.
Long Term Incentive Plan (“LTIP”)
Overview
In order to achieve its policy objective of motivating the CEO and senior employees over the long-term, the Company
has adopted a cash-based LTIP which helps align selected executives’ long-term interests with those of shareholders.(cid:3)
LTIP Awards were initially granted in 2008 with the intention that awards would be made every three years. In 2010, the
Committee reviewed the plan and it was felt that the retentive and motivational aspects of the plan would be enhanced
through the grant of annual awards. For Executive Directors participating in the scheme, 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 2008 LTIP Awards (see table below)). The equivalents of these
upper limits also apply to annual awards i.e. an annual grant limit of no more than two times’ salary in normal
circumstances.
Subsisting awards
A summary of the performance targets and other information with respect to the LTIP awards subsisting as at the date
of this report is given below.
Performance Period
1 January 2008 to 31 December
2010 (47% vested)
2008 LTIP
Vesting¹
Performance Conditions
TSR Comparator Group
50% on third anniversary and
remaining 50%, together with
notional interest, on fourth
anniversary of date of grant
Relative TSR Performance
Full Vesting: Upper Decile
75% Vesting: Upper Quartile
25% Vesting: Median
Straight line between lower
and mid thresholds, and mid
and upper thresholds
Tailored Peer Group2
(“the 2008 Comparator Group”)
Plan
2010 LTIP
1 January 2010 to
31 December 2012
2011 LTIP
1 January 2011 to
31 December 2013
100% on third anniversary
of date of grant
100% on third anniversary
of date of grant
Relative TSR Performance
Full Vesting: Upper Decile
75% Vesting: Upper Quartile
25% Vesting: Median
Straight line between lower
and mid thresholds, and mid
and upper thresholds
Relative TSR Performance
Full Vesting: Upper Decile
75% Vesting: Upper Quartile
25% Vesting: Median
Straight line between lower
and mid thresholds, and mid
and upper thresholds
The 2008 Comparator Group The 2008 Comparator Group plus
Fresnillo plc, Centamin Egypt
Limited, African Barrick Gold plc
and Randgold Resources Ltd
Other Information
– Clawback provisions3
Yes
– Basis of TSR calculation
of Comparator Group
After shareholder consultation,
local currency was used
Yes
Common currency
Yes
Average of local and
common currencies
1 Subject to meeting the relevant performance condition.
2 At the start of the plan, the tailored peer group 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.
3 Potential clawback if, before vesting, the Remuneration Committee determines either that (i) the overall underlying business performance of the Company is not satisfactory or
(ii) an unacceptable position has occurred regarding safety, the environment, community relations, and/or compliance with legal obligations of the Company.
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Proposed 2012 LTIP awards
During 2011 the Committee undertook a review of the LTIP with regard to the performance conditions governing the
vesting of awards to help ensure the LTIP remains robust, competitive and aligned with shareholders. In its review, the
Committee took into account market practice amongst UK-listed and other global mining companies, the possibility of
incorporating financial measures (e.g. EPS, cash flow) or non-financial measures to reinforce the achievement of our key
business objectives, and the sensitivity of performance measures to uncontrollable factors such as commodity prices.
Following considerable discussion, the Committee concluded that relative TSR remains the most appropriate performance
measure for the long-term incentive as it:
•(cid:3) helps ensure alignment with shareholders;
•(cid:3) is robust to commodity prices;
•(cid:3) is commonly used in long-term incentives in the mining sector; and
•(cid:3) is less sensitive to possible forecasting inaccuracies when setting long-term targets.
However, for the 2012 awards the Committee has made the following changes to the performance condition to improve
its robustness:
(i)(cid:3) The TSR benchmark will be based on two comparator groups: 70% of awards vest according to the Company’s TSR
relative to the existing TSR Comparator Group and 30% will vest on TSR relative to the constituents of the FTSE 350
Mining Index at the start of the performance period.
Rationale: The use of two benchmarks helps to ensure that LTIP vesting is not unduly sensitive to the TSRs of any one
single company. The Committee selected the FTSE 350 Mining Index on the basis that it represents an alternative
investment in the UK-listed mining sector.
(ii)(cid:3) For the 70% of awards vesting on performance against the existing TSR Comparator Group, the vesting schedule
will be such that full vesting is delivered at upper quintile, 75% for upper tercile and 25% vesting for median.
Rationale: The Committee has observed that the full-vesting performance level under the 2010 and 2011 LTIP
Awards which demanded top decile is extremely stretching relative to that required at TSR-based LTIPs at other
UK-listed companies, which generally set the full-vesting level at upper quartile. The Committee considers the
change in the full-vesting performance requirement from top decile to top quintile to be necessary to help ensure
the LTIP remains motivational. Furthermore, the pay levels of the Company’s most senior executives are significantly
below the median of the market and the Committee therefore felt that the imbalance was exacerbated by continuing
to set the LTIP full vesting level at above-market levels of toughness.
(iii)(cid:3) For the 30% of the awards vesting on performance against the FTSE 350 Mining Index, vesting will be based on the
Company’s TSR percentage outperformance of the median TSR of the index constituents: with 25% vesting of this
portion of the award occurring at Median TSR, and full vesting occurring at Median TSR+10% p.a.
Rationale: The Committee believes the use of TSR percentage outperformance is more appropriate when measuring
performance against the FTSE 350 Mining Index as the index comprises companies with a greater diversity of
mining operations than those comprising the existing TSR Comparator Group. The Committee believes that
setting the full vesting level on the basis of a fixed outperformance of median TSR will help ensure the full-vesting
performance requirement is less sensitive to the relative movements in metals/minerals prices than it would if a
ranking were used. At 10% p.a., the outperformance required for full vesting is consistent with market practice
amongst UK-listed companies taking into account company size.
The Remuneration Committee believes the revisions described above are important to ensure the Company is able
to motivate and retain its executives, and are in the interests of shareholders.
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Annual Report & Accounts 2011
Governance
Directors’ remuneration report continued
Director’s LTIP awards
Details of the LTIP awards held by Ignacio Bustamante, being the only Executive Director eligible to participate in the
plan are given in the table below.
Plan
2008 LTIP1
2010 LTIP2
2011 LTIP3
Value of maximum award
held at 31 December 2010 or
date of appointment, if later
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 2011
$1.6m
$0.74m
–
–
–
$0.9m
$0.376m
$0.848m
–
–
–
–
$0.376m
$0.74m
$0.9m
1 The performance conditions attached to the 2008 LTIP award are summarised in the table on page 82 in the section entitled ‘Subsisting awards’. The rules governing the award provide
for equal vesting on the third and fourth anniversaries of the date of grant of the award. Ignacio Bustamante will therefore be entitled to receive $376k together with notional interest,
on 9 May 2012 subject to continued employment with the Group on that date.
2 The performance conditions attached to the 2010 LTIP award are summarised in the table on page 82 in the section entitled ‘Subsisting awards’.
3 The performance conditions attached to the 2011 LTIP award are summarised in the table on page 82 in the section entitled ‘Subsisting awards’. Ignacio Bustamante is required to invest in
the Company’s shares at least 20% of any amount paid to him upon vesting of the 2011 LTIP award until such time as he has accumulated a shareholding with a value of two times’ salary.
Enhanced LTIP
Introduction
Ignacio Bustamante was appointed to the CEO role in March 2010. His salary was set initially at US$370k and the rest of
his remuneration package was in line with that offered to other senior executives (i.e. annual bonus opportunity of up to
125 per cent of salary and an LTIP opportunity of up to two times his salary p.a.).
Having reviewed relevant market pay benchmarks for the CEO (based on three comparator groups comprising (i) FTSE 350
miners, (ii) international gold miners, and (iii) international mining companies), the Committee was concerned that the
CEO’s remuneration package was significantly below lower quartile against market. Consequently, the Committee
approved an increase in the CEO’s salary (as disclosed earlier in this report) and received shareholder approval at the
2011 AGM for an enhancement to the CEO’s 2011 LTIP award designed to reinforce his alignment with shareholder
interests and to ensure his total remuneration package remained competitive.
The enhanced LTIP award is in the form of Conditional Shares with a value, on the date of grant, equivalent to six times’
the CEO’s salary that vests over an extended performance period of four, five and six years.
Subsisting Enhanced LTIP award
A summary of the performance targets and other information about the enhanced LTIP award subsisting as at the date
of this report is given below.
Performance Periods
Vesting¹
Performance Conditions
TSR Comparator Group
Other Information
– Clawback provisions2
– Basis of TSR calculation of
Comparator Group
– Shareholding requirement
1 January 2011 to 31 December 2014 in respect of 25% of the Award
1 January 2011 to 31 December 2015 in respect of 25% of the Award
1 January 2011 to 31 December 2016 in respect of 50% of the Award
28 April 2015 in respect of 90,549 Shares
28 April 2016 in respect of 90,549 Shares
28 April 2017 in respect of 181,098 Shares
Relative TSR Performance
Full Vesting: Upper Decile
75% Vesting: Upper Quartile
25% Vesting: Median
Straight line between lower and mid thresholds, and mid and upper thresholds
As for the 2011 LTIP Awards
Yes
50% of the after-tax vested shares is required to be retained until an overall beneficial
shareholding equal to two times’ salary has been achieved
Average of local and common currencies
1 Subject to meeting the relevant performance condition.
2 Potential clawback if, before vesting, the Remuneration Committee determines either that (i) the overall underlying business performance of the Company is not satisfactory or
(ii) an unacceptable position has occurred regarding safety, the environment, community relations, and/or compliance with legal obligations of the Company.
85
Director’s Enhanced LTIP award
Details of the Conditional Shares held by Ignacio Bustamante under the Enhanced LTIP are provided in the table below.
Number of
Conditional Shares
at 31 December 2010
Number of
Conditional Shares
granted during
the year
Number of
Conditional Shares
vesting during
the year
Number of
Conditional Shares
lapsing during
the year
Number of
Conditional Shares held
at 31 December 2011
Market Value of
each share at
date of award
(pence)
Exercise Price
Vesting of Awards
0
362,1961
0
0
362,196
Nil
428
See note 2
1 Details of the performance conditions attached to the award of Conditional Shares are provided in the table on the previous page.
2 Details on the timing of vesting of awards are provided in the table on the previous page.
Other information
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 31 December 2006. 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)
£
200
180
160
140
120
100
80
60
40
20
0
DEC 06
Source: Bloomberg
FTSE 350 Index
Hochschild Mining plc
DEC 07
DEC 08
DEC 09
DEC 10
DEC 11
Directors’ contractual arrangements
Executive Directors
As previously described, the contractual arrangements for Executive Directors appointed prior to the IPO in 2006 differ
to those for the Executive Directors appointed subsequently.
Eduardo Hochschild is 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 the Director’s contract.
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 12 months’ base salary.
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Hochschild Mining plc
Annual Report & Accounts 2011
Governance
Directors’ remuneration report continued
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, all Directors are subject to annual re-election by the Company in
general meeting in line with the UK Corporate Governance Code, and the appointments of Non-Executive Directors may
be determined by the Board or the Director giving not less than three months’ notice.
The Non-Executive Directors’ fees have been set at a level to reflect the amount of time and level of involvement required
in order to carry out their duties as members of the Board and its committees.
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
Dr Graham Birch and Rupert Pennant-Rea who were both appointed during the year, as detailed in the footnotes
accompanying the following table.
Director
Sir Malcolm Field1
Jorge Born Jr.
Nigel Moore1
Dionisio Romero
Fred Vinton
Roberto Dañino
Dr Graham Birch2
Rupert Pennant-Rea3
Letter of Appointment dated
16 October 2006
16 October 2006
16 October 2006
16 October 2006
9 July 2009
11 January 2011
20 June 2011
30 August 2011
Director’s fee per annum
£120,000 ($192,000)
£100,000 ($160,000)
£120,000 ($192,000)
£100,000 ($160,000)
£100,000 ($160,000)
£100,000 ($160,000)
£100,000 ($160,000)
£100,000 ($160,000)
1 The fees payable to Sir Malcolm Field and Nigel Moore reflect the additional time commitment required, given their positions as Chairman of the Remuneration Committee and the Audit
Committee respectively.
2 Dr Graham Birch was appointed a Non-Executive Director of the Company with effect from 1 July 2011.
3 Rupert Pennant-Rea was appointed a Non-Executive Director of the Company with effect from 1 September 2011.
External appointments
The Board recognises that Executive Directors may, in addition, serve as directors of other companies which can bring
benefits to the Group. The table below details the fees received by Eduardo Hochschild during the year, in respect of his
other directorships, which are retained by him.
Name of Director
Eduardo Hochschild
Company
Banco Crédito del Perú
Cementos Pacasmayo S.A.A.1
Cementos Selva
Inversiones Pacasmayo SA
Corianta S.A.
Pacifico Peruano Suiza Cia. De Seguros
Fees received
PEN 275,100 ($99,865)
PEN 8,689,782 ($3,154,513)
PEN 724,950 ($263,167)
PEN 3,483,900 ($1,264,705)
PEN 970,650 ($352,360)
PEN 124,875 ($45,331)
1 The amount disclosed includes salary received by Eduardo Hochschild in his capacity as an Executive Director of Cementos Pacasmayo S.A.A., a company of which he is the
controlling shareholder.
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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 2011 and 31 December 2010.
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
1,102
200
160
488
192
80
160
192
53
160
160
0
0
0
0
0
0
0
0
0
42
0
48
0
0
0
0
0
0
0
434
616
22
0
0
0
0
0
0
0
0
0
562
0
0
0
0
0
0
0
0
2357
0
0
0
0
0
0
0
0
Total remuneration
from 1 January 2011
(or date of appointment
if later) to
31 December 2011
(or date of resignation,
if earlier)
US$000
Total remuneration
from 1 January 2010
(or date of appointment
if later) to
31 December 2010
US$000
1,778
456
1,120
192
80
160
192
53
160
160
1,813
1,5098
822
170
–
155
186
–
155
155
2,747
200
90
517
562
235
4,351
4,965
Director
Eduardo Hochschild2,3,4,5
Roberto Dañino
Ignacio Bustamante9
Sir Malcolm Field
Dr Graham Birch10
Jorge Born Jr.
Nigel Moore
Rupert Pennant-Rea11
Dionisio Romero
Fred Vinton
Total
1 Amounts disclosed include sums paid by way of expense allowances.
2 Eduardo Hochschild has a service contract with both Hochschild Mining plc and Compañía Minera Ares S.A.C., a Group subsidiary.
3 One-fifth of Eduardo Hochschild’s salary was paid by the Company with the balance paid by Compañía Minera Ares S.A.C. In addition, US$40,000 of his annual pension supplement
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 650) but exclude legal profit sharing.
5 Following a review of Eduardo Hochschild’s remuneration conducted during 2010, it was agreed that he would receive an increased salary but he would not be entitled to participate
in any Long Term Incentive Plan or Bonus Plans in respect of 2010 and subsequent years.
6 Benefits-in-kind relate to the benefits provided to Mr Dañino pursuant to his engagement as a Special Adviser to the Chairman and Senior Management team (see note 7 below
for further details) which include transportation and out-of-pocket expenses.
7 The amount represents the fee of £150,000 per annum payable to Mr Dañino in respect of his engagement as Special Adviser to the Chairman and the Senior Management team
pursuant to a contract between Mr Dañino and Compania Minera Ares S.A.C. (“Ares”) dated 28 December 2010. The contract provides for a one-year term which renews automatically for
further one-year periods and can be terminated by either party on 30 days’ written notice. In the event that Ares terminates the contract before 31 December 2015, Mr Dañino is entitled
to receive 30% of the fee payable to him in the period from the date of termination until 31 December 2015.
8 Reflects the remuneration received by Mr Dañino in respect of his role as an Executive Director of the Company in 2010.
9 Ignacio Bustamante was appointed a Director of the Company with effect from 1 April 2010. The amount of the base salary disclosed in respect of 2010 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 650) but excludes legal profit sharing. The amount disclosed in respect of 2010 also includes the amount of CAD 39,900 (US$39,593) received by him during that year in his
capacity as a Hochschild-nominated director of Lake Shore Gold Corporation.
10 Dr Graham Birch was appointed a Director of the Company on 1 July 2011.
11 Rupert Pennant-Rea was appointed a Director of the Company on 1 September 2011.
Directors’ interests in shares
The interests of the Directors in the Company’s shares are set out in the Directors’ Report on page 62.
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
19 March 2012
88
Hochschild Mining plc
Annual Report & Accounts 2011
Governance
Statement of Directors’ responsibilities
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”
•(cid:3) Present 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
•(cid:3) State that the Group and parent company has complied with IFRS
•(cid:3) Prepare the accounts on a going concern basis unless
•(cid:3) Select suitable accounting policies in accordance with IAS 8: “Accounting Policies”
•(cid:3) Present 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
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.
89
Independent auditor’s report to the members of
Hochschild Mining plc
We have audited the financial statements of Hochschild Mining plc for the year ended 31 December 2011 which comprise
the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated statement
of financial position, the Consolidated statement of cash flows, the Consolidated statement of changes in equity and the
related notes 1 to 36. We have also audited the Parent company financial statements of Hochschild Mining plc for the
year ended 31 December 2011 which comprise the Parent company statement of financial position, the Parent company
statement of cash flows, the Parent company statement of changes in equity and the related notes 1 to 15. 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 set out on page 88, 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. In addition, we read all the
financial and non-financial information in the annual report to identify material inconsistencies with the audited financial
statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for
our report.
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 2011 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;
•(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.
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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;
•(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; and
•(cid:3) the information given in the Corporate Governance Statement set out on pages 65 to 76 in the Corporate Governance
report with respect to internal control and risk management systems in relation to financial reporting processes and
about share capital structures is consistent with the financial statements.
90
Hochschild Mining plc
Annual Report & Accounts 2011
Governance
Independent auditor’s report to the members of
Hochschild Mining plc continued
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; or
•(cid:3) a Corporate Governance Statement has not been prepared by the Company.
Under the Listing Rules we are required to review:
•(cid:3) the Directors’ statement, set out on pages 63 and 64, 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 UK Corporate Governance Code specified for our review; and
•(cid:3) certain elements of the report to shareholders by the Board on Directors’ remuneration.
Steve Dobson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
19 March 2012
Financial statements
Consolidated income statement
For the year ended 31 December 2011
91
Year ended 31 December 2011
Year ended 31 December 2010
Before
exceptional
items
US$000
Exceptional
items
US$000
Notes
Before
exceptional
items
US$000
Total
US$000
Exceptional
items
US$000
Total
US$000
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Exploration expenses
Selling expenses
Other income
Other expenses
Impairment and write-off of assets (net)
Profit from continuing operations
before net finance income/(cost),
foreign exchange loss and income tax
Share of post-tax profit/(losses)
of associates and joint ventures
accounted under equity method
Finance income
Finance costs
Foreign exchange loss
Profit from continuing operations
before income tax
3,5
987,662
6,11
(404,291)
583,371
(64,354)
(47,336)
(38,970)
7,062
7
8
9
11
11
11
–
–
–
–
–
–
–
987,662
752,322
–
752,322
(404,291)
(345,667)
(8,861)
(354,528)
583,371
406,655
(8,861)
397,794
(64,354)
(66,221)
(47,336)
(41,537)
(38,970)
(26,920)
–
–
–
(66,221)
(41,537)
(26,920)
7,062
5,605
77,197
82,802
(15,800)
(1,408)
(17,208)
(10,956)
–
(10,956)
–
1,210
1,210
–
(24,018)
(24,018)
423,973
(198)
423,775
266,626
44,318
310,944
11,18
11,12
11,12
11,707
4,689
(261)
5,989
11,446
10,678
(4,607)
(1,473)
(6,080)
4,140
9,204
13,344
(21,331)
(2,111)
(23,442)
(29,542)
(1,562)
–
(1,562)
29
–
–
(29,542)
29
417,476
3,419
420,895
236,646
52,049
288,695
Income tax (expense)/benefit
13
(148,557)
–
(148,557)
(77,816)
5,786
(72,030)
Profit for the year from continuing operations
268,919
3,419
272,338
158,830
57,835
216,665
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)
165,890
103,029
268,919
2,826
168,716
94,924
61,687
156,611
593
103,622
63,906
(3,852)
60,054
3,419
272,338
158,830
57,835
216,665
14
0.49
0.01
0.50
0.28
0.18
0.46
14
0.49
0.01
0.50
0.29
0.17
0.46
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Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Consolidated statement of comprehensive income
For the year ended 31 December 2011
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
13
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
Year ended 31 December
Notes
2011
US$000
2010
US$000
272,338
216,665
–
(1,143)
2,143
2,982
19
(33,078)
47,573
(6,836)
–
1,930
7,164
(5,915)
(2,346)
429
(7,189)
(31,963)
37,677
240,375
254,342
136,689
194,288
103,686
60,054
240,375
254,342
Consolidated statement of financial position
As at 31 December 2011
ASSETS
Non-current assets
Property, plant and equipment1
Evaluation and exploration assets1
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
Treasury shares
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
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As at
31 December
2011
US$000
As at
31 December
2010
US$000
Notes
15
16
17
18
19
20
28
21
20
22
23
461,554
406,914
274,507
212,080
18,772
83,201
20,166
79,068
40,769
153,620
8,741
36,817
–
–
2,401
5,229
887,544
916,295
53,032
55,130
166,931
145,935
601
28
917
20,662
627,481
525,482
848,073
748,126
1,735,617 1,664,421
27
27
27
158,637
158,637
395,928
395,928
(898)
–
(207,117)
(175,244)
677,218
528,788
1,023,768
195,299
908,109
147,120
1,219,067 1,055,229
24
25
26
28
24
22
25
26
8
2,393
104,866
248,380
68,430
68,152
86,443
28,534
241,456
365,750
117,037
116,074
12,831
46,334
74,432
24,460
1,930
69,272
41,871
14,295
275,094
243,442
516,550
609,192
1,735,617 1,664,421
1 31 December 2010 figures are subject to a reclassification as disclosed in note 2(z).
These financial statements were approved by the Board of Directors on 19 March 2012 and signed on its behalf by:
Ignacio Bustamante
Chief Executive Officer
19 March 2012
94
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Consolidated statement of cash flows
For the year ended 31 December 2011
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 (used in)/generated from investing activities
Cash flows from financing activities
Proceeds of borrowings
Repayment of borrowings
Transaction costs associated with borrowing
Purchase of treasury shares
Dividends paid
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
2011
US$000
2010
US$000
32
520,262
351,261
13,690
1,749
(29,474)
(20,604)
26
(4,113)
(4,634)
(36,255)
(23,540)
464,110
304,232
(140,004)
(122,836)
(73,010)
(35,980)
–
383,614
4(a)
(15,594)
–
6,603
2,633
–
(491)
–
(20,336)
(20,785)
(94)
82,485
11,915
113
832
(139,898)
198,963
117,670
37,650
(272,379)
(52,447)
–
(898)
(690)
–
29
(74,285)
(39,523)
7,991
–
(221,901)
(55,010)
102,311
448,185
(312)
(547)
525,482
77,844
23
627,481
525,482
Consolidated statement of changes in equity
For the year 31 December 2011
Other reserves
Equity
share
capital
US$000
Share
premium
US$000
Treasury
shares
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
Share-
based
payment
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
158,637 395,928
–
3,339
(13)
8,432
(14,633) (210,046)
– (212,921) 385,700
727,344
76,126 803,470
–
–
–
–
–
–
–
–
–
Balance at
1 January 2010
Other
comprehensive
income/(loss)
Profit for the year
Total
comprehensive
income for 2010
Capital
contribution from
non-controlling
interests
Dividends
declared during
the year
Dividends paid to
non-controlling
interests
Balance at
31 December 2010
Other
comprehensive
income/(loss)
Profit for the year
Total
comprehensive
income for 2011
Capital
contribution from
non-controlling
interest
CEO LTIP
provision
Treasury shares
Dividends
declared during
the year
Dividends
declared to
non-controlling
interests
–
–
–
–
29
–
29
–
–
–
–
–
–
–
158,637 395,928
–
–
–
–
–
–
29
–
29
–
–
–
–
–
–
–
–
–
34,469
(1,917)
–
–
34,469
(1,917)
–
–
–
–
–
–
–
–
–
–
–
–
5,125
–
5,125
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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)
37,808
(1,930)
8,432
(9,508) (210,046)
– (175,244) 528,788
908,109 147,120 1,055,229
(32,750)
1,930
–
–
–
(32,750)
1,930
–
–
(898)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,207)
–
(1,207)
–
–
–
–
–
–
–
–
–
–
–
–
–
(32,027)
–
(32,027)
64
(31,963)
– 168,716
168,716 103,622 272,338
(32,027) 168,716
136,689 103,686 240,375
–
154
154
–
–
–
–
–
–
–
–
–
–
7,991
7,991
154
(898)
–
–
154
(898)
(20,286)
(20,286)
–
(20,286)
–
–
(63,498)
(63,498)
Balance at
31 December 2011
158,637 395,928
(898)
5,058
8,432
(10,715) (210,046)
154 (207,117) 677,218 1,023,768 195,299 1,219,067
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96
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements
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 Jose) located in Argentina and one plant (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 19 March 2012.
The principal activities of the Company’s subsidiaries are as follows:
Equity interest at 31 December
Company
Principal activity
Country of incorporation
Hochschild Mining (Argentina) Corporation S.A.
(formerly Hochschild Mining (Argentina) Corporation)
MH Argentina S.A.
Minera Santa Cruz S.A.
Southwestern Gold (Bermuda) Limited
0848818 BC Ltd
Hochschild Mining Chile S.A.
Minera Hochschild Chile S.C.M. (formerly Minera MH
Chile Ltda.)
Southwest Minerals (Yunnan) Inc.
Hochschild Mining Holdings Limited
Hochschild Mining Ares (UK) Limited
Southwest Mining Inc.
Southwest Minerals Inc.
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.1
Servicios Corporativos Hochschild Mining Mexico,
S.A. de C.V. 2
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
Holding company
Exploration office
Production of gold & silver
Holding company
Subsidiary
Holding company
Exploration office
Subsidiary
Argentina
Argentina
Argentina
Bahamas
Canada
Chile
Chile
China
Holding company
England & Wales
Subsidiary
England & Wales
Subsidiary
Subsidiary
Mauritius
Mauritius
Holding company
Service company
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
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Peru
Peru
Peru
Peru
Peru
2011
%
100
100
51
100
100
100
100
100
100
100
100
100
100
100
100
100
–
–
100
100
99.1
100
–
2010
%
100
100
51
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
96.8
100
–
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1 Corporate information (continued)
Company
Minera Suyamarca S.A.C.
Inmaculada Holdings S.A.C.
Liam Holdings S.A.C.
Minera del Suroeste S.A.C.
Minera Quellopata S.A.C.4
Minas Pacapausa S.A.C. 5
Minera Minasnioc S.A.C.
Hochschild Mining (US) Inc. (formerly MH Nevada, Inc.)
Inmaculada Holdings S.A.C.
Principal activity
Country of incorporation
Production of gold & silver
Holding company
Holding company
Exploration office
Exploration office
Exploration office
Subsidiary
Subsidiary
Holding company
Peru
Peru
Peru
Peru
Peru
Peru
Peru
USA
Peru
Equity interest at 31 December
2011
%
60
100
100
100
–
–
100
100
100
2010
%
60
100
100
100
60
100
100
100
100
1 On 1 January 2011, Hochschild Mining Mexico, S.A. de C.V. absorbed 100% of the issued share capital of Moris Holdings, S.A. de C.V.
2 On 1 January 2011, HMX, S.A. de C.V. absorbed 100% of the issued share capital of Servicios Corporativos Hochschild Mining Mexico, S.A. de C.V.
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 October 2011, Minera Suyamarca S.A.C. absorbed 100% of the issued share capital of Minera Quellopata S.A.C.
5 On 1 January 2011, Minera Suyamarca S.A.C. absorbed 100% of the issued share capital of Minas Pacapausa S.A.C.
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 2011 and 2010 are set out below. These accounting policies have been consistently applied, except
for the effects of the adoption of new and amended accounting standards (refer to note 2(c)).
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 previously 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 2012 or later periods but which the Group has not
previously adopted. Those that are applicable to the Group are as follows:
•(cid:3) IFRS 9 “Financial Instruments: Classification and Measurement”, applicable for annual periods beginning on or after
1 January 2015;
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. The Group has determined however that the effect shall be quantified in conjunction with
the other phases, when issued, to present a comprehensive picture.
•(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) IFRS 7 “Financial Instruments: Disclosures”, applicable for annual periods beginning on or after 1 July 2012;
The amendment requires additional disclosure about financial assets that have been transferred but not derecognised
to enable the user of the Group’s financial statements to understand the relationship with those assets that have not
been derecognised and their associated liabilities. In addition, the amendment requires disclosures about continuing
involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity’s
continuing involvement in those derecognised assets. The amendment affects disclosure only and has no impact on the
Group’s financial position or performance.
98
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
•(cid:3) IFRS 10 “Consolidated Financial Statements”, applicable for annual periods beginning on or after 1 January 2013;
IFRS 10 replaces the portion of IAS 27 “Consolidated and separate financial statements” that addresses the accounting
for consolidated financial statements. It also includes the issues raised in SIC-12 “Consolidation-special purposes entities”.
IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The application
of this new standard has no impact on the Group’s financial position or performance.
•(cid:3) IFRS 11 “Joint arrangements”, applicable for annual periods beginning on or after 1 January 2013;
IFRS 11 replaces IAS 31 “Interests in joint ventures” and SIC-13 “Jointly-controlled entities non-monetary contributions
by venturers”. Instead, jointly-controlled entities that meet the definition of a joint venture must be accounted for using
the equity method. The application of this new standard has no impact on the Group’s financial position or
performance.
•(cid:3) IFRS 12 “Disclosure of involvement with other entities”, applicable for annual periods beginning on or after 1 January 2013;
IFRS 12 applies to an entity that has an interest in subsidiaries, joint arrangements, associates and/or structured entities.
Many of the disclosure requirements of IFRS 12 were previously included in IAS 27, IAS 31, and IAS 28. A number of new
disclosures are also required. The standard affects disclosure only and has no impact on the Group’s financial position
or performance.
•(cid:3) IFRS 13 “Fair value measurement”, applicable for annual periods beginning on or after 1 January 2013;
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change
when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when
fair value is required or permitted. The Group is currently assessing the impact that this standard will have on the
financial position and performance.
•(cid:3) IAS 1 “Financial statements presentation – Presentation of items in other comprehensive income”, applicable for annual
periods beginning on or after 1 July 2012;
The amendments to IAS 1 change the grouping of items presented in other comprehensive income. Items that could
be reclassified (or recycled) to profit and loss at a future point in time would be presented separately from items that
will never be reclassified. The amendment affects presentation only and has no impact on the Group’s financial position
and performance.
•(cid:3) IAS 19 “Employee benefits (amendment)”, applicable for annual periods beginning on or after 1 January 2013;
The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such as removing
the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording.
The application of this new standard has no impact on the Group’s financial position or performance.
•(cid:3) IFRIC 20 “Stripping costs in the production phase of a surface mine”, applicable for annual periods beginning
on or after 1 January 2013;
This interpretation would apply to waste removal (stripping) costs incurred in surface mining activity, during the
production phase of the mine. There can be two benefits accruing to the entity from the stripping activity: usable ore
that can be used to produce inventory and improved access to further quantities of material that will be mined in future
periods. When the benefit from the stripping activity is the production of inventory, an entity would be required to
account for the stripping activity costs as part of the cost of inventory. When the benefit is the improved access to ore,
the entity would recognise these costs as a non-current asset only if certain criteria are met, which is referred to as
the stripping activity asset. The amendment has no impact on the Group’s financial position and performance.
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 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 estimates are contained in the accounting policies and/or the notes
to the financial statements. The key areas are summarised below.
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2 Significant accounting policies (continued)
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) The determination of functional currency requires management judgement, particularly where there may be several
currencies in which transactions are undertaken and which impact the economic environment in which the entity operates
•(cid:3) Determination of useful lives of assets for depreciation and amortisation purposes – note 2(f).
•(cid:3) Estimates are required to be made by management as to the useful lives of assets. For depreciation calculated under
the unit-of-production method, estimated recoverable reserves are used in determining the depreciation and/or
amortisation of mine specific assets. This results in a depreciation/amortisation charge proportional to the depletion
of the anticipated remaining life-of-mine production. Each item’s life, which is assessed annually, has regard to both
its physical life limitations and to present assessments of economically recoverable reserves of the mine property
at which the asset is located. These calculations require the use of estimates and assumptions, including the amount
of recoverable reserves. Changes are accounted for prospectively.
•(cid:3) Determination of ore reserves and resources – note 2(h).
•(cid:3) 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.
•(cid:3) Review of asset carrying values and impairment charges – notes 2(i), (k), (v) and note 15 and 16.
•(cid:3) The assessment of asset carrying values 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.
•(cid:3) The impairment testing of goodwill is based on significant judgements and assumptions made by the management
when performing the annual impairment testing. Changes to be made to these assumptions may alter the results
of the impairment testing, the impairment charges recorded in profit or loss and the resulting carrying values of the
non-current assets tested.
•(cid:3) Estimation of the amount and timing of mine closure costs – notes 2(o) and 26.
•(cid:3) The Group assesses its mine closure cost provision annually. Significant estimates and assumptions are made
in determining the provision for mine closure cost 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, mine life and changes in discount rates. Those uncertainties may result in future
actual expenditure differing from the amounts currently provided. The provision at the balance sheet date represents
management’s best estimate of the present value of the future closure costs required. Changes to estimated future
costs are recognised in the balance sheet by adjusting the mine closure cost liability and the related asset originally
recognised. If, for mature mines, the revised mine assets net of mine closure cost provisions exceed the recoverable
value, that portion of the increase is charged directly to expense. For closed sites, changes to estimated costs
are recognised immediately in the income statement.
•(cid:3) Income tax – notes 2(t), 13 and 28.
•(cid:3) Judgement is required in determining whether deferred tax assets are recognised on the balance sheet. Deferred tax
assets, including those arising from un-utilised tax losses require management to assess the likelihood that the Group
will generate taxable earnings in future periods, in order to utilise recognised deferred tax assets. Estimates of future
taxable income are based on forecast cash flows from operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability
of the Group to realise the net deferred tax assets recorded at the balance sheet date could be impacted.
•(cid:3) Recognition of evaluation and exploration assets and transfer to development costs – note 2(g).
•(cid:3) Judgement is required in determining when the future economic benefit of a project can reasonably be regarded
as assured, at which point evaluation and exploration expenses are capitalised. For this purpose, the future economic
benefit of the project can reasonably be regarded as assured when either the Board authorises management to conduct
a feasibility study, mine-site exploration is being conducted to convert resources to reserves or mine-site exploration
is being conducted to confirm resources, all of which is based on supporting geological information. Expenditure
is transferred to mine development assets once the work completed to date supports the future development
of the property and such development receives appropriate approval.
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
(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) IAS 24 “Related Party Transactions (Amendment)”, applicable for annual periods beginning on or after 1 January 2011;
The IASB has issued an amendment to IAS 24 that clarifies the definitions of a related party. The new definitions
emphasise a symmetrical view of related party relationships as well as clarifying in which circumstances persons
and key management personnel affect related party relationships of an entity. Secondly, the amendment introduces
an exemption from the general related party disclosure requirements for transactions with a government and entities
that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity.
The adoption of the amendment did not have any impact on the financial position or performance of the Group.
•(cid:3) IAS 32 “Financial Instruments: Presentation — Classification of Rights Issues”, applicable for annual periods beginning
on or after 1 February 2010;
The amendment 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. This amendment did not have any impact on the Group after initial application.
•(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 did not have any
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 did not have any 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 including IFRS 3 Business
Combinations, IFRS 7 Financial Instruments – Disclosures, IAS1 Presentation of Financial Statements and IAS 34
Interim Financial Statements.
(d) Basis of consolidation
The consolidated financial statements set out the Group’s financial position, performance and cash flows as at
31 December 2011 and 31 December 2010 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 “NCI”; (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.
NCI 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 attributable to the NCI even if that results in a deficit balance.
2 Significant accounting policies (continued)
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
NCI in the acquiree. The choice of measurement of NCI, 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 NCI (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
NCI (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.
(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.
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Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
(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
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.
When a mine construction project moves into the production stage, the capitalisation of certain mine construction
costs ceases and costs are either regarded as part of the cost of inventory or expensed, except for costs which qualify
for capitalisation relating to mining asset additions or improvements, underground mine development or mineable
reserve development.
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.
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2 Significant accounting policies (continued)
(g) Evaluation and exploration assets
Evaluation and exploration expenses are capitalised when the future economic benefit of the project can reasonably
be regarded as assured.
Projects in the development phase – Exploration and evaluation costs are capitalised as assets from the date that the Board
authorises management to conduct a feasibility study.
Expenditure is transferred to mine development costs once the work completed to date supports the future development
of the property and such development receives appropriate approval.
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.
(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 NCI 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.
(j) Intangible assets
Goodwill
Goodwill is included in intangible assets and represents the excess of the cost of an acquisition over the fair value
of the Group’s share of the net identifiable assets of the acquired entity at the date of acquisition. Separately recognised
goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses
on goodwill are not reversed.
Goodwill is allocated to cash-generating units for impairment testing purposes. The allocation is made to those
cash-generating units that are expected to benefit from the business combination in which the goodwill arose.
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 equal to that of the mine to which it relates and that is amortised applying the units of production method
for that mine.
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
Other intangible assets
Other intangible assets are primarily computer software which are capitalised at cost and are amortised on a straight-line
basis over their useful life of three years.
(k) Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment.
The carrying amounts of property, plant and equipment 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.
(l) Inventories
Inventories are valued at the lower of cost or net realisable value. Cost is determined using the weighted average method.
The cost of work in progress and finished goods (ore inventories) is based on the cost of production.
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.
(m) Trade and other receivables
Current trade receivables are carried at the original invoice amount less provision made for impairment of these
receivables. Non-current receivables are stated at amortised cost. A provision for impairment of trade receivables
is established when there is objective evidence that the Group will not be able to collect all amounts due according to the
original terms of the receivable which on average, do not exceed 30 days. The amount of the provision is the difference
between the carrying amount and the recoverable amount and this difference is recognised in the income statement.
(n) Share capital
Ordinary shares are classified as equity. Any excess above the par value of shares received upon issuance of those shares
is classified as share premium.
(o) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event. It is
probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the
expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage
of time is recognised as a finance cost.
2 Significant accounting policies (continued)
Mine closure cost
Provisions for mine closure costs are made in respect of the estimated future costs of closure and restoration and for
environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual
materials and remediation of disturbed areas) in the accounting period when the related environmental disturbance
occurs. The provision is discounted and the unwinding of the discount is included in finance costs. At the time
of establishing the provision, a corresponding asset is capitalised and is depreciated over future production from
the mine to which it relates. The provision is reviewed on an annual basis for changes in cost estimates, discount rates
and operating lives.
Workers’ profit sharing and other employee benefits
In accordance with Peruvian legislation, 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
(note 10) and is considered deductible for income tax purposes. The Group has no pension or retirement benefit
schemes.
Other
Other provisions are accounted for when the Group has a legal or constructive obligation for which it is probable there
will be an outflow of resources for which the amount can be reliably estimated.
(p) Share-based payments
Cash-settled transactions
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.
Equity-settled transactions
The cost of equity-settled transactions is recognised, together with a corresponding increase in other reserves in equity,
over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised
for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period
has expired and the Group’s best estimate of the number of equity instruments that vest. The income statement expense
for a period represents the movement in cumulative expense recognised as at the beginning and end of that period
and is recognised in personnel expenses (note 10). During 2011, the Group has approved an equity-settled scheme
for its CEO.
(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 dore and concentrate containing both gold and
silver. Concentrate is sold directly to customers. Dore bars are sent to a third-party for further refining into gold and silver
which is then sold.
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue
can be reliably measured.
Revenue associated with the sale of concentrate and gold and silver from dore 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.
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Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
The revenue is subject to adjustment based on inspection of the product by the customer. Revenue is initially recognised
on a provisional basis using the Group’s best estimate of contained gold and silver. Any subsequent adjustments to the
initial estimate of metal content are recorded in revenue once they have been determined.
In addition, certain sales are “provisionally priced” where the selling price is subject to final adjustment at the end
of a period, normally ranging from 15 to 90 days after the start of the delivery process to the customer, based on the
market price at the relevant quotation point stipulated in the contract. Revenue is initially recognised when the conditions
set out above have been met, using market prices at that date. The price exposure is considered to be an embedded
derivative and hence separated from the sales contract at each reporting date. The provisionally priced metal is revalued
based on the forward selling price for the quotational period stipulated in the contract until the quotational period ends.
The selling price of gold and silver can be measured reliably as these metals are actively traded on 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.
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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.
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Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
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.
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.
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 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.
(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. This includes the reclassification of the costs associated with the Crespo and Azuca projects which were
previously classified as Mining properties and development costs. Given the stage of the projects, the capitalised costs
of US$50,269,000 have been reclassified to Evaluation and exploration assets. The reclassification has been made
in the 2010 financial statements, to ensure comparability of the two balance sheets presented.
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
2 Significant accounting policies (continued)
(aa) Hedging
The Group has used 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.
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 – Pallancata, which generates revenue from the sale of concentrate
•(cid:3) Operating unit – San Jose, 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 2011 the amount disclosed includes the profit or loss generated by Empresa de Transmisión Callalli S.A.C.
(a power generation company), HMX, S.A. de C.V. (a service company in Mexico), and the Selene mine, that closed
in 2009 which, as a consequence, is not considered to be a reportable segment . For 2010 the amount disclosed includes
the profit or loss generated by Empresa de Transmisión 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.
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.
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
3 Segment reporting (continued)
(a) Reportable segment information
Ares
US$000
Arcata
US$000
Pallancata
US$000
San Jose
US$000
Moris
US$000
Exploration
US$000
Other¹
US$000
Adjustment
and
eliminations
US$000
Total
US$000
Year ended
31 December 2011
Revenue for external
customers
68,097 209,239 352,642
325,302
32,298
Inter segment revenue
–
–
–
–
–
Total revenue
68,097 209,239 352,642
325,302
32,298
–
–
–
84
7,966
8,050
987,662
(7,966)
–
(7,966)
987,662
Segment profit/(loss)
Others2
Profit/(loss) from
continuing operations
before income tax
Other segment
information
Depreciation3
Amortisation
Impairment
Assets
20,297 125,209 230,281
160,017
9,086
(50,048)
6,864
(4,641)
497,065
(76,170)
420,895
(1,291)
(22,502)
(34,923)
(43,343)
(1,929)
(383)
(1,903)
–
–
–
–
–
–
(1,454)
–
–
–
–
–
(100)
–
–
–
–
(106,274)
(1,554)
–
Capital expenditure
2,673
33,040
55,059
62,994
555
61,629
1,997
–
217,947
Current assets
Other non-current
assets4
Total segment assets
Not reportable assets5
4,798
31,826
62,348
59,064
7,338
276
2,761
–
168,411
10,971
94,583 141,635
231,757
–
255,473
20,414
15,769 126,409 203,983
290,821
7,338
255,749
23,175
–
–
–
–
–
–
812,373
–
–
–
754,833
923,244
812,373
Total assets
15,769 126,409 203,983
290,821
7,338
255,749
835,548
– 1,735,617
1 “Other” revenue primarily relates to revenues earned by HMX S.A. de C.V. for services provided to the Moris mine, and the Mexican exploration activities.
2 Comprised of administrative expenses of US$64,354,000, other income of US$7,062,000, other expenses of US$17,208,000, reversal of impairment of assets of US$ 1,210,000, share of
gains of associates and joint ventures of US$11,446,000, finance income of US$10,678,000, finance cost of US$23,442,000, and foreign exchange loss of US$1,562,000.
3 Includes US$28,000 of depreciation capitalised in Minera Hochschild Mexico S.A. de C.V. due to the San Felipe project.
4 Includes goodwill in respect of San Jose amounting to US$2,091,000.
5 Not reportable assets are comprised of investments accounted under the equity method of US$83,201,000, available-for-sale financial assets of US$40,769,000, other receivables
of US$60,293,000, income tax receivable of US$601,000, deferred income tax assets of US$Nil, other financial assets of US$28,000 and cash and cash equivalents of US$627,481,000.
3 Segment reporting (continued)
(a) Reportable segment information (continued)
Ares
US$000
Arcata
US$000
Pallancata
US$000
San Jose
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
Others3
Profit/(loss) from
continuing operations
before income tax
Other segment
information
Depreciation4
Amortisation
Impairment
Assets
15,053 104,677 158,528
92,804
766
(49,277)
5,030
1,756 329,337
(40,642)
288,695
(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)
–
–
–
(102,446)
(2,368)
(24,018)
Capital expenditure
5,422
30,230
43,955
55,183
2,728
108,218
2,305
– 248,041
Current assets
Other non-current
assets5
Total segment assets
Not reportable assets6
4,661
20,934
69,968
39,739
7,295
11
1,926
– 144,534
9,670
82,983 127,869
210,010
1,428
194,111
12,939
– 639,010
14,331 103,917 197,837
249,749
8,723
194,122
14,865
– 783,544
–
–
–
–
–
–
880,877
– 880,877
Total assets
14,331 103,917 197,837
249,749
8,723
194,122
895,742
– 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 Jose 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.
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
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
2011
US$000
2010
US$000
153,301
147,701
82,223
158,540
148,023
137,713
185,447
128,834
152,612
50,540
215,516
88,457
38,802
52,275
987,662
752,322
667
7,299
882
6,110
995,628
759,314
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 2011
Year ended 31 December 2010
US$000
% Revenue
Segment
US$000
% Revenue
Segment
Aurubis AG
(formerly Nordeutsche Affinerie AG)
185,447
19%
LS Nikko
176,397
18%
Teck Metals Ltd.
(formerly Teck Cominco Metals Ltd)
148,023
15%
Pallancata
and
San Jose
Pallancata
and
San Jose
Pallancata
and
San Jose
128,834
17%
52,275
7%
137,713
18%
Johnson Matthey Inc.
Consorcio Minero S.A.
96,293
82,174
Ares Arcata
San Jose
and Moris
Arcata and
San Jose
10%
8%
79,384
11%
158,464
21%
Selene
Pallancata
San Jose
Pallancata
and
San Jose
Arcata
Pallancata
Ares
Arcata
San Jose
Moris
Arcata
San Jose
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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
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
As at 31 December
2011
US$000
2010
US$000
496,395
399,905
231,892
210,265
26,224
28,699
146
68
83,377
79,291
838,034
718,228
40,769
153,620
8,741
36,817
–
–
5,229
2,401
887,544
916,295
4 Acquisitions and disposals
(a) Acquisition of assets
Minera Quellopata S.A.C.
On 12 October 2010, the Group signed a Framework Agreement with International Minerals Corporation (“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, and (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 transferred to Minera Quellopata S.A.C.
(“Quellopata”), together with the Puquiopata project. The Group is the operator of the new venture pursuant
to a separate management agreement similar in form and substance to the Pallancata management agreement.
This transaction has been accounted for as an asset acquisition on the basis that Quellopata has no existing processes.
As a result of the acquisition, the Group obtained control over Quellopata and consolidated it as a subsidiary.
The net assets received in the asset acquisition were US$91,782,000 and the IMZ interest generated by the transaction
was US$36,940,000. At 31 December 2010, the Group recognised a contingent consideration of US$39,243,000
and an obligation to IMZ of US$15,594,000.
During 2011 the Group paid to IMZ its obligation of US$15,594,000.
Gold Resource Corporation
Between 26 January 2010 and 5 February 2010 the Group acquired 440,500 shares of its associate Gold Resource Corp.
for US$4,351,000 in the open market. In addition, on 8 March 2010 the Group signed a subscription agreement
with Gold Resource Corp. 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 Gold Resource Corp. for a total consideration
of US$6,000,000. Following completion of this purchase the Group’s ownership in its associate increased to 25.28%
on a fully diluted basis as at 31 December 2010.
At 31 December 2011 the Group’s ownership in Gold Resource Corp. was 25.2% on a fully diluted basis.
(b) Disposal of shares
Lake Shore Gold Corp.
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 common 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 held an interest of approximately 5.4%, no longer had the right to Board representation
and no longer exercised significant influence over 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 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$6,385,878 was recognised in 2011
in respect of the disposal.
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
5 Revenue
Gold (from dore bars)
Silver (from dore bars)
Gold (from concentrate)
Silver (from concentrate)
Services
Total
Year ended 31 December
2011
US$000
2010
US$000
144,812
125,613
155,122
98,431
134,438
118,327
553,206
409,846
84
105
987,662
752,322
Included within revenue is a gain of US$12,395,086 relating to provisional pricing adjustments representing the change
in the fair value of embedded derivatives (2010: gain of US$60,473,436) arising on sales of concentrates and dore (refer
to notes 2(r) and footnote 1 to note 22).
6 Cost of sales
Included in cost of sales are:
Depreciation and amortisation
Personnel expenses1 (note 10)
Mining royalty (note 35)
Change in products in process and finished goods
Year ended 31 December
2011
US$000
2010
US$000
105,897
102,705
109,011
17,950
97,055
15,091
6,893
(3,609)
1 2010 personnel expenses includes an exceptional item that corresponds to a one-off bonus paid to the mining workers in Peru, relating to 2009, of US$8,861,000.
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
2011
US$000
2010
US$000
32,376
34,337
6,256
7,717
1,088
1,878
823
3,147
1,869
34
26
565
457
453
9,557
6,686
1,176
1,756
133
2,008
1,747
301
1,814
1,354
437
250
7,665
4,665
64,354
66,221
8 Exploration expenses
Mine site exploration1
Arcata
Ares
Pallancata
San Jose
Prospects2
Peru
Argentina
Mexico
Chile
Generative3
Peru
Argentina
Mexico
Chile
Personnel
Others
Total
117
Year ended 31 December
2011
US$000
2010
US$000
4,512
2,476
2
2,917
1,612
9,043
2,952
3,534
2,419
6,558
–
3,742
2,153
8,371
5,292
2,767
1,485
7,607
15,463
17,151
7,093
3,356
117
562
164
7,936
10,882
4,012
46
460
175
4,037
7,851
4,127
47,336
41,537
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.
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
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
As at 31 December
2011
US$000
1,808
2010
US$000
1,117
As at 31 December
2011
US$000
2010
US$000
22,708
21,036
118
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
9 Selling expenses
Transportation of dore, concentrate and maritime freight
Sales commissions
Personnel expenses
Warehouse services
Other
Total
10 Personnel expenses1
Salaries and wages
Workers’ profit sharing
Other legal contributions
Statutory holiday payments
Long Term Incentive Plan
Termination benefits
Other
Total
Year ended 31 December
2011
US$000
5,215
3,300
340
27,151
2,964
38,970
2010
US$000
7,559
1,466
296
15,146
2,453
26,920
Year ended 31 December
2011
US$000
90,061
31,444
17,780
6,202
2,574
2,232
2010
US$000
77,803
22,830
15,215
5,406
6,975
2,768
12,170
14,307
162,463
145,304
1 Personnel expenses are distributed in cost of sales, administrative expenses, exploration expenses, selling expenses and capitalised as property plant and equipment amounting
to US$109,011,000 (2010: US$97,055,000), US$32,376,000 (2010: US$34,337,000), US$10,882,000 (2010: US$7,851,000), US$340,000 (2010: US$296,000) and US$9,854,000 (2010:
US$5,765,000) respectively.
Average number of employees for 2011 and 2010 were as follows:
Peru
Argentina
Mexico
Chile
United Kingdom
Total
As at 31 December
2011
2,402
1,188
148
28
11
2010
2,323
1,083
160
19
9
3,777
3,594
11 Pre-tax exceptional items
Cost of sales
Personnel expenses (see footnote 1 to note 6)
Total
Other income
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
Total
Other expenses
Termination benefits4
Total
Impairment and write-off of assets (net)
Impairment and write-off of assets5
Reversal of write-off of assets6
Total
Share of post-tax losses of associates and joint ventures accounted under equity method
Total
Finance income
Gain on sale and exchange of available-for-sale financial assets7
Gain from changes in the fair value of financial instruments8
Total
Finance expenses
Loss from changes in the fair value of financial instruments9
Total
119
Year ended
31 December
2011
US$000
Year ended
31 December
2010
US$000
–
–
–
–
–
–
(8,861)
(8,861)
6,010
7,533
63,654
77,197
(1,408)
(1,408)
–
–
–
(24,018)
1,210
1,210
(261)
(261)
5,989
–
5,989
(2,111)
(2,111)
–
(24,018)
(1,473)
(1,473)
5,915
3,289
9,204
–
–
1 Corresponds to the gain generated from 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 from 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 from the sale of 109,000,000 Lake Shore Gold shares on 3 November 2010.
4 Relates to the provision of termination benefits due to workers as a result of the closure of Moris mine.
5 Mainly comprises the effects of the result of the physical verification exercise performed every three years at the Peruvian unit mines 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, includes a write off of US$12,000 in Mexico, US$747,000 in Peru related to the Crespo project and
US$6,728,000 in Argentina related to the proposed conversion of San Jose’s production to dore only. In 2010, the Group 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.
6 Corresponds to the reversal of the write-off recorded in 2010 related to the 100% dore project at the San Jose mine.
7 The 2011 amount corresponds to the gain on sale of the remaining Lake Shore Gold shares held of US$6,386,000, net of the loss generated by the sale of Golden Minerals Company
shares of US$397,000. In 2010 the amount 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, and the gain for receiving shares of International Minerals
Corporation due to the merger with Ventura Gold Corp of US$202,000.
8 The 2010 amount corresponds to the gain from change in the fair value of Golden Minerals Company and Iron Creek Capital Corp warrants of US$2,972,000 and US$168,000
respectively. In addition, it includes US$149,000 related to the fair value adjustment on acquisition of International Minerals shares in November 2010.
9 Mainly corresponds to the fair value adjustment of the Golden Minerals Company and Iron Creek Capital Corp warrants of US$1,563,000 and US$139,000 respectively. In addition
the amount includes the impairment of Brionor Resources and Empire Petroleum Corp of US$380,000 and US$50,000 respectively.
F
i
n
a
n
c
i
a
l
s
t
a
t
e
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t
s
120
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
12 Finance income and finance costs before exceptional items
Finance income
Interest on deposits and liquidity funds1
Interest on loans to non-controlling interests1 (note 20)
Change in discount rate
Other
Total
Finance costs
Interest on bank loans and long-term debt1 (note 25)
Interest on convertible bond1 (note 25)
Unwind of discount rate
Loss from changes in the fair value of financial instruments
Other
Total
1 Interest income and expense from assets and liabilities that are not at fair value through the profit and loss are as follows:
Interest income from financial assets that are not at fair value through the profit and loss
Interest expense from financial liabilities that are not at fair value through the profit and loss
Total
Year ended
31 December
2011
Before
exceptional
items
US$000
Year ended
31 December
2010
Before
exceptional
items
US$000
2,225
2,352
–
112
350
2,514
283
993
4,689
4,140
(6,517)
(8,760)
(1,684)
(1,810)
(2,560)
(8,744)
(8,588)
(538)
(9,094)
(2,578)
(21,331)
(29,542)
As at 31 December
2011
US$000
4,577
2010
US$000
2,864
(15,277)
(17,332)
(10,700)
(14,468)
13 Income tax expense
Year ended 31 December 2011
Year ended 31 December 2010
Before
exceptional
items
US$000
Exceptional
items
US$000
Before
exceptional
items
US$000
Total
US$000
Exceptional
items
US$000
Total
US$000
Current corporate income tax from
continuing operations
Current corporate income tax charge
Current mining royalty charge (note 35)
Current special mining tax charge (note 35)
Withholding taxes
Deferred taxation
Origination and reversal of temporary differences
from continuing operations (note 28)
Recognition of deferred tax not previously
recognised following a change in
estimate/outlook (note 28)
86,154
2,536
3,002
4,963
96,655
54,277
(2,375)
51,902
Total taxation charge in the income statement
148,557
–
–
–
–
–
–
–
–
–
86,154
50,138
(2,659)
47,479
2,536
3,002
4,963
–
–
513
–
–
–
–
–
513
96,655
50,651
(2,659)
47,992
54,277
41,690
(3,127)
38,563
(2,375)
(14,525)
–
(14,525)
51,902
148,557
27,165
77,816
(3,127)
(5,786)
24,038
72,030
The weighted average statutory income tax rate was 31.8% for 2011 and 31.4% for 2010. 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:
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
2011
US$000
2010
US$000
(7,164)
(7,164)
7,189
7,189
121
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
122
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
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 31.8% (2010: 31.4%)
Expenses not deductible for tax purposes
Non-taxable income1
Recognition of previously unrecognised deferred tax assets2
Non-taxable share of losses/(gains) of associates
Net deferred tax assets generated in the year not recognised
Deferred tax recognised on special investment regime
Derecognition of deferred income tax assets
Adjustment of tax base of Minera Quellopata S.A.C.
Withholding tax
Special mining tax and new royalty3
Foreign exchange rate effect4
Other
At average effective income tax rate of 35.3% (2010: 25.0%)
Taxation charge attributable to continuing operations
Total taxation charge in the income statement
As at 31 December
2011
US$000
2010
US$000
420,895
288,695
133,881
2,742
(3,096)
(2,375)
(3,033)
8,636
(2,092)
5,981
(2,692)
4,963
5,538
4,532
(4,428)
148,557
148,557
148,557
90,594
2,250
(17,976)
(14,525)
1,702
8,179
(1,017)
–
–
513
–
(430)
2,740
72,030
72,030
72,030
1 Mainly corresponds to the non-taxable gain on the sale of Lake Shore Gold shares of US$1,692,000 (2010: US$17,743,000).
2 The amount for 2011 mainly corresponds to the recognition of a previously unrecognised mine closure provision of US$8,278,000. The amount for 2010, mainly corresponds to the use of
previously unrecognised tax losses.
3 Corresponds to the impact of the new mining royalty and special mining tax (note 35).
4 Mainly corresponds to the foreign exchange effect from converting tax bases and monetary items from local currency to the functional currency.
123
14 Basic and diluted earnings per share
Earnings per share (“EPS”) is calculated by dividing profit for the year attributable to equity shareholders of the Company
by the weighted average number of ordinary shares issued during the year.
The Company has dilutive potential ordinary shares.
As at 31 December 2011 and 2010, EPS has been calculated as follows:
Basic and earnings per share from continuing operations
Before exceptional items (US$)
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
2011
2010
0.49
0.01
0.50
0.49
0.01
0.50
0.28
0.18
0.46
0.29
0.17
0.46
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)
Profit from continuing operations before exceptional items attributable to
equity holders of the parent (US$000)
Interest on convertible bond (US$000)
Diluted profit from continuing operations before exceptional items attributable to
equity holders of the parent (US$000)
The following 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 (thousands)
Diluted weighted average number of ordinary shares in issue and dilutive
potential ordinary shares (thousands)
As at 31 December
2011
2010
272,338
216,665
(103,622)
(60,054)
168,716
156,611
(2,826)
(61,687)
165,890
8,760
94,924
8,588
174,650
103,512
As at 31 December
2011
2010
338,022
338,085
18,161
18,161
356,183
356,246
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
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t
s
124
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
15 Property, plant and equipment
Year ended 31 December 2011
Cost
At 1 January 2011
Additions
Change in discount rate
Disposals
Write-off
Change in mine closure estimate
Transfers and other movements
Transfers from evaluation and
exploration assets
Foreign exchange
At 31 December 2011
Accumulated depreciation
and impairment
At 1 January 2011
Depreciation for the year
Write-off
Disposals
Transfers to evaluation and exploration
assets
Foreign exchange
At 31 December 2011
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
299,871
120,948
234,888
3,606
56,093
61,925
777,331
79,284
5,806
16,345
782
43,654
145,880
–
–
(6,379)
–
509
9,269
2
–
–
–
–
–
(1,867)
(321)
–
9
–
(155)
(21)
–
2,884
–
–
3,318
–
–
–
–
17,040
16,028
1,192
–
(34,769)
–
(30)
–
(125)
–
(17)
–
108
–
26
2,884
(2,022)
(6,721)
3,318
–
9,269
(36)
382,556
143,764
264,948
4,614
63,185
70,836
929,903
179,672
59,830
(6,379)
–
(22)
2
52,987
17,763
–
–
–
–
94,332
26,329
(261)
(1,500)
–
(68)
233,103
70,750
118,832
1,562
40,766
1,098
370,417
664
(15)
(104)
–
(16)
2,091
2,523
1,871
(183)
106,274
–
–
–
–
–
–
–
21
(6,655)
(1,604)
(22)
(61)
42,637
936
468,349
20,548
69,900
461,554
Net book amount at 31 December 2011
149,453
73,014
146,116
1 The carrying value of plant and equipment held under finance leases at 31 December 2011 was US$5,741,000 (2010: US$7,936,000). Additions during the year included US$900,000
(2010: US$1,239,000) of plant and equipment under finance leases. Leased assets are pledged as security for the related finance lease.
There were no borrowing costs capitalised in property, plant and equipment as no significant qualifying assets were constructed during 2011.
125
15 Property, plant and equipment (continued)
Year ended 31 December 2010
Cost
At 1 January 2010
Reclassification
Mining
properties and
development
costs
US$000
Land and
buildings
US$000
Plant and
equipment
US$000
Vehicles
US$000
Mine closure
asset
US$000
Construction in
progress and
capital
advances
US$000
Total
US$000
283,887
109,127
215,577
3,708
55,131
59,284
726,714
(60,173)
–
–
–
–
–
(60,173)
Restated balance at 1 January 2010
223,714
109,127
215,577
3,708
55,131
59,284
666,541
Additions
Acquisition of subsidiary
Change in discount rate
Disposals
Transfer of leases
Write-off
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
Reclassification
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
1,081
39,572
126,358
–
989
–
–
–
–
–
–
–
5
989
(1,946)
(717)
(6,803)
(18,109)
(1,108)
–
(1,108)
–
(30,145)
–
–
–
–
17
4,249
1,069
299,871
120,948
234,888
3,606
56,093
61,925
777,331
135,750
37,667
74,768
1,541
36,932
1,098
287,756
Restated balance at 1 January 2010
125,846
Depreciation for the year
54,027
(9,904)
–
37,667
17,976
–
74,768
26,201
Write-off
Disposals
Transfer of leases
Foreign exchange
(201)
(2,657)
(5,911)
–
–
–
–
–
1
(648)
(123)
45
At 31 December 2010
179,672
Net book amount at 31 December 2010
120,199
52,987
67,961
94,332
140,556
–
–
–
(9,904)
1,541
36,932
1,098
277,852
408
(24)
(373)
–
10
1,562
2,044
3,834
–
–
–
–
–
–
–
–
–
102,446
(8,793)
(1,021)
(123)
56
40,766
1,098
370,417
15,327
60,827
406,914
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
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t
s
126
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
16 Evaluation and exploration assets
Cost
Balance at 1 January 2010
Reclassification
Restated balance at 1 January 2010
Additions
Foreign exchange
Transfers to property, plant and equipment
Balance at 31 December 2010
Additions
Foreign exchange
Transfers from/(to) property plant and equipment
Azuca
US$000
Crespo
US$000
Inmaculada
US$000
San Felipe
US$000
Others
US$000
Total
US$000
7,079
8,076
15,155
13,162
–
22
28,339
30,014
–
–
1,238
52,097
53,335
2,436
–
–
55,771
9,927
(280)
–
–
–
–
53,185
10,857
72,359
–
–
60,173
53,185
10,857
132,532
91,507
581
15,078
122,764
–
–
91,507
16,920
62
188
3,058
–
–
(4,271)
56,824
21,664
39
15,949
(913)
–
–
(9,457)
3,058
(4,249)
254,105
72,849
(1,131)
(9,269)
Balance at 31 December 2011
58,353
65,418
108,677
55,950
28,156
316,554
Accumulated impairment
Balance at 1 January 2010
Reclassification
Restated balance at 1 January 2010
Impairment
Foreign exchange
Balance at 31 December 2010
Transfers from property, plant and equipment
Balance at 31 December 2011
–
–
–
–
–
–
22
22
Net book value as at 31 December 2010
20,263
–
9,904
9,904
–
–
9,904
–
9,904
53,943
–
–
–
–
–
–
–
–
15,360
1,171
–
–
16,531
9,904
15,360
14,702
888
1,171
26,435
–
–
14,702
888
30,950
1,171
42,025
–
–
22
30,950
1,171
42,047
91,507
25,874
20,493
212,080
Net book value as at 31 December 2011
58,331
55,514
108,677
25,000
26,985
274,507
There were no borrowing costs capitalised in evaluation and exploration assets.
127
Goodwill
US$000
Transmission
line
US$000
Software
licences
US$000
Total
US$000
2,091
22,157
–
–
989
111
25,237
111
2,091
22,157
1,100
25,348
–
–
–
–
161
(1)
161
(1)
2,091
22,157
1,260
25,508
–
–
–
–
–
–
2,165
2,067
–
4,232
1,454
5,686
2,091
2,091
17,925
16,471
647
301
2
950
100
1,050
150
210
2,812
2,368
2
5,182
1,554
6,736
20,166
18,772
17 Intangible assets
Cost
Balance at 1 January 2010
Additions
Balance at 31 December 2010
Additions
Foreign exchange difference
Balance at 31 December 2011
Accumulated amortisation
Balance at 1 January 2010
Amortisation for the year1
Foreign exchange difference
Balance at 31 December 2010
Amortisation for the year1
Balance at 31 December 2011
Net book value as at 31 December 2010
Net book value as at 31 December 2011
1 The amortisation for the period is included in cost of sales and administrative expenses in the income statement.
The carrying amount of goodwill is reviewed annually to determine whether it is in excess of its value-in-use. The value-in-
use is determined at the cash-generating unit level, in this case being the San Jose mine, by discounting the expected cash
flows estimated by management over the life of the mine.
The calculation of value-in-use is most sensitive to the following assumptions:
•(cid:3) Commodity prices – Commodity prices of gold and silver are based on prices considered in the Group’s 2012 budget
(2010: 2011 budget) and external market consensus forecasts. The prices considered in the 2011 (2010) impairment
tests were:
Year
2011
2012
2013
2014
2015
2016
2017
2018–2022
2011 – Gold – US$/oz
2011 – Silver – US$/oz
–
–
1,825.0
1,750.0
1,500.0
1,400.0
1,324.6
1,323.1
1,300.0
40.0
35.0
29.6
30.0
25.5
25.4
25.0
2010 – Gold – US$/oz
1,300.0
1,367.50
1,300.0
1,200.0
1,175.0
1,175.0
1,000.0
1,000.0
2010 – Silver – US$/oz
25.0
26.3
23.8
21.7
21.7
23.5
16.9
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) Production volumes and grades – Tonnage produced was estimated at plant capacity with 12 days of maintenance per
year (2010: 12 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 2011 impairment test was 24.18%
(2010: 16.63%).
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Financial statements
Notes to the consolidated financial statements continued
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
2011
Variation
(37.1)%
(27.1)%
(67.9%)
35.3%
2010
Variation
(13.1)%
(10.7)%
(52.9)%
11.9%
292.3%
107.0%
Headroom for the 2011 and 2010 impairment tests were US$193,591,000 and US$61,523,000 respectively.
Cash flows used for impairment tests were based on the annual 2012 budget presented and approved by the Board,
subject to a number of conditions, in November 2011. The starting point in all cases was January 2012. Individual cash
flows are based on the annual 2012 budget and an estimated set of reserves and resources as of December 2011 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 2012 budget. Future capital expenditure is based on the 2012 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
(a) Gold Resource Corp.
The Group has a 25.2% interest in Gold Resource Corp., which is involved in the exploration for and production of gold
and silver in Mexico. The company was organised under the laws of the State of Colorado, USA, where the principal
executive offices are located. The operations are conducted through two wholly-owned subsidiaries, located in Mexico,
Don David Gold S.A. de C.V. and Golden Trump Resources S.A. de C.V.
At 31 December 2011, the capital and reserves were US$132,582,000, and US$3,978,000 (loss on currency translation)
respectively.
The profit for the period was US$46,464,000.
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
Profit1
Carrying amount of the investment
Year ended 31 December
2011
US$000
2010
US$000
20,258
57,919
(7,605)
(11,727)
58,845
24,356
26,496
11,446
83,201
15,087
56,065
(1,632)
(14,808)
54,712
24,356
3,730
3,711
79,068
1 Share of the associate’s profit in 2011 includes (1) a pre-exceptional gain from the Group’s share in the results of the period of Gold Resource Corp. of US$11,707,000 (2010: loss of
US$3,171,000) and (2) an exceptional loss from dilution of US$261,000 (2010: gain of US$6,882,000).
(b) Lake Shore Gold Corp.
The profit and loss effect in 2010 was a loss of US$9,785,000 which included (1) a pre-exceptional loss from the
Group’s share in the results for 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.
19 Available-for-sale financial assets
Beginning balance
Additions1
Impairment
Fair value change recorded in equity
Disposals2
Reclassification from investments accounted under equity method3
Ending balance
129
Year ended 31 December
2011
US$000
153,620
2,910
(198)
2010
US$000
19,185
25,786
–
(33,078)
47,573
(82,485)
(11,924)
–
73,000
40,769
153,620
1 The amount represents the fair value of shares at the date of acquisition and mainly includes: (i) the conversion of Golden Minerals Company warrants into shares of U$2,419,000,
(ii) the conversion of Iron Creek Capital Corp warrants into shares of US$83,000 and the purchase of shares of Iron Creek Capital Corp. for US$408,000.
2 Explained by the sale of: (i) 21,540,992 shares of Lake Shore Gold Corp, and (ii) 104,889 shares of Golden Minerals Company. The amount for 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.
3 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, as the Group no longer had 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
Total
1 Includes Pembrook Mining Corp and Electrum Capital Inc. shares.
Year ended 31 December
2011
US$000
2010
US$000
27,175
131,603
31
1,722
11,841
40,769
39
8,397
13,581
153,620
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 ECI Exploration and Mining Inc.) were recognised
at cost given that there is not an active market for these investments. The investment in ECI Exploration and Mining Inc.
is fully impaired.
Available-for-sale financial assets are denominated in the following currencies:
Canadian dollars
US dollars
Pound sterling
Total
2011
US$000
2010
US$000
39,016
145,184
31
1,722
39
8,397
40,769
153,620
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
20 Trade and other receivables
As at 31 December
Trade receivables (note 36(c))
Advances to suppliers
Credit due from exports of Minera Santa Cruz
Loan to non-controlling interests1
Receivables from related parties (note 30)
Loans to employees
Interest receivable
Receivable from Kaupthing, Singer and Friedlander Bank
Other
Provision for impairment2
Financial assets classified as receivables
Prepaid expenses
Value Added Tax (VAT)3
Total
2011
2010
Non-current
US$000
Current
US$000
Non-current
US$000
–
–
5,413
–
–
2,051
–
–
23
–
7,487
526
728
115,379
13,008
964
1,025
932
1,350
711
515
1,986
(2,406)
133,464
6,305
27,162
Current
US$000
89,404
9,050
4,004
9,393
1,609
3,297
4
648
1,027
(2,533)
–
–
578
32,165
–
2,128
–
–
25
–
34,896
115,903
933
988
4,252
25,780
8,741
166,931
36,817
145,935
The fair values of trade and other receivables approximate their book value.
1 Corresponds to a loan to International Minerals Corporation. At 31 December 2010, this related to loans to Minera Andes Inc. with an effective interest rate of 7%. These loans were repaid
during 2011.
2 Includes the provision for impairment of trade receivable from a customer in Peru of US$1,108,000 (2010: US$1,108,000), the impairment of deposits in Kaupthing, Singer and
Friedlander of US$515,000 (2010: US$648,000) and other receivables of US$783,000 (2010: US$777,000).
3 This includes an amount of US$16,315,000 (2010: US$14,593,000) of VAT paid in the development and plant expansion of the San Jose project that will be recovered through future sales
of gold and silver by Minera Santa Cruz S.A. It also includes the VAT of Minera Suyamarca of US$3,040,000 (2010: US$2,282,000), Compañía Minera Ares S.A.C. of US$6,503,000 (2010:
US$1,678,000) and Minas Santa María de Moris of US$1,256,000 (2010: US$2,456,000). The VAT is valued at its recoverable amount.
Movements in the provision for impairment of receivables:
At 1 January 2010
Provided for during the year
Released during the year
At 31 December 2010
Provided for during the year
Released during the year
At 31 December 2011
Individually
impaired
US$000
2,443
241
(151)
Total
US$000
2,443
241
(151)
2,533
2,533
76
(203)
76
(203)
2,406
2,406
20 Trade and other receivables (continued)
As at 31 December, the ageing analysis of financial assets classified as receivables net of impairment is as follows:
Year
2011
2010
21 Inventories
Finished goods
Products in process
Raw materials
Supplies and spare parts
Provision for obsolescence of supplies
Total
Total
US$000
Neither past due
nor impaired
US$000
140,951
140,951
150,799
150,799
Less than
30 days US$000
30 to 60 days
US$000
61 to 90 days
91 to 120 days
US$000
US$000
–
–
–
–
–
–
–
–
Over
120 days
US$000
–
–
Past due but not impaired
As at
31 December
2011
US$000
As at
31 December
2010
US$000
1,791
13,537
5
40,240
55,573
(2,541)
4,601
17,620
255
33,788
56,264
(1,134)
53,032
55,130
Finished goods include ounces of gold and silver and concentrate. Dore 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 dore on hand at 31 December 2011 included in products in process is US$1,379,000 (2010: US$4,995,000).
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 of supplies, spare parts and raw materials
is US$72,105,000 (2010: US$67,907,000).
The amount of the expense related to the increase of the inventory provision is US$695,000 (2010: US$1,252,000).
The amount of income relating to the reversal of the inventory provision is US$21,000 (2010: US$Nil).
131
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
22 Other financial assets and liabilities
Other financial assets
Warrants in Golden Minerals Company
Warrants in Iron Creek Capital Corp.
Embedded derivatives1
Total financial assets at fair value through profit or loss
Other financial liabilities
Embedded derivatives1
Total financial liabilities at fair value through profit or loss
Swap contracts
Total derivatives designated as hedge instruments
Total financial liabilities
As at 31 December
2011
US$000
2010
US$000
–
28
–
28
12,831
12,831
–
–
12,831
3,982
168
16,512
20,662
–
–
1,930
1,930
1,930
1 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 dore 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).
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
2011
US$000
349
2010
US$000
694
370,021
424,049
45,030
212,081
44,346
56,393
627,481
525,482
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 papers and floating rate notes with a weighted average maturity between 5 to 24 days as at 31 December
2011 (2010: between 33 and 56 days). In addition, liquidity funds include US Treasury bonds amounting to US$199,924,000 (note 36(g)).
2 Relates to bank accounts which are freely available and bear interest .
3 These deposits have an average maturity from 10 to 83 days (2010: 1 to 30 days) (refer to note 36(g)).
24 Trade and other payables
Trade payables1
Salaries and wages payable2
Dividends payable
Taxes and contributions
Accrued expenses
Guarantee deposits
Mining royalty (note 35)
Professional fees
Interest payable
Accounts payable to related parties (note 30)
Other
Total
2011
Current
US$000
57,720
24,748
9,797
6,302
5,873
4,197
1,205
1,131
192
32
5,840
As at 31 December
2010
Current
US$000
49,407
21,120
339
11,157
3,777
2,697
3,537
1,247
88
–
22,705
Non-
current
US$000
–
2,385
–
–
8
–
–
–
–
–
–
117,037
2,393
116,074
Non-
current
US$000
–
–
–
–
8
–
–
–
–
–
–
8
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.
2 Salaries and wages payable were as follows:
Remuneration payable
Board members’ remuneration
Executive Long Term Incentive Plan
Total
2011
US$000
2010
US$000
21,039
16,633
652
3,057
947
5,925
24,748
23,505
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
5.5%
1.75%
7%
486
84,222
59,028
877
29,256
11,074
5,145
23
25 Borrowings
Secured bank loans (a)
•(cid:3)Pre-shipment loans in Minera Santa Cruz
(note 21)
•(cid:3)Leasing agreement with Banco de Credito
del Peru
2011
Effective
interest rate
Non-
current
US$000
Current
US$000
Effective
interest rate
Non-
current
US$000
2010
Current
US$000
As at 31 December
1.3% to 6.0%
–
38,500
1.6% to 2.4%
20,000
3.25% to 3.5%
336
3.25%
817
2,897
•(cid:3)Leasing agreement with Banco Interamericano
de Finanzas
•(cid:3)Syndicated loan with JP MorganChase Bank N.A.
Amount due to non-controlling interests (b)
5% to 6%
–
–
24
–
–
760
461
–
–
Convertible bond payable (c)
5.75% 104,506
6,613
5.75%
103,827
Amounts due to related parties (note 30)
–
–
–
0%
–
Total
104,866
46,334
248,380
69,272
(a) The following table demonstrates the present value and maturity of future minimum lease payments as at 31 December
2011 and 2010:
Not later than one year
Between 1 and 2 years
Between 2 and 5 years
Total
As at 31 December
2011
US$000
1,221
360
–
1,581
2010
US$000
3,774
1,279
24
5,077
The following table reconciles the total minimum lease payments and their present values as at 31 December 2011 and 2010:
Present value of leases
Future interest
Total minimum lease payments
The carrying amount of net lease liabilities approximate their fair value.
As at 31 December
2011
US$000
1,581
40
1,621
2010
US$000
5,077
155
5,232
25 Borrowings (continued)
(b) Amounts due to non-controlling interests
The balance as at 31 December 2010 mainly corresponded to a loan from Minera Andes Inc. to Minera Santa Cruz S.A.
for an amount of US$64,070,000 with an interest rate of 7%, and a further loan of US$6,032,000 advanced to Minera
Santa Cruz S.A. by Minera Andes S.A. with an interest rate of 7% (refer to note 36(g)). These loans were repaid in full
during 2011.
(c) Convertible bond payable
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 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 Price (before adjustment for the recommended 2011 Final Dividend): GBP 3.94;
•(cid:3) Fixed Exchange Rate: US$1.59/GBP 1.00.
The balance as at 31 December 2011 is comprised of the principal of US$115,000,000 (2010: US$115,000.000) plus
accrued interest of US$7,292,000 (2010: US$5,145,000), net of transaction costs of US$2,741,000 (2010: US$2,741,000)
and the bond equity component of US$8,432,000 (2010: 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
2011
US$000
1,039
2010
US$000
59,265
103,827
136,951
–
52,164
104,866
248,380
The carrying amount of current borrowings approximates their fair value. The carrying amount and fair value
of the non-current borrowings are as follows:
Secured bank loans
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
2011
US$000
360
–
2010
US$000
85,525
59,028
2011
US$000
375
–
104,506
104,866
103,827
116,413
248,380
116,788
2010
US$000
84,728
80,184
121,709
286,621
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Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
26 Provisions
At 1 January 2010
Additions
Accretion
Change in discount rate
Change in estimate
Payments
Foreign exchange
At 31 December 2010
Less current portion
Non-current portion
At 1 January 2011
Additions
Accretion
Change in discount rate
Change in estimate5
Payments
Foreign exchange
At 31 December 2011
Less current portion
Non-current portion
Provision
for mine
closure¹
US$000
61,321
1,081
538
1,137
2,583
–
–
–
(4,634)
(10,862)
–
(26)
62,026
21,307
(10,592)
(21,307)
51,434
62,026
782
533
3,541
10,856
–
21,307
31,444
–
–
–
(4,113)
(23,398)
–
478
73,625
29,831
(9,791)
(29,831)
63,834
–
Workers’
profit
sharing2
US$000
1,996
30,199
Contributions
to Peruvian
Government
US$000
893
1,814
Long term
incentive
plan³
US$000
–
Contingent
consideration4
US$000
–
1,061
39,243
Other
US$000
2,371
378
–
–
–
–
108
Total
US$000
66,581
73,776
538
1,137
2,583
(16,221)
(80)
–
–
–
–
–
39,243
(5,859)
33,384
2,857
128,314
(2,293)
(41,871)
564
86,443
39,243
2,857
128,314
–
204
313
7
1,000
35,858
–
–
–
737
3,854
10,863
(7,389)
(484)
(37,160)
–
–
396
–
–
–
–
–
1,061
–
1,061
1,061
2,594
–
–
–
–
–
3,655
32,378
3,373
142,862
–
(32,378)
(2,432)
(74,432)
3,655
–
941
68,430
–
–
–
(725)
(162)
1,820
(1,820)
–
1,820
38
–
–
–
(1,776)
(82)
–
–
–
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 2011 and 2010 respectively, and
the cash flows have been adjusted to reflect the risk attached to these cash flows. Uncertainties on the timing for use of this provision include changes in the future that could impact the
time of closing the mines, as new resources and reserves are discovered.
2 Corresponds to the legal and voluntary workers’ profit sharing of the Group. Legal workers’ profit sharing represents 8% of taxable income of Peruvian companies. Voluntary workers’
profit sharing is determined by the Group taking into account the market conditions of employment. The balance of the provision as at 31 December 2011 is: (i) Legal (US$21,584,000),
(ii) Voluntary (US$8,247,000).
3 Corresponds to the provision related to awards granted under the Long Term Incentive Plan to designated personnel of the Group. Includes the following benefits: (i) 2011 awards,
granted in April 2011, payable in April 2014, (ii) 2010 awards, granted in May 2010, payable in May 2013, and (iii) Exploration incentive plan awards, granted in January 2011, payable 50%
in March 2013 and 50% in March 2014. Only employees who remain in the Group’s employment on the vesting date will be entitled to a cash payment, 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 2011 there is a provision of
US$2,594,000 that is disclosed under administrative expenses (US$1,467,000), exploration expenses (US$146,000) and capitalised as evaluation and exploration expenses (US$981,000).
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 mining operations within the Inmaculada property.
5 During 2011 the Group conducted an external review of the provision for mine closure costs for all its mining units. Consequently, at 31 December 2011 an increase of US$10,856,000 in
this provision was recognised.
137
27 Equity
(a) Share capital and share premium
Issued share capital
The issued share capital of the Company as at 31 December 2011 and 2010 is as follows:
Class of shares
Ordinary shares
Issued
Number
Amount
338,085,226 £84,521,307
At 31 December 2011 and 2010, all issued shares with a par value of 25 pence each were fully paid (2011: weighted average
of US$0.469, 2010: weighted average of US$0.469 per share).
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.
(b) Treasury shares
Treasury shares represent the cost of Hochschild Mining plc shares purchased in the market and held by the trustee
of the Hochschild Mining Employee Share Trust to satisfy the award of conditional shares under the Group’s Enhanced
Long Term Incentive Plan granted to the CEO (note 2(p)). During 2011, the Group purchased 126,769 shares for the
purposes of the plan, for a total consideration of £561,477.91 (equivalent to $897,214).
(c) 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.
Share-based payment reserve
Is used to recognise the value of equity-settled share-based payment transactions provided to employees, as a part of their
remuneration.
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138
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
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
Foreign exchange effect
End of the year
As at 31 December
2011
US$000
(23,305)
2010
US$000
5,190
(51,902)
(24,038)
7,164
(7,189)
–
–
(109)
1,762
1,208
(238)
(68,152)
(23,305)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets
against current tax liabilities and when the deferred income tax assets and liabilities relate to the same fiscal authority.
The movement in deferred income tax assets and liabilities before offset during the year is as follows:
Deferred income tax liabilities
At 1 January 2010
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
Income statement (credit)/charge
Net deferred income tax from unrealised loss
on available-for-sale financial assets
Foreign exchange
At 31 December 2011
Differences
in cost
of PP&E
US$000
Mine
development
US$000
Financial
instruments
US$000
Others
US$000
Total
US$000
5,527
10,027
20,613
14,101
–
–
–
15,554
16,433
–
–
–
–
238
34,952
38,289
–
109
31,987
73,350
799
3,627
7,189
–
–
11,615
(6,560)
(5,055)
–
–
859
1,254
27,798
29,009
–
(1,208)
–
905
280
–
–
7,189
(1,208)
238
63,026
48,442
(5,055)
109
1,185
106,522
Deferred income tax assets
At 1 January 2010
Income statement credit/(charge)
Arising on acquisition
At 31 December 2010
Income statement credit/(charge)
Net deferred income tax from
unrealised loss on available-for-sale
financial assets
Differences
in cost
of PP&E
US$000
Provision
for mine
closure
US$000
9,807
1,873
–
11,680
5,653
4,972
1,482
–
6,454
3,647
–
–
At 31 December 2011
17,333
10,101
Tax
losses
US$000
2,770
3,846
–
6,616
(5,973)
–
643
Interest
payable
US$000
Financial
instruments
US$000
Others
US$000
Total
US$000
8,210
(3,068)
–
5,142
(5,142)
–
–
–
–
–
7,229
32,988
838
1,762
9,829
(1,645)
4,971
1,762
39,721
(3,460)
–
–
2,109
2,109
–
2,109
8,184
38,370
139
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
2011
US$000
–
2010
US$000
5,229
(68,152)
(28,534)
As at 31 December
2011
US$000
2010
US$000
–
–
–
–
–
–
–
–
1,855
1,855
23,789
23,789
1,486
3,428
4,632
6,384
92,010
107,940
109,795
624
2,997
2,548
4,592
55,416
66,177
89,966
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 comprise (gross amounts):
Provision for mine closure1
Impairments of assets2
As at 31 December
2011
US$000
38,822
14,702
2010
US$000
39,350
14,702
1 This relates to provision for mine closure expenditure which is expected to be incurred in periods in which taxable profits are not expected against which the expenditure can be offset.
2 Corresponds to the impairment of the San Felipe project recognised in 2010.
Unrecognised deferred tax liability on retained earnings
At 31 December 2011, there was no recognised deferred tax liability (2010: 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.
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140
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
29 Dividends paid and proposed
Declared and paid during the year
Equity dividends on ordinary shares:
Final dividend for 2010: US$0.03 (2009: US$0.02)
Interim dividend for 2011: US$0.03 (2010: US$0.02)
Dividends paid to non-controlling interest: US$0.55 (2010: US$0.40)
Dividends declared to non-controlling interest: US$0.06 (2010: nil)
Dividends declared and paid
Proposed for approval by shareholders at the AGM
Final dividend for 2011: US$0.03 (2010: US$0.03)
2011
US$000
2010
US$000
10,143
10,143
53,999
9,499
6,762
6,761
26,000
–
83,784
39,523
10,135
10,143
Dividends per share
The dividends declared in August 2011 were US$10,142,557 (US$0.03 per share). A dividend in respect of the year ending
31 December 2011 of US$0.03 per share, amounting to a total dividend of US$10,134,951 is to be proposed at the Annual
General Meeting on 23 May 2012. 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 2011 and 2010.
The related parties are companies owned or controlled by the main shareholder of the parent company, joint ventures
or associates.
Current related party balances
Fosfatos del Pacífico S.A.
Cementos Pacasmayo S.A.A.
Gold Resource Corp (note 18(a))
Total
Accounts receivable
at 31 December
Accounts payable
at 31 December
2011
US$000
2010
US$000
2011
US$000
2010
US$000
–
222
710
932
28
291
1,290
1,609
–
32
–
32
–
23
–
23
As at 31 December 2011 and 2010 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.
Dividend recognised for Gold Resource Corp. investment (note 18(a))
Revenue recognised for services provided to Gold Resource Corp
Expenses
Year ended
2011
US$000
2010
US$000
–
7,313
35
7,533
2,633
29
Expense recognised for the rental paid to Cementos Pacasmayo S.A.A.
(170)
(231)
Transactions between the Group and these companies are on an arm’s length basis.
30 Related-party balances and transactions (continued)
(b) Compensation of key management personnel of the Group
Compensation of key management personnel (including Directors)
Short-term employee benefits
Termination benefits
Long Term Incentive Plan
Workers’ profit sharing
Others
141
As at 31 December
2011
US$000
6,504
–
1,200
184
950
2010
US$000
6,751
1,170
2,348
205
647
Total compensation paid to key management personnel
8,838
11,121
This amount includes the remuneration paid to the Directors of the parent company of the Group of US$4,816,370
(2010: US$6,996,557), out of which US$199,660 (2010: US$239,975) relates to pension payments.
(c) Purchase of additional interest in Inmaculada project
During 2010, the Group acquired an additional interest in the Inmaculada project effectively diluting the interest of its
joint-venture partner, 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 (note 4(a)).
31 Auditor’s remuneration
The auditor’s remuneration for services provided to the Group during the years ended 31 December 2011 and 2010
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
Amounts paid to
Ernst & Young
in the
year ended
31 December
2011
US$000
1,292
156
194
110
2010
US$000
1,250
150
139
241
1,752
1,780
Amounts paid
to others
in the
year ended
31 December
2011
US$000
2010
US$000
1
–
–
–
1
38
–
–
–
38
1 The total audit fee in respect of local statutory audits of subsidiaries is US$844,000 (2010: US$865,000).
In 2011 and 2010, all fees are included in administrative expenses, with the exception of 2011 fees related to the sale
of shares in Lake Shore Gold which were deducted from the gain on the sale of Lake Shore Gold shares and not disclosed
within administrative expenses (note 4(b)).
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142
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
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 (note 3(a))
Amortisation of intangibles
Impairment and write-off of assets (net)
Gain on sale of available-for-sale financial assets
Gain on sale of investment in associates
Share of post-tax (gains)/losses of associates and joint ventures accounted under equity method
Increase in provision for mine closure
Finance income
Finance costs
Income tax expense
Other
Increase (decrease) of cash flows from operations due to changes in assets and liabilities
Trade and other receivables
Income tax receivable
Other financial assets and liabilities
Inventories
Trade and other payables
Provisions
Cash generated from operations
As at 31 December
2011
US$000
2010
US$000
272,338
216,665
106,246
102,446
1,554
31
2,368
24,018
(5,989)
(5,915)
–
(77,197)
(11,446)
8,728
(4,689)
23,442
148,557
1,268
6,080
3,838
(7,146)
29,542
72,030
4,066
(30,522)
(42,239)
2,717
7,264
27,125
(27,389)
828
(10,095)
(22,919)
2,993
31,140
21,785
520,262
351,261
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:
Offset of income tax payable with value added tax receivable
As at 31 December
2011
US$000
2010
US$000
43,413
31,065
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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
2011
US$000
4,064
19,200
2010
US$000
1,208
5,760
(i) Teck Peru S.A. (Huachoja Project)
On 9 August 2011 the Group entered into an option agreement with Teck Peru S.A. (“Teck”) to explore and develop
minerals in the Huachoja property located in Peru.
Under the agreement, the Group will have the right to acquire a 60% interest in the property by investing US$4,000,000
and by drilling 4,000 metres at the property before 31 August 2015. The Group has a binding commitment for the first
US$500,000 (the “Committed Expenditures”) and for the first 1,500 metres of drilling (the “Committed Drilling”)
before 31 August 2012.
If the Group has not completed the Committed Expenditures and the Committed Drilling before this date, the mine
option will expire and the Group shall pay to Teck the shortfall in Committed Expenditures and the shortfall in
Committed Drilling at the rate of US$200 per metre.
The Group has made a provision for US$800,000 in respect of these commitments.
(ii) Minera Coriwasi S.A. (Incognitas Project)
On 27 June 2011 the Group entered into an exploration and option agreement with Minera Coriwasi S.A. (“Minera
Coriwasi”) to explore and develop minerals in the Incognitas properties located in Peru. Upon signing of the agreement
the Group paid US$70,000 to Minera Coriwasi.
Under the agreement, the Group will have the right to acquire a 100% interest in the property by investing US$940,000
and by investing US$1,300,000 within four years. The Group can withdraw from the agreement at any time without
incurring any further expenditures or penalties.
(iii) Sociedad Contractual Minera Valleno (Valeriano)
On 10 November 2010, the Group entered into a purchase option agreement with Sociedad Contractual Minera Valleno
(“Minera Valleno”) amongst others, to earn the right to purchase 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$500,000
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 work 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 exploration expenditure necessary to vest the option but only after having funded the first US$1,000,000
in exploration expenditure. As at 31 December 2011 the Group has funded US$2,200,000.
(iv) 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 the right to purchase 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 expenditure necessary to vest the option. At 31 December 2011 the Group
had invested US$806,000 in the project.
144
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the consolidated financial statements continued
33 Commitments (continued)
(v) Robert Schnell Dresel and John Chellew Urzúa (San Antonio Project)
On 12 December 2011 a Purchase Option Agreement between Mr. Robert Schnell Dresel and MH Chile S.C.M. was signed
in respect of an option to acquire “Susy 1 to 9” and “San Antonio 1 to 10” properties, within a term of 36 months,
extendable to 60 months.
In order to exercise the option, the Group is required to make a fixed payment of US$2,100,000 and a variable payment
of 2% of the gold value in the measured and inferred resources if the 4% gold value exceeds US$10,000,000; or
US$500,000 if the 4% gold value is below US$10,000,000. The Group is required to undertake exploration work
comprising 1,000 metres of drilling by 31 December 2012.
If the Group wants to extend the period of the agreement, it is required to pay US$1,500,000 to extend the period
to 48 months and a further US$1,500,000 to extend it to 60 months.
On 12 December 2011 a Purchase Option Agreement between Mr. John Chellew Urzúa, Sociedad de Inversiones Puelche
Ltda. (“SCM Puelche”) and MH Chile S.C.M. was signed in respect of an option to acquire all of the outstanding shares
of SCM Puelche. SCM Puelche holds the “Tres Amantes” Option Agreement with the Gomez family, for the “Tres Amantes
1 to 20” and “Antonia 1 to 80” properties.
In order to exercise the option, the Group is required to make a fixed payment of US$7,900,000 and a variable payment
of 2% of the gold value in the measured and inferred resources if the 4% gold value exceeds US$10,000,000; or
US$500,000 if the 4% gold value is below US$10,000,000. The Group is required to incur exploration expenditure
of US$400,000 by 31 December 2012.
If the Group wishes to extend the term of the agreement, it must pay US$1,500,000 to extend the period to 48 months
and a further US$1,500,000 to extend it to 60 months.
The Group can withdraw from the agreements at any time without incurring any further expenditure or penalties.
(b) Operating lease commitments
The Group has a number of operating lease agreements, as lessee.
The lease expenditure charged to the income statement during the years 2011 and 2010 are included in the production
costs (2011: US$6,699,000, 2010: US$4,905,000), administrative expenses (2011: US$1,088,000, 2010: US$1,176,000)
and selling expenses (2011:US$115,000, 2010: nil).
As at 31 December 2011 and 2010, the future aggregate minimum lease payments under the operating lease agreements
are as follows:
Not later than one year
Later than one year and not later than five years
(c) Capital commitments
Peru
Mexico
Argentina
For the year ended 31 December
2011
US$000
1,306
520
2010
US$000
2,245
1,490
For the year ended 31 December
2011
US$000
2010
US$000
39,472
39,490
51
3,472
34
6,200
42,995
45,724
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34 Contingencies
As at 31 December 2011, 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.
As at 31 December 2011, the Group had exposures totalling US$29,243,000 (2010: US$26,760,000) which are assessed
as “possible”, rather than “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.
35 Mining royalties
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 have been calculated with rates ranging from 1% to 3%
of the value of mineral concentrate or equivalent, based on quoted market prices.
In October 2011 changes came into effect for mining companies, with the following features:
a) Introduction of a Special Mining Tax (“SMT”), levied on mining companies at the stage of exploiting mineral
resources. The new tax is calculated by applying a progressive scale of rates ranging from 2% to 8.4%, of the quarterly
operating profit. This new tax is in addition to existing mining royalties.
b) Modification of the mining royalty calculation, which consists of applying a progressive scale of rates ranging from
1% to 12%, of the quarterly operating profit. The former royalty was calculated on the basis of monthly sales value
of mineral concentrates.
The SMT and modified mining royalty are accounted for as an income tax in accordance with IAS 12.
c) For companies that have mining projects benefiting from tax stability regimes, mining royalties are calculated and
recorded as they were previously, applying an additional new special charge on mining that is calculated using progressive
scale rates, ranging from 4% to 13.12% of quarterly operating profit. This was the case for the Arcata mine unit.
As at 31 December 2011, the amount payable as under the former mining royalty (for the Arcata mining unit), the new
mining royalty (for the Ares and Pallancata mining units), and the SMT amounted to US$709,000 (2010: US$2,946,000),
US$1,261,000 (2010: nil), and US$1,394,000 (2010: nil) respectively. The former mining royalty is recorded as “Trade
and other payables”, and the new mining royalty and SMT as “Income tax payable” in the Statement of Financial Position.
The amount recorded in the income statement was US$11,921,000 comprising the former mining royalty, disclosed
as cost of sales (2010: US$11,223,000), and US$2,536,000 of new mining royalty and US$3,002,000 of SMT, both disclosed
as income tax (2010: nil).
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 Jose, the mining royalty is fixed at 1.85% of the pit-head value of
the production where the final product is dore and 2.55% where the final product is mineral concentrate or precipitates.
As at 31 December 2011, the amount payable as mining royalties amounted to US$496,000 (2010: US$591,000).
The amount recorded in the income statement as cost of sales was US$6,029,000 (2010: US$3,868,000).
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Financial statements
Notes to the consolidated financial statements continued
36 Financial risk management
The Group is exposed to a variety of risks and uncertainties which may have a financial impact on the Group and which
also impact the achievement of social, economic and environmental objectives. These risks include strategic, commercial,
operational and financial risks and are further categorised into risk areas to facilitate consolidated risk reporting across
the Group.
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, 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.
(a) Commodity price risk
Silver and gold prices have a material impact on the Group’s results of operations. Prices are significantly affected
by changes in global economic conditions and related industry cycles. Generally, producers of silver and gold are unable
to influence prices directly; thus, the Group’s profitability is ensured through the control of its cost base and the efficiency
of its operations.
The Group is committed to remain hedge free, however management continuously monitors silver and gold prices
and reserves the right to take the necessary action, where appropriate and within Board approved parameters, to mitigate
the impact of this risk.
The Group has embedded derivatives arising from the sale of concentrate and dore which were provisionally priced at the
time the sale is recorded (refer to notes 5 and 22(1)). For these derivatives, 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
2011
2010
Increase/
decrease price
of ounces of:
Gold
+/–10%
Silver
+/–10%
Gold
+/–10%
Silver
+/–10%
Effect
on profit
before tax
US$000
+/–523
+/–716
+/–713
+/–5,334
36 Financial risk management (continued)
(b) Foreign currency risk
The Group produces silver and gold which are typically priced in US dollars. A proportion of the Group’s costs are
incurred in pound sterling, Peruvian nuevos soles, Argentinian pesos and Mexican pesos. Accordingly, the Group’s
financial results may be affected by exchange rate fluctuations between the US dollar and the local currency. The long-
term relationship between commodity prices and currencies in the countries in which the Group operates provides a
certain degree of natural protection. The Group does not use derivative instruments to manage its foreign currency risks.
The following table demonstrates the sensitivity of financial assets and liabilities, at the reporting date denominated
in their respective currencies, to a reasonably possible change in the US dollar exchange rate, with all other variables
held constant, of the Group’s profit before tax and the Group’s equity.
Year
2011
Pound sterling
Argentinian pesos
Mexican pesos
Peruvian nuevos soles
Canadian dollars
2010
Pound sterling
Argentinian pesos
Mexican pesos
Peruvian nuevos soles
Canadian dollars
Increase/
decrease in
US$/other
currencies’ rate
Effect
on profit before
tax
US$000
+/–10%
+/–10%
+/–10%
+/–10%
+/–10%
+/–1
–/+1,049
+/–110
–/+4,414
+/–22
Effect
on equity
US$000
+/–172
–
–
–
+/–3,882
+/–10%
–/+107
+/–840
+/–10%
–/+227
+/–10%
+/–679
+/–10%
+/–852
–
–
–
+/–10%
+/–415 +/–14,519
147
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Financial statements
Notes to the consolidated financial statements continued
36 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 trade receivables, embedded derivatives and cash
balances in banks as at 31 December 2011 and 31 December 2010:
Summary commercial partners – Trade receivables
LS Nikko.
Teck Metals Ltd (formerly Teck Cominco Metals Ltd.)
Korea Zinc Co., Ltd
Aurubis AG (formerly Nordeutsche Affinerie AG)
Argor Heraus S.A.
Standard Bank
MRI Trading AG
Consorcio Minero S.A.
Doe Run Peru S.R.L.
Johnson Matthey Inc.
Traxys Peru S.A.C.
Others
Summary commercial partners – Embedded derivatives
LS Nikko.
Teck Metals Ltd (formerly Teck Cominco Metals Ltd.)
Korea Zinc Co., Ltd
Aurubis AG (formerly Nordeutsche Affinerie AG)
Consorcio Minero S.A.
Argor Heraus S.A.
MRI Trading AG
Traxys Peru S.A.C.
As at
31 December
2011
US$000
Credit
rating or %
collected as at
16 March
2012
As at
31 December
2010
US$000
Credit
rating or %
collected as at
23 March
2011
36,972
22,025
19,091
18,848
6,672
4,713
4,135
1,475
1,108
318
–
22
115,379
A1
BBB
AA
90%
97%
100%
98%
80%
0%
100%
–
0%
10,691
30,274
–
24,802
215
–
6,380
11,577
1,108
4,313
34
10
89,404
A1
BBB
–
99%
100%
–
92%
82%
0%
100%
0%
0%
As at
31 December
2011
US$000
Credit
rating or %
collected as at
16 March
2012
As at
31 December
2010
US$000
Credit
rating or %
collected as at
23 March
2011
(5,097)
(3,129)
(2,447)
(1,437)
(461)
(200)
(61)
–
A1
BBB
AA
90%
80%
97%
98%
–
2,916
6,464
–
2,498
4,347
24
245
18
A1
BBB
–
99%
82%
100%
92%
0%
(12,832)
16,512
149
Credit
rating1
–
AA
A+
–
A
BBB–
AA
BBB–
–
NA
As at
31 December
2011
US$000
199,924
186,883
141,398
40,000
32,080
8,669
3,101
1,298
As at
31 December
2010
US$000
–
618
Credit
rating1
–
A+ S&P
A-1 S&P
380,887
A-1 S&P
A S&P
A-3 S&P
AA- S&P
BBB-
–
92,406
30,474
5,426
1,519
–
300
BBB S&P
13,828
627,481
NA
14,152
525,482
36 Financial risk management (continued)
Financial counterparties
US Treasury bonds
HSBC
JP Morgan
Deutsche Bank
Citibank
Banco de Crédito del Peru
Banco Bilbao Vizcaya Argentaria
Banorte
Interbank
Others (including cash in hand)
Total
1 The long-term credit rating.
To manage the credit risk associated with commercial activities, the Group took the following steps:
•(cid:3) Active use of prepayment/advance clauses in sales contracts
•(cid:3) Delaying delivery of title and/or requiring advance payments to reduce exposure timeframe (potential delay
in sales recognition)
•(cid:3) Obtaining parent guarantees or contracting directly with parent company to shore up the credit profile of the customer
(where possible)
•(cid:3) Maintaining as diversified a portfolio of clients as possible
•(cid:3) 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) Increasing banking relationships with large, established and well-capitalised institutions in order to secure access
to credit and to diversify credit risk
•(cid:3) Limiting exposure to financial counterparties according to Board approved limits
•(cid:3) Investing cash in short-term, highly liquid and low risk instruments (money market accounts, term deposits,
US Treasuries)
•(cid:3) 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.
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Financial statements
Notes to the consolidated financial statements continued
36 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
2011
2010
Increase/
decrease
in prices
Effect on profit
before tax
US$000
Effect
on equity
US$000
+25%
–25%
+25%
–25%
–375
+10,137
–1,020
–9,867
+1,895
+38,405
–2,066
–38,300
(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 2011 and 2010, the Group held the following financial instruments measured at fair value:
Assets measured at fair value
Equity shares (note 19)
Warrants
Liabilities measured at fair value
Embedded derivatives (note 22(1))
Assets measured at fair value
Embedded derivatives (note 22(1))
Equity shares (note 19)
Warrants
Liabilities measured at fair value
Swap contracts (note 22)
31 December
2011
US$000
40,769
28
12,831
31 December
2010
US$000
16,512
Level 1
US$000
28,928
–
–
Level 1
US$000
–
153,620
140,039
4,150
1,930
–
–
During the period ending 31 December 2011 and 2010, there were no transfers between these levels.
The reconciliation of the financial instruments categorised as level 3 is as follows:
Balance at 1 January 2010
Gain from the period recognised in revenue (note 22(1))
Fair value change through equity
Balance at 31 December 2010
Embedded
derivatives
assets
US$000
695
15,817
–
16,512
Embedded
derivatives
liabilities
US$000
(175)
175
–
–
Loss from the period recognised in revenue (note 22(1))
(16,512)
(12,831)
Fair value change through equity
Balance at 31 December 2011
–
–
–
(1,740)
(12,831)
11,841
Level 2
US$000
–
28
Level 3
US$000
11,841
–
–
12,831
Level 2
US$000
–
–
4,150
1,930
Level 3
US$000
16,512
13,581
–
–
Equity
shares
US$000
11,743
–
1,838
13,581
–
151
36 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 2011 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 2011
Trade and other payables
Embedded derivative liability
Borrowings
Provisions
Total
At 31 December 2010
Trade and other payables
Swap contracts
Borrowings
Provisions
Total
Less than
1 year
US$000
106,538
12,831
46,660
32,378
198,407
102,220
1,938
75,133
5,895
Between
1 and
2 years
US$000
Between
2 and
5 years
US$000
Over
5 years
US$000
Total
US$000
8
–
6,977
2,726
9,711
2,393
–
69,978
34,105
–
–
112,129
997
113,126
–
–
–
–
–
–
–
–
–
106,546
12,831
165,766
36,101
321,244
104,613
1,938
163,634
66,068
374,813
1,095
–
41,095
185,186
106,476
164,729
66,068
522,459
(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 at fixed rate.
Fixed rate
Cash at bank (note 23)
Time deposits (note 23)
Loans to non-controlling interests (note 20)
Liquidity funds (note 23)
Secured bank loans (note 25)
Convertible bond payable (note 25)
Floating rate
Liquidity funds (note 23)
As at 31 December 2011
Between
1 and
2 years
US$000
Between
2 and
5 years
US$000
Over
5 years
US$000
Total
US$000
–
–
–
–
(360)
(679)
–
–
–
–
–
(103,827)
–
–
–
–
–
–
349
212,081
1,025
199,924
(40,081)
(111,119)
Within
1 year
US$000
349
212,081
1,025
199,924
(39,721)
(6,613)
170,097
–
–
–
170,097
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Financial statements
Notes to the consolidated financial statements continued
36 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)
Within
1 year
US$000
694
56,393
9,393
(11,074)
(53,030)
(5,145)
380,887
Between
1 and
2 years
US$000
–
–
1,173
(1,668)
As at 31 December 2010
Between
2 and
5 years
US$000
Over
5 years
US$000
–
–
–
–
2,047
28,945
Total
US$000
694
56,393
41,558
(5,196)
(52,164)
(70,102)
(57,597)
(27,928)
(103,827)
–
–
(138,555)
(108,972)
–
–
380,887
–
–
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 2011 and 2010 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
2011
2010
Increase/
decrease
interest
rate
Effect
on profit
before tax
US$000
+/–50bps
+/–850
+/–50bps
+/–1,904
(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 (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.
Management also retains the right to fund operations (fully owned and joint ventures) with a mix of equity and joint
venture partners’ debt.
Parent company statement of financial position
As at 31 December 2011
ASSETS
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Other receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity share capital
Share premium
Treasury shares
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
153
As at 31 December
Notes
2011
US$000
2010
US$000
4
176
223
5
2,319,649 2,319,649
2,319,825 2,319,872
6
7
8
8
8
3,903
1,671
5,574
3,128
1,191
4,319
2,325,399 2,324,191
158,637
158,637
416,154
416,154
(898)
–
1,323,982 1,321,898
138,445
177,661
2,036,320 2,074,350
9
10
11
9
12
10
–
223
104,506
188,049
123
44
104,629
188,316
177,837
–
6,613
184,450
25,194
1,930
34,401
61,525
289,079
249,841
2,325,399 2,324,191
The financial statements on pages 153 to 168 were approved by the Board of Directors on 19 March 2012 and
signed on its behalf by:
Ignacio Bustamante
Chief Executive Officer
19 March 2012
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Financial statements
Parent company statement of cash flows
For the year ended 31 December 2011
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
Net cash used in operating activities
Cash flows from investing activities
Investments in subsidiaries
Receipts on sale of associates
Loans to subsidiaries
Net cash generated from investing activities
Cash flows from financing activities
Proceed of borrowing
Repayment of borrowings
Dividends paid
Purchase of treasury shares
Cash flows generated from financing activities
Net increase/(decrease) in cash and cash equivalents during the year
Foreign exchange gain/(loss)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended 31 December
Notes
2011
US$000
2010
US$000
(18,930)
950,487
47
–
–
1
(10)
93
(967,630)
(4,947)
8
(55)
11,917
12,389
(197)
52
(3,314)
815
233
814
(439)
44
(9,438)
(9,184)
64
40
(8,869)
(8,249)
(18,243)
(17,393)
–
–
2,485
2,485
(1,624)
9,598
(9)
7,965
151,545
18,613
(114,320)
–
(20,286)
(13,523)
(898)
16,041
283
197
1,191
1,671
–
5,090
(4,338)
(52)
5,581
1,191
4
5
14
8
7
155
Parent company statement of changes in equity
For the year ended 31 December 2011
Other reserves
Unrealised
gain/(loss)
on
available-
for-sale
financial
assets and
valuation of
cash flow
hedges
US$000
Share-
based
payment
reserve
US$000
Bond equity
component
US$000
Equity share
capital
US$000
Share
premium
US$000
Treasury
Shares
US$000
Notes
Balance at
1 January 2010
Recycling of the
change in fair value of
cash flow hedges
Unrealised gain/(loss)
in the valuation of
cash flow hedges
Other comprehensive
income
Profit for the year1
Total comprehensive
loss for 2010
Transfer1
Dividends
14
158,637 416,154
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Balance at
31 December 2010
Recycling of the
change in fair value of
cash flow hedges
Other comprehensive
income
Loss for the year
Total comprehensive
loss for 2011
Treasury shares
CEO LTIP
Dividends
Balance at
31 December 2011
158,637 416,154
12
–
–
–
–
–
–
–
–
–
–
–
–
8
14
–
–
–
–
–
–
–
–
–
–
–
–
(898)
–
–
(13)
8,432
429
(2,346)
(1,917)
–
(1,917)
–
–
–
–
–
–
–
–
–
(1,930)
8,432
–
–
–
–
–
–
1,930
1,930
–
1,930
–
–
–
–
Merger
reserve
US$000
Total other
reserves
US$000
Retained
earnings
US$000
Total equity
US$000
347,766
356,185 208,327 1,139,303
–
–
–
–
–
429
(2,346)
(1,917)
–
–
–
429
(2,346)
(1,917)
– 950,487
950,487
(1,917) 950,487
948,570
967,630
967,630
(967,630)
–
–
–
(13,523)
(13,523)
1,315,396
1,321,898 177,661 2,074,350
–
–
–
–
–
–
1,930
1,930
–
–
1,930
1,930
–
(18,930)
(18,930)
–
(18,930)
(17,000)
–
154
–
–
(898)
154
–
(20,286)
(20,286)
–
–
–
–
–
–
–
–
–
–
–
–
–
154
–
158,637 416,154
(898)
8,432
154 1,315,396 1,323,982 138,445 2,036,320
1 The profit for the year includes the reversal of the impairment of the investment in subsidiaries of US$967,630,000 (note 5). This amount has subsequently been transferred from
retained earnings to the merger reserve.
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156
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements
For the year ended 31 December 2011
1 Corporate information
Hochschild Mining plc (hereinafter “the Company”) is a public limited company incorporated on 11 April 2006 under
the Companies Act 1985 as a Limited Company and registered in England and Wales with registered number 05777693.
The Company’s registered office is located at 46 Albemarle Street, London W1S 4JL, United Kingdom. The Company
was incorporated to serve as a holding company to be listed on the London Stock Exchange. The Company acquired its
interest in a group of companies to constitute the Hochschild Mining Group (“the Group”) pursuant to a share exchange
agreement (“Share Exchange Agreement”) dated 2 November 2006.
The ultimate controlling party of the Company is Mr Eduardo Hochschild whose beneficial interest in the Company and
its subsidiaries (together “the Group” or “Hochschild Mining Group”) is held through Pelham Investment Corporation,
a Cayman Islands company.
On 8 November 2006, the Company’s shares were admitted to the Official List of the UKLA (United Kingdom Listing
Authority) and to trading on the London Stock Exchange.
2 Significant accounting policies
(a) Basis of preparation
The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union and are also consistent with IFRS issued by the IASB, as applied in accordance
with the Companies Act 2006.
The financial statements of the Company have been prepared on a historical cost basis. The financial statements
are presented in US dollars (US$) and all monetary amounts are rounded to the nearest thousand ($000) except when
otherwise indicated.
The ability for the Company to continue as a going concern is dependent on Hochschild Mining Holdings Limited
providing additional funding to the extent that the operating inflows of the Company are insufficient to meet future cash
requirements. As Hochschild Mining Holdings Limited has committed to provide this support, is a going concern itself
and can provide financial support if necessary, the Directors have prepared the financial statements for the Company
on the going concern basis.
(b) Exemptions
The Company’s financial statements are included in the Hochschild Mining Group consolidated financial statements
for the years ended 31 December 2011 and 31 December 2010. 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:
•(cid:3) IAS 24 “Related Party Transactions (Amendment)”;
The IASB has issued an amendment to IAS 24 that clarifies the definitions of a related party. The new definitions
emphasise a symmetrical view of related party relationships as well as clarifying in which circumstances persons
and key management personnel affect related party relationships of an entity. Secondly, the amendment introduces
an exemption from the general related party disclosure requirements for transactions with a government and entities
that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity.
The adoption of the amendment did not have any impact on the financial position or performance of the Company.
•(cid:3) IAS 32 “Financial Instruments: Presentation — Classification of Rights Issues”, applicable for annual periods beginning
on or after 1 February 2010;
The amendment 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. This amendment did not have any impact on the Company after initial application.
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2 Significant accounting policies (continued)
•(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 did not have any
impact on the financial statements of the Company.
•(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 did not have any effect on the financial statements of the Company.
•(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 including
IFRS 3 Business Combinations, IFRS 7 Financial Instruments – Disclosures, IAS1 Presentation of Financial Statements
and IAS 34 Interim Financial Statements.
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 2012 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 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.
(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.
158
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements continued
2 Significant accounting policies (continued)
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.
(h) Dividends receivable
Dividends are recognised when the Company’s right to receive payments is established. Dividends received are recorded
in the income statement.
(i) 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.
(j) 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.
(k) 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.
(l) 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.
(m) Share-based payments
Cash-settled transactions
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.
Equity-settled transactions
The cost of equity-settled transactions is recognised, together with a corresponding increase in other reserves in equity,
over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised
for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period
has expired and the Group´s best estimate of the number of equity instruments that vest. The income statement expense
for a period represents the movement in cumulative expense recognised as at the beginning and end of that period
and is recognised in personnel expenses. During 2011, the Company has approved an equity-settled scheme for its CEO.
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2 Significant accounting policies (continued)
(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.
(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 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:
•(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.
(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.
A detailed description of this policy is included in the Group’s financial statements (note 2(v)).
(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 loss attributable to equity shareholders of US$18,930,000 (2010: gain of US$950,487,000).
160
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements continued
4 Property, plant and equipment
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
Year ended 31 December 2011
Cost
At 1 January 2011 and 31 December 2011
Accumulated depreciation
At 1 January 2011
Depreciation
At 31 December 2011
Net book value at 31 December 2011
5 Investments in subsidiaries
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
Year ended 31 December 2011
Cost
At 1 January 2011
At 31 December 2011
Accumulated impairment
At 1 January 2011
At 31 December 2011
Net book value at 31 December 2011
Office building
US$000
Equipment
US$000
Total
US$000
277
267
544
47
27
74
203
181
66
247
20
228
93
321
223
277
267
544
74
28
102
175
247
19
266
1
321
47
368
176
Total
US$000
2,318,025
1,624
2,319,649
967,630
(967,630)
–
2,319,649
2,319,649
2,319,649
–
–
2,319,649
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5 Investments in subsidiaries (continued)
The breakdown of the investments in subsidiaries is as follows:
Name
Hochschild Mining Holdings Limited
Total
As at 31 December 2011
As at 31 December 2010
Country of
incorporation
Equity interest
%
Carrying value
US$000
Country of
incorporation
Equity interest
%
Carrying value
US$000
England &
Wales
100% 2,319,649
2,319,649
England &
Wales
100% 2,319,649
2,319,649
The list of subsidiaries of the Group is presented in note 1 (Corporate information) of the notes to the consolidated
financial statements.
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.
6 Other receivables
Year ended 31 December
Amounts receivable from subsidiaries (note 13)
Prepayments
Receivable from Kaupthing, Singer and Friedlander
Other debtors
Provision for impairment1
Total
2011
US$000
3,479
324
421
100
4,324
(421)
3,903
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$421,000 accrued in 2008 and partially recovered in 2011
(2010: US$461,000).
Movements in the provision for impairment of receivables:
At 1 January 2010
Amounts recovered
At 31 December 2010
Amounts recovered
At 31 December 2011
2010
US$000
2,773
255
461
100
3,589
(461)
3,128
Total
US$000
500
(39)
461
(400)
421
As at 31 December, the ageing analysis of other receivables is as follows:
Year
2011
2010
Past due but not impaired
Neither
past
due nor
impaired
US$000
3,903
3,128
Total
US$000
3,903
3,128
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
–
–
–
–
–
–
162
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements continued
7 Cash and cash equivalents
Bank current account1
Time deposits2
Liquidity funds
Cash and cash equivalents considered for the cash flow statement
1 Relates to bank accounts which are freely available and bear interest.
2 These deposits have an average maturity of 83 days.
8 Equity
(a) Share capital and share premium
Issued share capital
The issued share capital of the Company as at 31 December 2011 and 2010 is as follows:
Year ended 31 December
2011
US$000
2010
US$000
850
821
–
1,671
43
–
1,148
1,191
Class of shares
Ordinary shares
Number
Issued
Amount
338,085,226
£84,521,307
At 31 December 2011 and 2010, all issued shares with a par value of 25 pence (2011: weighted average of US$0.469,
2010: 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.
(b) Treasury shares
Treasury shares represent the cost of Hochschild Mining plc shares purchased in the market and held by the trustee of
the Hochschild Mining Employee Share Trust to satisfy the award of conditional shares under the Company’s Enhanced
Long Term Incentive Plan granted to the CEO (note 2(m)). During 2011, the Company purchased 126,769 shares
for the purposes of the plan, for a total consideration of £561,477.91 (equivalent to $897,214).
(c) 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.
Bond equity component
Represents the equity component of the Convertible bond issued on 20 October 2009. 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.
Share-based payment reserve
Is used to recognise the value of equity-settled share-based payment transactions provided to employees, as a part
of their remuneration.
163
As at 31 December
2011
Non-current
US$000
Current
US$000
Non-current
US$000
28
176,619
102
–
358
403
138
189
–
–
–
–
223
–
–
–
–
–
–
–
–
–
–
–
–
2010
Current
US$000
784
23,019
95
120
465
497
86
128
177,837
223
25,194
9 Trade and other payables
Trade payables
Payables to subsidiaries (note 13)
Professional fees
Board members’ remuneration
Remuneration payable
Audit fees
Accrued expenses
Taxes and contributions
Total
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.
10 Borrowings
Secured bank loans1
Convertible bond payable2
Total
1 Secured bank loans
As at 31 December
2011
Non-current
US$000
Current
US$000
Non-current
US$000
–
104,506
104,506
–
84,222
6,613
103,827
6,613
188,049
2010
Current
US$000
29,256
5,145
34,401
As at 31 December 2010, the balance corresponds to the loan facility with a syndicate of lenders with JP Morgan Chase Bank N.A. acting as the Administrative Agent. The secured term
loan facility of US$200,000,000 accrued an effective interest rate of LIBOR + 1% and was guaranteed by all the equity share capital, free and clear of any liens, of Compania Minera Aves
S.A.C. The balance as at 31 December 2010 comprised of the principal of US$114,320,000 plus accrued interest of US$2,393,000 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:
• Conversion Price (before adjustment for the recommended 2011 Final Dividend): GBP 3.94
• Fixed Exchange Rate: US$1.59/GBP 1.00
The balance as at 31 December 2011 is comprised of the principal of US$115,000,000 (2010: US$115,000,000) plus accrued interest of $7,292,000 (2010: US$5,145,000),
net of transaction costs of US$2,741,000 (2010: US$2,741,000) and the bond equity component of US$8,432,000 (2010: US$8,432,000).
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164
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements continued
10 Borrowings (continued)
The maturity of non-current borrowings is as follows:
Between 1 and 2 years
Between 2 and 5 years
As at 31 December
2011
US$000
2010
US$000
679
56,318
103,827
131,731
104,506
188,049
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
11 Provisions
Beginning balance
Increase of provision
At 31 December 2011
Less current portion
Non-current portion
Carrying amount
As at 31 December
Fair values
As at 31 December
2011
US$000
2010
US$000
2011
US$000
2010
US$000
–
84,222
–
83,351
104,506
104,506
103,827
116,413
121,709
188,049
116,413
205,060
As at 31 December
2011
US$000
2010
US$000
44
79
123
–
123
–
44
44
–
44
1 Corresponds to the provision related to the Long Term Incentive Plans granted to designated personnel of the Company. Includes the following benefits: (i) Long Term Incentive Plan,
granted April 2011, payable April 2014, and (ii) Long Term Incentive Plan, granted May 2010, payable May 2013. Only employees who remain in the Company’s employment until
the vesting date will be entitled to a cash payment, 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.
12 Other financial liabilities
Swap contracts1
Total liabilities
1 The swap contract was paid in January 2011.
As at 31 December
2011
US$000
–
–
2010
US$000
1,930
1,930
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.
At 31 December 2011, the Company did not hold any financial instrument measured at fair value.
During the period ending 31 December 2011, there were no transfers between these levels.
12 Other financial liabilities (continued)
The reconciliation of the financial instruments categorised as Level 2 is as follows:
Balance at 1 January 2010
Loss on valuation through equity
Balance at 31 December 2010
Recycling to profit and loss
Balance at 31 December 2011
165
Swap contracts
US$000
(13)
(1,917)
(1,930)
1,930
–
13 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 2011 and
31 December 2010.
Subsidiaries
Compañía Minera Ares S.A.C.1
0848818 BC (formerly Southwestern Resources)2
Southwestern Gold Bermuda3
Hochschild Mining Holdings Ltd.4
Minas Santa María de Moris S.A. de C.V.5
Other subsidiaries
As at 31 December 2011
As at 31 December 2010
Accounts
receivable
US$000
Accounts
payable
US$000
Accounts
receivable
US$000
Accounts
payable
US$000
117
–
–
2,631
3,182
600
1
–
–
1,484
2,894
–
3,338
170,183
209
18,638
–
24
–
23
2,554
9
–
3
3,479
176,619
2,773
23,019
1 Mainly relates to the services performed by Compañía Minera Ares S.A.C. to Hochschild Mining plc during 2011 of US$1,284,000 (2010: US$1,562,455).
2 Mainly relates to the purchase of 38,100,000 shares of Zincore Metals Inc. made on 10 September 2009. The amount outstanding at 31 December 2011 and 2010 was CAD$2,651,544
and CAD$2,809,799 respectively, equivalent to US$2,607,263 and US$2,825,056 respectively. In addition, during 2011, 0848818 BC made payments on behalf of Hochschild Mining plc
amounting to US$507,464.
3 Relates to collection of an account receivable by Hochschild Mining plc on behalf of Southwestern Gold Bermuda.
4 Relates to loans receivable by and payable to Hochschild Mining Holdings Ltd. The loan payable is repayable on demand and is free of interest.
5 Corresponded 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 loan was repaid in full
during 2011.
The fair values of the receivables and payables approximate their book values. Transactions between the Company
and these companies are on an arm’s length basis.
(b) Compensation of key management personnel of the Company
Key management personnel include the Directors who receive remuneration. The amount of this remuneration totals
US$1,567,083 (2010: US$1,322,000), out of which US$39,900 (2010: US$79,975) relates to cash supplements in lieu
of pension contributions.
Compensation of key management personnel (including directors)
Short-term employee benefits
Long Term Incentive Plan
Total compensation
As at 31 December
2011
US$000
1,413
154
2010
US$000
1,322
–
1,567
1,322
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166
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements continued
14 Dividends paid and proposed
Declared and paid during the year
Equity dividends on ordinary shares:
Final dividend for 2010: US$0.03 (2009: US$0.02)
Interim dividend for 2011: US$0.03 (2010: US$0.02)
Dividends paid
Proposed for approval by shareholders at the AGM
Final dividend for 2011: US$0.03 (2010: US$0.03)
2011
US$000
2010
US$000
10,143
10,143
6,762
6,761
20,286
13,523
10,135
10,143
Dividends per share
The dividends declared in August 2011 were US$10,142,557 (US$0.03 per share). A dividend in respect of the year ended
31 December 2011 of US$0.03 per share, amounting to a total dividend of US$10,134,951 is to be proposed at the Annual
General Meeting on 23 May 2012. These financial statements do not reflect this dividend payable.
15 Financial risk management
The Company is exposed to a variety of risks and uncertainties which may have an impact on the achievement of financial
and economic objectives. These risks include strategic, operational and financial risk and are further categorised into risk
areas to facilitate risk assessment.
(a) Foreign currency risk
Due to the operations of the Company, it has cash and cash equivalents and trade payables denominated in pound sterling
and Canadian dollars. Accordingly, the financial results of the Company may be affected by exchange rate fluctuations.
The Company does not use derivative instruments to manage its foreign currency risks. The following table demonstrates
the sensitivity of financial assets and liabilities, at the reporting date denominated in their respective currencies, to a
reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Company’s profit
before tax and the Company’s equity.
Year
2011
Pound sterling
2010
Canadian dollars
Pound sterling
Increase/
decrease in
US$/other
currencies rate
Effect
on profit
before tax
US$000
Effect
on equity
US$000
+/–10%
–/+503
+/–10%
–/+289
+/–10%
–/+335
–
–
–
167
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(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 statement of financial position date.
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) increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit
and to diversify credit risk;
•(cid:3) investing cash (to the extent possible) with counterparties with whom the Company has debt outstanding;
•(cid:3) investing cash in short-term, highly liquid and low risk instruments (money market accounts);
•(cid:3) 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 note 6.
(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 2011 of US$1,671,000
and US$526,247,000 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 2011
Trade and other payables
Borrowings
Provisions
At 31 December 2010
Trade and other payables
Swap contracts
Borrowings
Provisions
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
177,648
–
–
6,613
6,613
112,129
–
25,066
1,938
35,961
–
97
223
–
29
–
–
63,041
146,856
–
45
–
–
–
–
–
–
–
177,648
125,355
126
25,289
1,938
245,858
45
(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.
168
Hochschild Mining plc
Annual Report & Accounts 2011
Financial statements
Notes to the parent company financial statements continued
15 Financial risk management (continued)
Fixed rate
Bank current account (note 7)
Time deposits (note 7)
Convertible bond payable (note 10)
Fixed rate
Bank current account (note 7)
Amounts receivable from subsidiaries (note 13)
Secured bank loans (note 10)
Convertible bond payable (note 10)
Floating rate
Liquidity funds (note 7)
As at 31 December 2011
Within
1 year
US$000
Between
1 and 2 years
US$000
Between
2 and 5 years
US$000
Over
5 years
US$000
850
821
–
–
–
–
(6,613)
(679)
(103,827)
–
–
–
Total
US$000
850
821
(111,119)
As at 31 December 2010
Within
1 year
US$000
Between
1 and 2 years
US$000
Between
2 and 5 years
US$000
Over
5 years
US$000
43
2,554
–
–
(29,256)
(56,318)
–
–
(27,904)
–
–
Total
US$000
43
2,554
(113,478)
(5,145)
1,148
–
–
(103,827)
–
(108,972)
–
–
1,148
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 2011 and 2010 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
2011
2010
Increase/
decrease in
interest rate
+/–50bps
+/–50bps
Effect on profit
before tax
US$000
–
+/–10
(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.
169
Further information
Profit by operation1
(Segment report reconciliation) for the year ended 31 December 2011
Company (US$000)
Revenue
Ares
68,097
Arcata
209,239
Pallancata
352,642
San Jose
325,302
Consolidation
Moris
32,298
adjustment
Total
84 987,662
Cost of sales (pre-consolidation)
(47,708)
(80,962)
(118,206)
(133,599)
(23,212)
Consolidation adjustment
75
567
970
(395)
(613)
Cost of sales (post-consolidation)
(47,783)
(81,529)
(119,176)
(133,204)
(22,599)
Production cost w/o depreciation
(42,168)
(52,970)
(63,496)
(86,749)
(15,859)
Depreciation in production cost
Other items
(1,023)
(4,738)
(23,291)
(34,863)
(42,608)
(1,929)
(6,575)
(17,475)
(3,654)
Change in inventories
146
1,307
(3,342)
(193)
Gross profit
Administrative expenses
Exploration expenses
Selling expenses
Other income/expenses
20,389
128,277
234,436
191,703
–
–
(92)
–
–
–
–
–
–
–
(3,068)
(4,155)
(31,686)
–
–
–
–
(4,811)
9,086
–
–
–
–
Operating profit before impairment
20,297
125,209
230,281
160,017
9,086
Impairment of assets
Investments under equity method
Finance income
Finance costs
FX gain/(loss)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Profit/(loss) from continuing operations
before income tax²
20,297
125,209
230,281
160,017
9,086
Income tax
–
–
–
–
–
(604)
(604)
–
–
–
–
–
(520)
(64,354)
(47,336)
31
(10,146)
(122,325)
1,210
11,446
10,678
(23,442)
(1,562)
(404,291)
–
(404,291)
(261,242)
(103,714)
(32,442)
(6,893)
583,371
(64,354)
(47,336)
(38,970)
(10,146)
422,565
1,210
11,446
10,678
(23,442)
(1,562)
(123,995)
(148,557)
420,895
(148,557)
Profit/(loss) for the year from
continuing operations
20,297
125,209
230,281
160,017
9,086
(272,552)
272,338
1 On a post-exceptional basis.
2 Hochschild profit before income tax reflected in 2011 annual report.
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Hochschild Mining plc
Annual Report & Accounts 2011
Further information
Reserves and resources
ORE RESERVES AND MINERAL RESOURCES ESTIMATES
Hochschild Mining plc reports its mineral resources and reserves estimates in accordance with the Australasian
Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2004 edition (“the JORC Code”).
This establishes minimum standards, recommendations and guidelines for the public reporting of exploration results
and mineral resources and reserves estimates. In doing so it emphasises the importance of principles of transparency,
materiality and confidence. The information on ore reserves and mineral resources on pages 171 to 175 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 2011, 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$1,080 per ounce
and Ag Price: US$18 per ounce.
171
Ag
(g/t)
Au
(g/t)
Ag
(moz)
Au
(koz)
Ag Eq
(moz)
Proved and
probable
(t)
1,059,998
1,304,008
2,364,006
1,643,165
426,591
2,069,755
410,654
446,672
857,326
3,113,817
2,177,270
5,291,087
159,677
67,445
227,122
159,677
67,445
227,122
343
313
327
289
278
287
475
354
412
332
315
325
106
138
115
106
138
115
3,273,494
2,244,715
5,518,209
321
310
316
1.0
1.0
1.0
1.4
1.3
1.4
7.0
5.8
6.4
2.0
2.0
2.0
4.1
2.5
3.6
4.1
2.5
3.6
2.1
2.0
2.1
11.7
13.1
24.8
15.3
3.8
19.1
6.3
5.1
34.4
40.7
75.1
72.6
18.4
91.1
92.3
83.1
11.4
175.4
33.2
22.0
55.3
199.3
142.3
341.6
0.5
0.3
0.8
0.5
0.3
0.8
20.9
5.4
26.3
20.9
5.4
26.3
33.8
22.3
56.1
220.2
147.7
367.8
13.7
15.6
29.3
19.6
4.9
24.6
11.8
10.1
21.9
45.2
30.6
75.8
1.8
0.6
2.4
1.8
0.6
2.4
47.0
31.2
78.2
Attributable metal reserves as at 31 December 2011
Reserve category
MAIN OPERATIONS¹
Arcata
Proved
Probable
Total
Pallancata
Proved
Probable
Total
San Jose
Proved
Probable
Total
Main operations total
Proved
Probable
Total
OTHER OPERATIONS
Ares
Proved
Probable
Total
Other operations total
Proved
Probable
Total
Group total
Proved
Probable
TOTAL
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.
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Hochschild Mining plc
Annual Report & Accounts 2011
Further information
Reserves and resources continued
Attributable metal resources as at 31 December 2011
Resource category
Tonnes (t) Ag (g/t) Au (g/t)
Zn (%)
Pb (%)
Cu (%)
(g/t) Ag (moz)
Au (koz)
Ag Eq
Ag Eq
(moz) Zn (kt)
Pb (kt)
Cu (kt)
MAIN OPERATIONS
Arcata
Measured
Indicated
Total
Inferred
Pallancata
Measured
Indicated
Total
Inferred
San Jose
Measured
Indicated
Total
1,339,610
492 1.46
1,335,478
423 1.32
2,675,088
457 1.39
4,424,489
376 1.45
2,517,648
382 1.76
491,568
323 1.53
3,009,216
372 1.72
1,687,576
347 1.46
589,252
560 8.21
1,791,762
423 6.53
2,381,014
457 6.95
Inferred
Main operations total
924,843
384 5.30
Measured
Indicated
Total
Inferred
4,446,510
439 2.53
3,618,808
409 3.93
8,065,319
425 3.16
7,036,908
370 1.96
OTHER OPERATIONS
Ares
Measured
Indicated
Total
Inferred
Other operations total
470,660
161 6.18
151,650
157 3.63
622,310
160 5.56
379,639
167 3.32
Measured
Indicated
Total
Inferred
470,660
161 6.18
151,650
157 3.63
622,310
160 5.56
379,639
167 3.32
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,053
10.6 155.6
–
–
–
–
–
–
–
–
579
502
541
463
487
414
476
434
815
874
702
590
645
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21.2
18.2
62.9
56.7
39.3 119.6
53.4 205.9
25.0
21.6
46.5
65.8
30.9 142.6
39.5
5.1
24.1
36.0 166.7
18.8
79.4
24.4 376.2
35.0 531.9
11.4 157.6
6.6
46.0
23.6
20.0
46.9
66.9
20.9
62.7 361.1
84.4
47.6 457.1
75.1
615 110.3 818.1 159.4
487
83.7 442.9 110.2
532
375
493
367
532
375
493
367
2.4
0.8
93.5
17.7
3.2 111.2
2.0
40.6
2.4
0.8
93.5
17.7
3.2 111.2
2.0
40.6
8.0
1.8
9.9
4.5
8.0
1.8
9.9
4.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Attributable metal resources as at 31 December 2011 (continued)
Resource category
Tonnes (t) Ag (g/t) Au (g/t)
Zn (%)
Pb (%)
Cu (%)
(g/t) Ag (moz)
Au (koz)
Ag Eq
Ag Eq
(moz)
Zn (kt)
Pb (kt)
Cu (kt)
ADVANCED
PROJECTS
Inmaculada
Measured
Indicated
Total
Inferred
Crespo
Measured
Indicated
Total
Inferred
Azuca
Measured
Indicated
Total
Inferred
Advanced
Projects total
Measured
Indicated
Total
Inferred
1,970,058
128 4.10
2,269,691
159 4.05
4,239,749
144 4.07
2,962,666
152 3.91
4,582,255
51 0.49
18,804,956
36 0.44
23,387,211
39 0.45
5,171,188
31 0.35
190,602
244 0.77
6,858,594
187 0.77
7,049,197
188 0.77
6,946,341
170 0.89
6,742,915
79 1.55
27,933,241
83 0.82
34,676,157
82 0.96
15,080,195
119 1.30
OTHER PROJECTS
374
402
389
387
80
63
66
52
290
233
234
223
8.1
11.6
19.7
14.5
7.5
21.7
29.2
5.2
1.5
41.2
42.7
37.9
259.7
295.4
555.0
372.0
71.6
268.4
340.0
58.5
4.7
168.8
173.5
199.5
23.7
29.3
53.0
36.8
11.8
37.8
49.6
8.7
1.8
51.3
53.1
49.9
172
132
140
197
17.1
74.5
336.0
37.2
732.6 118.4
91.6 1,068.6 155.7
57.6
630.0
95.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 161.2
Jasperoide
Measured
Indicated
Total
Inferred
San Felipe
Measured
Indicated
Total
Inferred
Other projects
total
Measured
Indicated
Total
Inferred
GRAND TOTAL
Measured
Indicated
Total
Inferred
–
–
–
315
295
305
283
315
295
305
160
–
–
–
–
3.1
3.6
6.7
3.4
3.1
3.6
6.7
3.4
–
–
–
–
–
–
–
–
–
12,187,270
– 0.32
–
–
–
–
–
–
126.8
57.6
1.32
147
1,393,716
69 0.02 7.12
1,354,261
2,747,977
1,257,731
82
76
84
0.06
6.14
0.04
6.64
0.05
6.18
3.10
2.73
2.92
2.26
0.39
0.31
0.35
0.19
1,393,716
69 0.02 7.12
1,354,261
82 0.06 6.14
2,747,977
76 0.04 6.64
13,445,001
8 0.30 0.58
13,053,802
203 1.89 0.76
33,057,961
119 1.14 0.25
46,111,762
143 1.35 0.40
35,941,742
127 1.07 0.22
3.10
2.73
2.92
0.21
0.33
0.11
0.17
0.08
0.39
0.31
0.35
1.22
0.04
0.01
0.02
0.46
0.9
2.4
3.3
1.9
14.1 99.3 43.1
12.9
83.2
37.0
27.0 182.4
80.1
11.5
77.8
28.5
0.9
2.4
3.3
14.1 99.3 43.1
12.9 83.2 37.0
27.0 182.4 80.1
5.5
4.2
9.7
2.3
5.5
4.2
9.7
128.6
69.0 77.8 28.5 163.6
343
85.3
791.5 143.8 99.3 43.1
196 126.5 1,209.9 208.2 83.2 37.0
237 211.8 2,001.3 352.0 182.4 80.1
5.5
4.2
9.7
242 146.7 1,242.2 279.1 77.8 28.5 163.6
173
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Hochschild Mining plc
Annual Report & Accounts 2011
Further information
Reserves and resources continued
Change in total reserves and resources
Ag equivalent content (million ounces)
Category
December
2010
Production¹
Movements²
2011 Net difference
% change
December
Arcata
(cid:3)
Pallancata
(cid:3)
San Jose
(cid:3)
Resource
Reserve
Resource
Reserve
Resource
Reserve
Main operations total
Resource
(cid:3)
Ares
(cid:3)
Moris
(cid:3)
Other operations total
(cid:3)
Inmaculada
(cid:3)
Crespo
(cid:3)
Azuca
(cid:3)
Advanced Projects total
Jasperoide
San Felipe
Other projects total
(cid:3)
Total
(cid:3)
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
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
137.3
47.4
70.3
255.0
0.0
38.5
38.5
672.4
120.8
7.8
13.1
11.8
32.7
2.3
1.7
4.0
13.6
8.0
6.9
4.7
15.2
15.6
35.7
28.2
1.9
3.0
(1.8)
0.4
0.1
3.4
112.3
29.3
116.0
41.0
172.1
42.9
400.4
113.2
14.3
2.4
0.0
0.0
14.3
2.4
13.6
0.2
7.0
(8.4)
15.2
3.7
35.7
(4.6)
1.9
0.7
(1.8)
(1.3)
0.1
(0.7)
12.3
149.7
12.4
13.8
0.7
6.4
(17.0)
9.7
9.4
9.8
(3.9)
15.3
41.2
(100.0)
(100.0)
0.7
(22.6)
9.0
10.9
58.3
10.9
23.0
32.7
103.0
32.7
46.5
55.9
310.9
55.9
21.9
57.6
57.6
57.6
0.0
38.5
0.0
–
0.0
57.6
96.0
57.5
149.3
36.7
149.3
31.5
821.7
115.6
149.3
(5.2)
22.2
(4.3)
1 Depletion: reduction in reserves based on ore delivered to the mine plant.
2 Increase in reserves and resources due mainly to mine site exploration but also to price increases.
Change in attributable reserves and resources
Ag equivalent content (million ounces)
Arcata
(cid:3)
Pallancata
(cid:3)
San Jose
(cid:3)
Main operations total
(cid:3)
Ares
(cid:3)
Moris
(cid:3)
Other operations total
(cid:3)
Inmaculada2
Crespo
(cid:3)
Azuca
(cid:3)
Advanced Projects total
Jasperoide
(cid:3)
San Felipe
(cid:3)
Other projects 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
Resource
Reserve
Resource
Reserve
Percentage
attributable
December
2011
100%
60%
51%
100%
100%
60%
December
2010
Att.¹
December
2011
Att.¹ Net difference
% change
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
82.4
112.3
29.3
69.6
24.6
87.8
21.9
269.7
75.8
14.3
2.4
0.0
0.0
14.3
2.4
89.8
13.6
0.2
4.2
(5.1)
7.8
1.9
25.5
(3.0)
1.9
0.7
(1.8)
(1.3)
0.1
(0.7)
7.4
13.8
0.7
6.4
17.2
9.8
9.5
10.4
(3.8)
15.3
41.2
(100.0)
(100.0)
0.7
(22.6)
9.0
100%
47.4
58.3
10.9
23.0
100%
70.3
103.0
32.7
46.5
200.1
251.1
51.0
25.5
100%
0.0
57.6
57.6
100%
38.5
38.5
0.0
–
–
38.5
96.0
57.5
149.3
497.0
81.8
631.1
78.2
134.1
(3.6)
27.0
(4.4)
1 Attributable reserves and resources based on the Group’s percentage ownership of its joint venture projects.
2 The Company increased its holding in the Inmaculada project to 60% in 2010.
175
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Annual Report & Accounts 2011
Further information
Production
2011 Total Group production1
Silver production (koz)
Gold production (koz)
Total silver equivalent (koz)
Total gold equivalent (koz)
Silver sold (koz)
Gold sold (koz)
Year ended
31 December
2011
Year ended
31 December
2010
% change
21,363
180.51
32,193
536.56
21,792
182.0
24,430
200.05
36,434
607.23
24,283
199.9
(13)
(10)
(12)
(12)
(10)
(9)
1 Total production includes 100% of all production, including production attributable to joint venture partners at San Jose and Pallancata.
Attributable Group production2
Silver production (koz)
Gold production (koz)
Attributable silver equivalent (koz)
Attributable gold equivalent (koz)
2 Attributable production includes 100% of all production from Arcata, Ares and Moris, 60% from Pallancata and 51% from San Jose.
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)
Silver produced (koz)
Gold produced (koz)
Silver equivalent produced (koz)
Silver sold (koz)
Gold sold (koz)
Year ended
31 December
2011
Year ended
31 December
2010
% change
14,980
127.29
22,617
377.0
17,768
144.40
26,432
440.5
(16)
(12)
(14)
(14)
Year ended
31 December
2011
Year ended
31 December
2010
687,966
645,974
312
0.88
6,081
17.38
7,124
5,979
16.7
439
1.40
8,099
25.83
9,649
8,095
24.9
Year ended
31 December
2011
Year ended
31 December
2010
344,085
301,726
61
2.90
581
29.03
2,323
598
29.7
92
3.58
786
32.53
2,738
810
32.7
% change
7
(29)
(37)
(25)
(33)
(26)
(26)
(33)
% change
14
(34)
(19)
(26)
(11)
(15)
(26)
(9)
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 Jose2
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)
2 The Company has a 51% interest in San Jose.
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)
Year ended
31 December
2011
Year ended
31 December
2010
1,070,466 1,071,617
301
1.33
8,767
33.88
344
1.41
10,135
35.85
10,800
12,286
9,064
33.9
9,998
33.7
Year ended
31 December
2011
Year ended
31 December
2010
462,825
461,134
444
5.86
5,870
80.95
397
6.14
5,324
84.30
10,727
10,382
6,087
82.4
5,284
85.0
Year ended
31 December
2011
Year ended
31 December
2010
858,028 1,148,826
5.02
0.96
64
19.26
1,220
64
19.3
4.44
1.14
86
21.53
1,378
95
23.5
% change
(0.1)
(13)
(6)
(13)
(6)
(12)
(9)
0.6
% change
0.4
12
(5)
10
(4)
3
15
(3)
% change
(25)
13
(16)
(26)
(11)
(11)
(33)
(18)
177
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Hochschild Mining plc
Annual Report & Accounts 2011
Further information
Glossary
Ag
Silver
Adjusted EBITDA
Adjusted EBITDA is calculated as profit from continuing operations
before net finance income/(cost), foreign exchange loss and
income tax plus depreciation and exploration expenses other
than personnel and other exploration related fixed 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
CAD$
Canadian dollar
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.
Dore
Dore bullion is an impure alloy of gold and silver and is generally
the final product of mining and processing; the dore 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 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 tonnes
ktpa
Thousand 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 25 pence 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
179
Investor relations
For investor enquiries please contact our Investor Relations
team by writing to the London Office address (see below),
by phone on 020 7907 2933 or via the website by visiting
the ‘Contact Us’ section.
2 May 2012
4 May 2012
9 May 2012
29 May 2012
August 2012
Financial calendar
Ex-dividend date
Record date
Deadline for return
of currency election form
Final dividend payable
Half-yearly results announced
London Office and Registered Office address
46 Albemarle Street
London
W1S 4JL
United Kingdom
Company Secretary
R D Bhasin
Shareholder information
Annual General Meeting (‘AGM’)
The AGM will be held at 10am on 23 May 2012 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
– By fax
+44 (0)1484 600 911
Currency option and dividend mandate
Shareholders wishing to receive their dividend in
US dollars should contact the Company’s registrars to
request a currency election form. This form should be
completed and returned to the Registrars by 9 May 2012.
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 9 May 2012. This arrangement is only available
in respect of dividends paid in UK pound sterling.
Shareholders who have already completed one or both
of these forms need take no further action.
Advice to shareholders concerning Boiler Room Scams
In recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning
investment matters. These are typically from overseas based ‘brokers’ who target UK shareholders, offering to sell them what often turn out
to be worthless or high risk shares in US or UK investments. These operations are commonly known as ‘boiler rooms’. These ‘brokers’ can be very
persistent and extremely persuasive, and a 2006 survey by the Financial Services Authority (FSA) has reported that the average amount lost
by investors is around £20,000.
It is not just the novice investor that has been duped in this way; many of the victims had been successfully investing for several years. Shareholders
are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. If you receive any unsolicited
investment advice:
• Make sure you get the correct name of the person and organisation
• Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register/home.do and contacting the firm using
the details on the register
• Report the matter to the FSA either by calling 0845 606 1234 or visiting www.moneyadviceservice.org.uk
• If the calls persist, hang up
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme.
The FSA can be contacted by completing an online form at www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas.shtml
Details of any share dealing facilities that the company endorses will be included in company mailings.
More detailed information on this or similar activity can be found on the Money Advice Services website at www.moneyadviceservice.org.uk
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Annual Report & Accounts 2011
Notes
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 Pureprint Group
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)20 7907 2930
Fax: +44 (0)20 7907 2931
info@hocplc.com
www.hochschildmining.com