Sustainable Growth
in the Americas
Hochschild Mining plc
Annual Report & Accounts 2017
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Our future is looking bright.
We are positioned to deliver
additional ounces at a competitive
cost through organic expansion and
there is still plenty more to come.
2017 highlights
Adjusted EBITDA
$301m
(2016: $329m)
EPS of
$0.08
(2016: $0.11)
Final dividend of
AISC
1.965 ¢/share
(2016: 1.38¢/share)
$12.3 /oz Ag Eq
(2016: $11.2/oz Ag Eq)
Cash balance of
Net debt of
$257m
(31 Dec 2016: $140m)
$103m
(31 Dec 2016: $187m)
Gold production (attrib.) up 4%
Silver production (attrib.) up 11%
254,930 oz
19.1 m oz
(2016: 246,080oz)
(2016: 17.3m oz)
01
During 2017, we made significant progress with another year
of record production from our core producing mines. We
are aiming to continue to drive low cost growth from the
business over the next few years through a combination
of new discoveries, optimising our current portfolio and
potential increased throughput from our plants.
A world-class
asset portfolio
In 2017, our four current operating mines
produced 19.1 million attributable ounces
of silver and 254,930 ounces of gold
which resulted in another overall record
of 38 million silver equivalent ounces.
Strong track
record
We have over 50 years’ operating
experience in the Americas and in
the last decade have an enviable track
record of meeting stated production
and cost targets.
Exciting discovery
opportunities
We have a pipeline of brownfield
and greenfield projects in numerous
locations across three countries in the
Americas, as well as substantial parcels
of premium geological land.
See page 04
See page 06
See page 08
Strategic Report
Governance
Financial statements
Further information
Profit by operation
Reserves and resources
Change in attributable reserves
and resources
Shareholder information
152
153
155
156
Key highlights
At a glance
Market review
Business model and
investment case
Chairman’s statement
Chief Executive’s review
Our strategy
Key Performance Indicators
Operating review
Financial review
Sustainability
Risk management & viability
IFC
Board of Directors
Senior management
Directors’ Report
Corporate Governance Report
Supplementary information
Directors’ Remuneration Report
Statement of Directors’
responsibilities
Independent Auditor’s Report
to the members of Hochschild
Mining plc
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10
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30
36
44
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52
53
55
67
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86
87
Consolidated income
statement
Consolidated statement
of comprehensive income
Consolidated statement
of financial position
Consolidated statement
of cash flows
Consolidated statement
of changes in equity
Notes to the consolidated
financial statements
Parent company statement
of financial position
Parent company statement
of cash flows
Parent company statement
of changes in equity
Notes to the parent company
financial statements
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Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 02
At a glance
Our business
Who we are
We are a leading underground precious metals
company, focusing on the exploration, mining,
processing and sale of silver and gold in the Americas.
Mining operations
Hochschild operates four underground epithermal deposits, three
of which are located in the south west of Peru in our ‘Southern Peru
Cluster’ and one in the southern Argentinian province of Santa Cruz.
Growth projects
Hochschild currently has three growth projects with two in southern
Peru close to the operating assets and one in northern Chile.
Operation
1 Inmaculada
Peru
2 Arcata
Peru
3 Pallancata
Peru
4 San Jose
Argentina
Gold
production
Silver
production
All-in
sustaining costs
165,000 oz
5.5m oz
$721/oz Au Eq
15,000 oz
4.4m oz
$18.4/oz Ag Eq
23,000 oz
6.0m oz
$10.7/oz Ag Eq
100,000 oz
6.4m oz
$14.0/oz Ag Eq
Project
5 Crespo
Peru
6 Volcan
Chile
7 Azuca
Peru
Estimated silver equivalent production p.a.
2.7m oz
N/a
N/a
Greenfield prospects
Hochschild has a portfolio of greenfield prospects across the Americas.
Asset
Ares
Corina
Fresia
Cueva Blanca
Alto Ruri
Casma
Antaymarca
Mario
Loro
Moho, Redlitch, Olympic
Cobalt Silver District
Country
Peru
Chile
US
Canada
2017
2018
2019
Drilling plan for
potential resources
Hochschild has a long-term plan to
execute almost 150,000 metres of
resource drilling at our core assets.
Arcata
Inmaculada
Pallancata
San Jose
Ares
Annual Report & Accounts 2017 Hochschild Mining plc Where we operate
The operational and geological
experience we have developed
over many years has allowed us to
maximise the productivity of our
current operations, develop mining
projects and find new deposits
across the Americas.
Operating review
Page 22
3
1
7
5
2
Volcan
Chile
6
Peru
Pallancata
Inmaculada
Arcata
3
1
7
5
2
Crespo
Azuca
4
San Jose
Argentina
2019
2020
Key
Underground drilling
Surface drilling
03
Our Strategy
Page 18
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 04
A world-class
asset portfolio
In 2017, we once again delivered record
production figures with 19.1 million
attributable ounces of silver and just over
254,000 ounces of gold. This marked the
fifth consecutive year of output increases.
Inmaculada –
expansion potential
at our flagship mine
We believe that there is strong
upside resource potential at the
Inmaculada deposit with drilling
results from our first campaign in
six years confirming the geological
hypothesis. We intend to continue
to explore the area, add further
resources and then we will be in
position to make a decision on
whether to expand our modular
processing plant or to add to
Inmaculada’s life-of-mine.
Pallancata –
realising significant
potential
Since its discovery in 2015, the
Pablo area including the main
Pablo vein and ancillary veins has
hugely expanded its contained
tonnage and grade. In 2017, the
Company received the Peruvian
government approval to begin
mining the Pablo vein, increasing
the throughput up to 2,800 tonnes
per day during 2018 and delivering
competitive costs.
235,000
gold equivalent ounce target
in 2018 at Inmaculada
53,000
metres of drilling
scheduled for Inmaculada
in 2018
2,800
tonnes per day target
for Pallancata in 2018
Annual Report & Accounts 2017 Hochschild Mining plc 05
Pallancata spare plant
capacity opportunity tpd
Arcata spare plant
capacity opportunity tpd
67%
60%
Current 1,000 tpd
Pablo 1,400 tpd
Spare 1,000 tpd
Current 1,000 tpd
Spare 1,500 tpd
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 06
A strong
track record
We have over 50 years of operating experience
in the Americas and are experts at managing
complex underground ore bodies throughout the
commodity price cycle and in varying political,
economic and social environments.
Consistently meeting
annual production
targets
We have built up an enviable track
record of meeting and often
exceeding our annual production
targets, demonstrating the
Company’s sensible approach to
guidance but also the expertise we
have built in managing our portfolio
of complex underground narrow
vein mines. This has been
particularly evident in periods of
significant price volatility over the
last five years.
Social licence
to operate
The Company has maintained a
number of long-term policies which
demonstrate our commitment to a
safe and healthy workplace, manage
and minimise the environmental
impact of our operations and
encourage sustainability by
respecting the communities of the
localities in which we operate. Our
relations with local communities are
of the utmost importance and we
dedicate significant resources in
recognition of the social licence
granted to us.
Debt reduction
programme on track
Since the completion of the
construction of the Inmaculada
mine in 2015, we have been aiming
to reduce the Company’s debt
position. In 2017, we made further
encouraging progress with net debt
almost halved versus the end of
2016 and a refinancing programme
towards the end of the year that is
expected to result in significant
reductions in the Company’s
ongoing interest payments.
87%
production growth
since 2012
43%
cost reduction
since 2012
$350m
reduction in net debt
since June 2015
All-in sustaining costs
$/oz Ag equivalent
7
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1
2
6
.
8
1
4
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7
1
9
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2
1
3
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2
1
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1
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2
Annual Report & Accounts 2017 Hochschild Mining plc
07
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 08
Exciting
discovery
opportunities
We have a pipeline of brownfield and greenfield
projects in numerous locations across the
Americas as well substantial parcels of
premium geological land.
Increasing our
reserves and resources
Hochschild aims to invest in
mineralised districts with the
possibility to grow over time and
we are excited by the potential to
grow our reserves and resources.
The discovery and subsequent
resource growth of our Pablo vein
district at Pallancata and the
recent discoveries at Inmaculada
demonstrate the efficacy of our
low cost brownfield programme.
We believe that there are significant
further opportunities to extend
the lives of our mines and expand
their capacity.
Building a
greenfield portfolio
Our greenfield exploration
programme incorporates
exploration campaigns at various
types of project. We continue to
develop early-stage projects that
have the potential to move through
the project pipeline from prospects,
to drill targets, to Advanced Projects
and finally, to production. In this
regard we now have six projects in
three different countries, all in
jurisdictions with geological
potential and political and
regulatory stability.
5 year
4-6 projects
brownfield exploration
programme
in three countries
to be drilled in 2018
Annual Report & Accounts 2017 Hochschild Mining plc 09
Earn-in and joint
venture agreements
Hochschild is also targeting earn-in
and joint venture type
arrangements with junior mining
companies who have assets in
known jurisdictions. These
prospects must satisfy our long
held acquisition criteria of assets
that are early-stage with significant
geological upside potential and
where we can acquire a clear path
to control.
12-15%
Return on invested
capital target for
acquisitions
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 10
Market review
Gold Market
Summary
Hochschild is exposed to market dynamics associated with
the precious metals industry, whilst our operations, located in
Peru and Argentina, are exposed to changing country-specific
factors that can impact our business.
Gold
Market review 2017
Gold prices rose for a second
consecutive year – by 14% on a
Comex nearby active futures
monthly settlement basis. This
increase came despite negative
factors such as a generally
improving global economy,
record levels in equity markets
and a normalisation in US
monetary policy. Political factors
underpinned prices.
Prices rose from $1,152 at the
end of 2016 to an intraday high
of $1,358 on 8 September
2017. Escalating tensions
between the US and North
Korea, several policy
implementation failures by the
Donald Trump US government
and politically inspired problems
in Syria, Qatar, Iran, and
Catalonia helped to fuel the rally
in gold prices. Prices did lose
some of their momentum
during the fourth quarter,
following an announcement by
the Federal Reserve to unwind
its bond portfolio and raise
interest rates for a third time in
2017. Prices touched an
intraday low of $1,238 on
12 December but with no
changes to interest rate hike
expectations for 2018, the
price began to rise once again,
finishing 2017 at $1,309.
Market drivers
Demand
Net gold investment demand was
24.4 million ounces in 2017, down
11% from 2016. Investment demand
had risen sharply in 2016 as it
became increasingly evident to
investors that the bottom in gold
prices had been reached causing a
move into gold, pushing up net
investment demand sharply. The
numerous political/economic issues
provided ample reason for investors
to remain interested in 2017, which
resulted in the healthy net addition
to investor gold holdings. While
these additions were down versus
2016 they were still very high by
historical standards. Investment
demand in 2017 was the 14th
highest year of net investment
demand for data over the past
68 years.
Central banks remained net buyers
of gold during 2017 as they
continued to diversify their reserve
assets away from FX. During the first
11 months of the year, central banks
added a net 10.44 million ounces of
gold to their holdings.
The present level of additions puts
purchases on track to match levels
seen from 2010 to 2012. The top
three contributors during 2017 were
the central banks of Russia, Turkey,
and Kazakhstan. Russia and
Kazakhstan have been following a
long-term programme, while Turkey
joined the list as a buyer in May 2017,
for the first time since 1991.
Gold fabrication demand reached
92.8 million ounces in 2017 up from
92.2 million ounces in 2016. The
increase was due to healthy
economic conditions which typically
increase discretionary spending, a
softening US dollar which reduced
the price of gold in the domestic
currencies of consuming countries,
and a recovery in demand from 2016
when a gold price rise had pushed
fabrication demand down.
Supply
Total gold supply, which is
composed primarily of mine supply
and scrap, rose 0.3% to 127.2
million ounces in 2017. A slowdown
in mine supply growth coupled with
flat secondary recovery resulted
in the weak supply growth.
Global gold mine supply stood
at 97.1 million ounces, up from
96.8 million ounces in 2016 but
the growth is beginning to show
signs of slowing after years of
rises due to new capacity
bought onstream following the
2002–2012 gold bull market.
Secondary supply was flat
year-on-year at 30.1 million
ounces as healthy gold prices
supported it on the downside.
Outlook
– Gold investment demand is
forecast to remain healthy
during 2018
– Central banks are expected to
continue adding gold to their
holdings programmes
– Total gold supply is forecast
to rise only marginally to
127.9 million ounces in 2018,
up from 127.2 million ounces
in 2017.
Demand %
Supply %
Jewellery 62.7%
Electronics 7.6%
Official sector purchases 7.9%
Private investor demand 19.2%
Dental and other 2.7%
Mine production 72.6%
Secondary supply 23.6%
Net exports from
transitional economies 3.8%
Annual Report & Accounts 2017 Hochschild Mining plc Silver Market
Summary
Gold and silver prices in 2017
Daily settlement of nearby active Comex futures, indexed to 3 January 2017.
120
Silver
Gold
115
110
105
100
95
90
Jan 17
Feb 17 Mar 17 Apr 17 May 17
Jun 17
Jul 17
Aug 17
Sep 17 Oct 17 Nov 17 Dec 17
11
Country production
Latin American production rankings
2017
2016
Gold
Silver
Gold
Silver
7
13
9
19
3
8
1
4
7
13
8
16
3
10
1
5
Peru
Argentina
Mexico
Chile
Silver
Market review 2017
On an average basis, silver
prices fell slightly to $17.09 in
2017 from $17.14 in 2016. This
was in sharp contrast to 2016
when short-term investors,
alongside long-term investors,
purchased the metal and drove
prices sharply higher. Healthy
global economic conditions kept
silver prices from rising further
although factors such as US
tension with North Korea, the
Syrian conflict and the Catalonia
referendum provided a degree
of support. In addition,
continued equity market
strength also played a part in
price suppression throughout
2017. US tax reform helped the
stock market repeatedly hit
record highs in December,
further driving investors away
from precious metals. While the
Federal Reserve delivered three
rate hikes in 2017, inflation did
not become a concern, which
was another factor that stood in
silver’s way.
Market drivers
Demand
Investors were net buyers of 108.1
million ounces silver in 2017. The
net additions to investor holdings
were lower than the average added
to inventories annually between
2009 and 2016, but still remained
high by historical standards. The
net buying of close to 110 million
ounces of silver during 2017
remains a key factor in supporting
silver prices.
Fabrication demand also plays an
important role and is estimated to
have reached 889.9 million ounces
in 2017, down 1% from 2016 levels
with the decline in silver use in the
photovoltaic sector, after a record
year in 2016, one of the primary
reasons.
The largest single source of demand
for silver is jewellery/silverware with
silver use in these products
estimated to have risen to a record
high of 303.4 million ounces in
2017. The rate of increase
rebounded in 2017 to 1.4% from a
0.6% increase in the previous year
with jewellery demand in India
helping to underpin demand during
the year.
Demand from the electronics
sector, the second largest single use
of silver, rose to a record of 229.6
million ounces in 2017, up 1.5%
from 2016 with most of the increase
estimated to have come from
consumer electronics. In addition,
developments in automotive
electronics, medical electronic
devices and automation-related
industrial electronic products
helped underpin silver use in the
electronics industry.
The solar panel industry has been
one of the fastest growing major
uses of silver in recent years and in
2017 it remained the third largest
single use of silver although demand
is estimated to have fallen by 20% to
68.7 million ounces in 2017.
Supply
Total supply of silver, which is
comprised of mine production,
secondary supply, government
disposals, and net exports from
transitional economies, is
estimated to have fallen by 1%
to 998.1 million ounces in 2017.
The faster pace of decline in
mine supply was largely
responsible for the decline,
slipping by 1% to 876.9 million
ounces in 2017. Major
contributing countries to this
weakness included Australia,
Peru, and the US. Total
secondary supply is estimated
to have fallen slightly to 202.0
million ounces in 2017.
Outlook
– Investors are expected to
continue adding silver during
2018 on concerns over volatile
global political developments
– Total supply is forecast to rise,
driven by increases in both
mine supply and secondary
supply
– Fabrication demand for silver
is forecast to resume its
uptrend in 2018, reaching
894.0 million ounces.
Demand %
Supply %
Other industrial uses 50.8%
Jewellery and silverware 29.4%
Coin fabrication 13.8%
Photography 6.1%
Investment demand N/A (excl coins)
Mine production 79.8%
Secondary supply 20.2%
Source: CPM Group LLC
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 12
Business model
Creating value and
long-term sustainable growth
We believe that our long-term business model will not
only create sustainable value for our stakeholders but
also differentiates Hochschild, resulting in an attractive
investment proposition.
Inputs
Our core activities
These inputs are key in
achieving operational control
and ensuring viability in the
long-term.
We have always emphasised exploration
expertise to be a key attribute underpinning
our business model.
Operational and
geological expertise
We have a particular expertise in
mining mid-sized, narrow epithermal
veins in complex geological conditions
in the Americas.
Experienced
management team
Long experience in operation, cost
reduction, project construction,
acquisitions and the management
of local communities.
Consistent financial
strategy
Long-standing financial relationships
in place to invest in growth, manage
operations and access further
required liquidity.
Corporate governance
framework
Controls and processes to protect
and enhance stakeholder interests.
Highly skilled
employees
Strong focus on safety and
a value-driven approach.
Effective sustainability
programme
Promoting education, health and
sustainable economic development
in acknowledgment of our social
licence to operate.
Extract
y
t
i
n
u
m
m
o
C
E n vironment
How we
create value
Develop
Sustainabi l i t y
Discover
H
e
a
l
t
h
&
S
a
f
e
t
y
Annual Report & Accounts 2017 Hochschild Mining plc
13
Outputs
The ongoing success of our business model
allows us to invest in the skills and training of
our employees, redistribute profit into our
host communities through a wide variety of
programmes and deliver long-term value for
our shareholders.
$10m
Recommended
final dividend
for the full
year 2017
81%
workforce
trained in 2017
Shareholders
We aim to deliver sustainable low
cost growth throughout the cycle,
generate excess cash flow and use
that to reward shareholders and
other stakeholders. Since the
middle of 2016 we have declared
$21 million in equity dividends.
Employees
The quality of our employees is
key to achieving our strategic
objectives and attracting and
retaining high quality personnel.
The success of our business model
helps to achieve this by ensuring
competitive remuneration, a
positive working environment
through the promotion of social
and recreational activities and
ongoing professional development.
Communities
Hochschild has been able to
invest in a number of local
programmes focusing on our
core themes of education,
health and socio-economic
development and allowing us to
operate collaboratively with our
neighbours in the Southern Peru
Cluster for more than 50 years.
$5.6m
Amount spent
on social and
community
welfare
activities
Discover
We have a strong track record of finding
geological deposits. The value of ounces we
have discovered in less than 10 years exceeds
$5 billion in revenue. Our brownfield team
believes that there is still potential at all our
assets to find further low cost ounces and in
addition, our greenfield team is set to drill a
number of premium prospects in various
countries across the Americas.
Develop
We are able to execute development of our
discoveries in a short space of time. Our flagship
Inmaculada deposit was first drilled in early
2009 and production was achieved in June 2015
with the mine being ramped up to full
production within three months. The operation
was also designed and built in a modular fashion
to facilitate cost effective expansion potential.
Extract
We have developed a unique in-depth
knowledge base of the technical challenges
inherent in our orebodies as well as of the
environment and jurisdiction where we operate.
This has resulted in us consistently meeting
annual production targets, executing significant
cost reduction programmes, increasing our
resource base and achieving positive results
from brownfield exploration at existing mines.
Operating review
Page 22
Financial review
Page 30
Sustainability
Page 36
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 14
Chairman’s statement
Fit for an exciting
future of growth
I am delighted with the progress made operationally and geologically
in 2017 as well as with our long-term goal of balance sheet optimisation.
This has been demonstrated with our enviable track record of meeting
our production and cost forecasts, as well as the delivery of our
ambitious brownfield exploration programme which we believe
is now starting to bear fruit.
21%
increase in dividends
Jan 2018
early redemption
of high yield bonds
Over the course of a mine’s life, geological conditions and
mining methods may change but our commitment to safety
remains constant and is one of our values which we are not
willing to compromise.”
Eduardo Hochschild
Chairman
Whilst a complex permitting situation in Peru
and unpredictable precious metal prices have
at times impacted both the management of our
core assets and our ability to execute our drilling
campaigns, Hochschild Mining has maintained a
consistent strategy over the last few years which
places geological expertise at the heart of how
we manage our deposits and how we generate
further low cost organic growth in the long-term.
The Board is pleased, therefore, to be able to
recommend an increased final dividend of
$1.965 cents per share.
Operationally we were able to continue to grow
our output, reaching another Company record in
2017 with key contributions from Inmaculada
and San Jose (both production records) and a
vastly improved performance at Pallancata. With
a positive gold price performance, we were still
able to generate solid cash flow throughout the
year despite a fall in profitability due to a rise in
overall costs. With regards to our balance sheet,
we took a decisive step in January 2018 with the
early redemption of the high yield bonds, issued
in 2014 to finance the construction of
Inmaculada, using existing cash and lower
cost local Peruvian debt. We are now in
an advantageous financial position with a
manageable debt profile and the firepower to
meet the requirements of our brownfield and
greenfield programmes, consider acquisitions
and continue to return capital to shareholders.
Towards the end of the year we started to
receive some positive results from our
brownfield drilling campaigns. In particular,
I would like to mention the geological
developments at Inmaculada which have
confirmed our long-held confidence in the
prospectivity of the district and I look forward
to the team continuing to add high quality
resources in 2018 and beyond. The majority of
our assets are still underexplored and following
positive changes to the permitting process in
Peru, I believe that our organic growth
programme is beginning to gain real momentum.
Furthermore, it is pleasing to see an increasing
number of greenfield targets come through the
pipeline as well as some earn-in joint venture
opportunities being evaluated.
Annual Report & Accounts 2017 Hochschild Mining plc 15
Where we are
Hochschild has grown its production
since 2012 by almost 90% and in that
time we have reduced our costs by
over 40%. We are still focusing on
organic growth whether through our
ambitious brownfield exploration
programme at our current mines or
through greenfield prospects spread
across the Americas.
We made solid progress in 2017 with our
brownfield aims – undertaking mapping
and geophysics studies, securing surface
drilling permits from the Peruvian
government and subsequently starting
our drilling campaigns at Arcata,
Inmaculada and San Jose.
Our drilling exploration plan
‘17
‘18
‘19
‘20
‘21
Arcata
Inmaculada
Pallancata
San Jose
Ares
Underground
and surface drilling
Surface drilling
Production at our four mines
Safety and environment
As mentioned in my statement last year, an
accident at the Inmaculada mine early in 2017
resulted in two fatalities. With great regret, we
disclosed that a second accident occurred at the
Arcata mine in July 2017 which also claimed the
lives of two colleagues. On behalf of the Board,
I would like to again convey our deepest
condolences to the families of the victims
involved. Our resolve to make Hochschild Mining
a safe place to work is as strong as ever and
management has responded by instigating a
wide-ranging programme to reinforce our safety
culture which: includes senior management
reviewing all high-risk activities; involves even
more frequent training; focuses on initiatives
to motivate and incentivise safe working; and
implements the most up-to-date safety risk
management information systems. Over the
course of a mine’s life, geological conditions
and mining methods may change but our
commitment to safety remains constant and
is one of our values which we are not willing
to compromise.
Our focus on environmental performance
continues to be one of our key priorities. During
2017, we introduced a new environmental
corporate objective as part of the Company’s
overall Performance Objectives Plan (the base
for calculating employee bonuses), which has
historically been only based on production,
safety and financial indicators. We believe that
this new objective will help us in further
promoting a strong environmental culture,
achieve our goal of operating with the least
environmental footprint possible and generate
long-term value for our stakeholders.
Our people
Our employees are pivotal to the Company’s
performance and, to them, I wish to express my
gratitude for their contribution in making 2017
a record year of profitable production. I also wish
to thank my fellow Board colleagues for their
support over the year. I am delighted that
Dionisio Romero Paoletti joined the Board at the
start of the year as a Non-Executive Director,
bringing a wealth of business experience in Peru
and internationally. Finally, I wish to express the
Board’s utmost gratitude to Enrico Bombieri
who, having served as a Non-Executive Director
since 2012 and as Senior Independent Director
for four years, retired at the end of 2017.
Outlook
After an encouraging year for metal prices in
2017, particularly for gold, the prospects for
precious metals in 2018 remain strong with
robust global equity markets and inflation on the
rise. We are aiming to continue our long-term
growth strategy based around low cost
brownfield investment, selective greenfield
exploration and a targeted approach to
acquisitions. Safety, operational excellence
and cost control will remain of paramount
importance and we will also continue repaying
debt as and when the opportunity arises.
Eduardo Hochschild
Chairman
20 February 2018
Inmaculada 47%
Arcata 14%
Pallancata 20%
San Jose 19%
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 16
Chief Executive’s review
We are confident of
our enormous potential
Hochschild delivered another record year of production whilst maintaining cost
increases within expectations, excellent environmental performance, advancing
our brownfield programme and continuing our drive to repay debt and optimise
our balance sheet. We have also begun to widen our exploration focus to include
selected greenfield projects across the Americas as well as assessing a wide variety
of joint ventures and acquisitions that could supplement our long-term growth
profile at a low cost.
We are confident that our exploration-led growth strategy
will continue to add high quality ounces to our existing
assets, generate new early-stage projects and deliver
long-term shareholder value.”
Ignacio Bustamante
Chief Executive Officer
Our strategy for growth
Our strategy for growth focuses on three
key paths to secure low cost growth.
Brownfield
Optimising and exploring
close to our current mines
to increase life-of-mine
and facilitate low cost
plant expansion.
Greenfield
A reshuffled portfolio
generating a number of
promising targets in
good geographies.
Acquisitions
Targeting early-stage
opportunities with strong
geological potential.
Our Strategy
Page 18
No less important and in response to the
fatalities that occurred during the year, I would
like to highlight that the management team has
designed and is implementing the ‘Hochschild
Safety Transformation’ plan which will reinforce
the entire Company’s commitment to a safe
working environment.
Operations
Our core operations produced over half a million
attributable gold equivalent ounces (38.0 million
silver equivalent ounces) for the first time since
the IPO – achieving a fifth year of output
increases and improving on our original 37.0
million ounce silver equivalent target. This, yet
again, demonstrates the value of our long-term
organic growth strategy. Inmaculada was a key
driver, delivering another record year of almost
240,000 gold equivalent ounces at a competitive
all-in sustaining cost of $721 per gold equivalent
ounce ($9.7 per silver equivalent ounce). San
Jose also achieved a record (7.1 million
attributable silver equivalent ounces) and
Pallancata moved strongly into a new phase with
7.7 million silver equivalent ounces at a cost of
$10.7 per silver equivalent ounce. At our Arcata
mine, the effects of a lengthy permit delay to
brownfield exploration in 2016 began to be fully
felt with the accessing of increasingly narrower
veins and a reduced number of stopes lowering
production to 5.5 million silver equivalent
ounces. We remain optimistic that, despite the
impairment recognised in 2017, there is still
geological potential in the Arcata deposit area
and expect that our current drilling programme
will enable an improvement in resource quality
and quantity in the future. Finally, I am pleased to
report that, during 2017, we achieved an
excellent score in our newly implemented
environmental corporate objective at all our
operations. We will continue to work to maintain
and improve our environmental culture and
performance based on a strong belief that
responsible mining is fully compatible with
respect for the environment.
Exploration
Our ambitious brownfield exploration
programme in Peru started to gain momentum
in the second half of 2017 when, with all requisite
permits in place, we were able to commence our
surface drilling programmes at Inmaculada and
Arcata. Early results from the first campaign in six
years at Inmaculada are very encouraging and
confirmed the presence of the Millet vein as well
as eight other structures close to our mining
infrastructure at the Angela vein. In Argentina,
we had some success in discovering new
structures close to the San Jose mine and we
also continued to drill in the Aguas Vivas area to
the north west where we are currently assessing
the nature of this polymetallic orebody which has
significant quantities of zinc and lead as well as
precious metals. At Pallancata, the focus was on
developing the Pablo vein in preparation for
mining in 2018 whilst the discovery of the Marco
vein nearby has added further resources and
prompted a new regional geological hypothesis
Annual Report & Accounts 2017 Hochschild Mining plc 17
514,000
Gold equivalent
ounces produced
9
New veins discovered
at Inmaculada
which we will be testing in 2018. Finally, at Arcata
we were able to discover additional inferred
resources and throughout 2018, an intensive
campaign will continue to explore for resources
with the goal of utilising the plant’s significant
spare capacity.
Financial position
Strong cash flow from our operations
combined with some balance sheet management
opportunities has left us in a healthy financial
position. On 23 January 2018, we were able to
redeem the remaining $295 million of our 7.75%
Senior Notes. We replaced a portion of these
bonds with short to medium term debt from
local banks in Peru with an average rate of 2.2%
and approximately $100 million was repaid from
existing cash resources. Consequently, our cash
balance after this transaction remains a healthy
$85 million and we expect our interest costs to
fall by approximately $20 million per year from
2019 onwards.
Financial results
Whilst an increased average gold price received
was offset by a moderate fall in the silver price
received, record production once again ensured a
rise in revenue of 5% to $723 million (2016: $688
million). The operational all-in sustaining cost of
$12.3 per silver equivalent ounce (2016: $11.2
per ounce) was in line with forecasts although
the increase reflected an increased investment in
brownfield exploration as well as one-off project
costs at Inmaculada and consequently this
resulted in Adjusted EBITDA of $301 million
(2016: $329 million). Finally, with finance costs
reduced despite the high yield bonds (now
repaid), basic earnings per share and adjusted
earnings per share was $0.08 per share (2016:
$0.11 and $0.09 per share respectively).
Outlook
We expect attributable production in 2018 to
be 514,000 gold equivalent ounces (38 million
silver equivalent ounces) driven by another
240,000 gold equivalent ounces from
Inmaculada, an increased contribution of
9.5 million silver equivalent ounces from the
revitalised Pallancata mine and another
7.1 million silver equivalent ounces from the
dependable San Jose mine. At Arcata, where we
expect production of 4 million silver equivalent
ounces, management will continue to closely
monitor performance to ensure production
is optimised whilst maintaining the asset´s
optionality with regards to prices, exploration
results and cost efficiencies. All-in sustaining
costs for operations are expected at between
$960 to $990 per gold equivalent ounce
($13.0 to $13.4 per silver equivalent ounce) with
the slight increase versus the $12.3 per ounce in
2017 resulting from further development costs
of the Pablo vein and a one-off highly profitable
investment in a hydraulic backfill project at San
Jose. We are also pleased to note that the
corporate tax rate in Argentina has been reduced
from 35% to 30% from 2018 (and to 25% from
2020) and, hence we can look forward to a
significant positive impact on San Jose’s net
profitability although taxes on dividends have
also been reinstated to 7% through to 2020
and then to 13% thereafter.
A further $17 million is expected to be invested
in our brownfield exploration in 2018 as we look
to maintain the current momentum and an
additional budget of $10 million is assigned to
greenfield projects with some exciting prospects
to be drilled in Peru, Chile, Canada and the
United States. Low cost, early-stage acquisition
opportunities will continue to be pursued across
the Americas and, in particular, earn-in joint
ventures where operations can benefit from
Hochschild’s technical expertise. We are
confident that our exploration-led growth
strategy will continue to add high quality ounces
to our existing assets, generate new early-stage
projects and deliver long-term shareholder value.
Ignacio Bustamante
Chief Executive Officer
20 February 2018
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 18
Our strategy
A successful and effective
strategy for low cost growth
Our strategy is to create value for shareholders based on exploration-led
growth by investing in our brownfield drilling programme, pursuing selected
greenfield opportunities and assessing opportunistic early-stage acquisitions.
Strategic pillar
2017 Activities
Brownfield
We have always focused on mineralised districts with the
possibility to grow over time and in this regard we are excited
by the brownfield growth potential of our portfolio. We
believe that the current long-term programme will discover
further resources to fill up our existing spare plant capacity,
increase our core asset life-of-mine and consider future plan
capacity expansions.
– Achieved all required drilling permits
– Added approximately 10 million ounces of
resources at Inmaculada from exploratory
underground drilling
– Started first surface drilling programme at
Inmaculada for six years
– Discovered Aguas Vivas orebody to the north
west of San Jose mine
Greenfield
Our exploration programme is focused on finding new, high
quality deposits and we are continually evaluating new
opportunities throughout the Americas. We have reshuffled
our portfolio in the last few years and have generated a
number of promising targets in good geographies. For 2018
we have assigned a budget of approximately $10 million for
greenfield exploration.
– Assessed 13 opportunities across 10 countries
– Progressing drill-ready projects
– Staking opportunities
– Optimising early-stage projects
– Drilled Fresia greenfield project
Acquisitions
Our business development team is dedicated to pursuing
early-stage opportunities that demonstrate strong geological
potential, value accretion and a clear path to control. This
strategy is implemented in line with our conservative financial
policies and may include earn in joint venture agreements with
junior companies.
– Assessed 22 opportunities across 13 countries
– Two deals announced already
– Loro (Chile)
– Cobalt Silver District (Canada)– alliance
established with Cobalt Power Group
– Continue assessing Inmaculada’s long-term geological potential
– Explore areas surrounding Pallancata
– Improve quality and quantity of Arcata resource base
– Further drilling campaign at Aguas Vivas and other areas in San Jose to
fully understand orebody
– Execute new drilling programme at Ares
– Test geological hypothesis at Azuca and surrounding area
– Political, legal and regulatory
– Community relations
– Personnel: recruitment and retention
– Aim to drill 4-6 projects in 3 countries (Peru, Chile and US)
– Progress mapping and permitting activities at other selected sites
– Targeting skarns, epithermal veins and porphyries
– Continue to assess staking opportunities in Peru and other
countries in the Americas
– Political, legal and regulatory
– Community relations
– Personnel: recruitment and retention
– Progress current targets to decision stage
– Continue to assess acquisition opportunities across the Americas
– Long-term research into minerals of the future
– Political, legal and regulatory
– Commodity prices
Annual Report & Accounts 2017 Hochschild Mining plc 19
Brownfield
We have always focused on mineralised districts with the
possibility to grow over time and in this regard we are excited
by the brownfield growth potential of our portfolio. We
believe that the current long-term programme will discover
further resources to fill up our existing spare plant capacity,
increase our core asset life-of-mine and consider future plan
capacity expansions.
– Achieved all required drilling permits
– Added approximately 10 million ounces of
resources at Inmaculada from exploratory
underground drilling
– Started first surface drilling programme at
Inmaculada for six years
– Discovered Aguas Vivas orebody to the north
west of San Jose mine
Greenfield
Our exploration programme is focused on finding new, high
– Assessed 13 opportunities across 10 countries
quality deposits and we are continually evaluating new
opportunities throughout the Americas. We have reshuffled
our portfolio in the last few years and have generated a
number of promising targets in good geographies. For 2018
we have assigned a budget of approximately $10 million for
– Progressing drill-ready projects
– Staking opportunities
– Optimising early-stage projects
– Drilled Fresia greenfield project
greenfield exploration.
Acquisitions
Our business development team is dedicated to pursuing
early-stage opportunities that demonstrate strong geological
potential, value accretion and a clear path to control. This
strategy is implemented in line with our conservative financial
policies and may include earn in joint venture agreements with
junior companies.
– Assessed 22 opportunities across 13 countries
– Two deals announced already
– Loro (Chile)
– Cobalt Silver District (Canada)– alliance
established with Cobalt Power Group
2018 Priorities
Risks
– Continue assessing Inmaculada’s long-term geological potential
– Explore areas surrounding Pallancata
– Improve quality and quantity of Arcata resource base
– Further drilling campaign at Aguas Vivas and other areas in San Jose to
fully understand orebody
– Execute new drilling programme at Ares
– Test geological hypothesis at Azuca and surrounding area
– Political, legal and regulatory
– Community relations
– Personnel: recruitment and retention
– Aim to drill 4-6 projects in 3 countries (Peru, Chile and US)
– Progress mapping and permitting activities at other selected sites
– Targeting skarns, epithermal veins and porphyries
– Continue to assess staking opportunities in Peru and other
countries in the Americas
– Political, legal and regulatory
– Community relations
– Personnel: recruitment and retention
– Progress current targets to decision stage
– Continue to assess acquisition opportunities across the Americas
– Long-term research into minerals of the future
– Political, legal and regulatory
– Commodity prices
Key Performance
Indicators
Page 20
Risk management
and viability
Page 44
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 20
Key Performance Indicators
Measuring our progress
Financial measures
Production
m oz Ag equivalent
38.0
35.5
38.0
20.5
22.2
27.0
13
14
15
16
17
Revenue
$m
622
493
469
723
688
723
13
14
15
16
17
Adjusted EBITDA
$m
195
301
329
301
136
139
13
14
15
16
17
Links to
strategy
Links to
remuneration
Yes
Definition
Silver equivalent production equals
total attributable gold production
multiplied by a gold/silver ratio for
2015–2017 of 74x and 60x for
2012–2014 and added to the total
attributable silver production.
Performance
Total silver equivalent production
increased by 7% versus 2016 due
to increased contributions from
Inmaculada, Pallancata and San Jose.
Links to
strategy
Links to
remuneration
Yes
Definition
Revenue presented in the financial
statements is disclosed as net
revenue and is calculated as gross
revenue less commercial discounts.
Performance
Total revenue increased by 5% versus
2016 due to increased production
and increases in average precious
metal prices.
Links to
strategy
Links to
remuneration
Yes
Performance
Adjusted EBITDA decreased by 9%
versus 2016 due to increases in cost
of sales and administrative expenses.
Definition
Calculated as profit from continuing
operations before exceptional items,
net finance costs, foreign exchange
loss and income tax plus
depreciation,exploration expenses
other than personnel and other
exploration related fixed expenses and
other non-cash (income)/expenses.
Basic earnings per share
Links to
strategy
Links to
remuneration
No
$ pre-exceptional
0.08
0.11
0.08
(0.15)
(0.13)
(0.14)
13
14
15
16
17
Definition
The pre-exceptional basic per-share
(using the weighted average number
of shares outstanding during the
year) profit available to equity
shareholders of the Company from
continuing operations before
exceptional items.
Performance
Pre-exceptional basic earnings per
share decreased by 27% due to the
decrease in EBITDA.
Dividend per share
Links to
strategy
Links to
remuneration
No
US cents per share
3.35
3 .35
2.76
Nil
13
Nil
14
Nil
15
16
17
Definition
The per-share dividend paid to equity
shareholders of the Company
as recommended by the Board.
Performance
Total dividend per share increased
by 21%.
Outlook
Total silver equivalent production
is forecast to be 38.0 million silver
equivalent ounces in 2018.
Risks
– Operational performance
– Business interruption
– Personnel: labour relations
– Exploration and Reserve and
Resource replacement
– Sustainability risks
Outlook
Production is expected to be
38.0 million silver equivalent
ounces in 2018.
Risks
– Operational performance
– Commodity price
Outlook
Adjusted EBITDA result for
2018 will depend on precious
metal prices and cost and
expenses performance.
Risks
– Operational performance
– Commodity price
Outlook
Pre-exceptional basic earnings per
share will depend on EBITDA
performance and the effective tax
rate but is expected to be positively
impacted by the reduction in
interest from the redemption of
the Company’s senior notes and
the refinancing of the remaining
debt at lower interest rates.
Risks
– Operational performance
– Commodity price
Outlook
Dividend per share for 2018
will depend on the level of
profitability of the Company and
the available uses of cash and is at
the discretion of the Board.
Risks
– Operational performance
– Commodity price
Annual Report & Accounts 2017 Hochschild Mining plc
21
All-in sustaining costs
Links to
strategy
$/oz Ag equivalent 12.3
18.6
17.4
12.9
11.2
12.3
13
14
15
16
17
Definition
Calculated before exceptional items
and includes cost of sales less
depreciation and change in
inventories, administrative expenses,
brownfield exploration, operating
capex and royalties divided by silver
equivalent ounces produced using
a gold/silver ratio of 74:1.
Links to
remuneration
Yes
Performance
All-in sustaining costs for operations
increased by 10% versus 2016 due to
increased investment in brownfield
exploration, one-off investments at
Inmaculada, increased costs at
Arcata and inflation in Argentina.
Outlook
All-in sustaining cost from
operations in 2018 is expected to be
between $13.0 and $13.4 per silver
equivalent ounce (or $960 and $990
per gold equivalent ounce).
Risks
– Operational performance
Total silver cash costs
Links to
strategy
Links to
remuneration
No
$/oz Ag equivalent 8.8
12.9
12.1
10.0
8.2
8.8
13
14
15
16
17
Definition
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.
Performance
Total silver cash costs for the
Company increased by 7% versus
2016 due to increases in unit costs
in Peru and Argentina partially
offset by decreasing costs at the
Pallancata mine.
Outlook
Cash costs performance in 2018 is
expected to be dependent on
operational performance, levels of
local cost inflation and levels of local
currency devaluation in Argentina.
Risks
– Operational performance
Non-financial measures
Resource base
Links to
strategy
m oz Ag equivalent
1,340
1,300
1,250
1,260
1,370
1,340
Definition
Total attributable silver
equivalent metal resources
as at 31 December 2017.
Links to
remuneration
Yes
Performance
Total attributable silver equivalent
metal resources fell by 2% in 2017.
Links to
remuneration
Yes
Definition
Calculated as total number of
accidents per million labour hours.
Performance
LTIFR increased by 22% but still
remains low relative to the industry.
13
14
15
16
17
LTIFR
Total number of 2.69
accidents per
million labour hours
3.07
2.69
2.08
2.20
1.85
13
14
15
16
17
Accident Severity Index
Total number of 1,264
days lost per million
1,264
Definition
Calculated as total number of days
lost per million labour hours.
598
13
149
14
112
15
138
16
17
Links to
remuneration
Yes
Performance
The Accident Severity Index
increased to 1,264 due to the
fatalities at Inmaculada and Arcata.
Outlook
Resource increases in 2018 will
depend on the level of ongoing
success in finding potential
resources and the ability to turn
these resources into the inferred
and measured and indicated
categories through drilling.
Risks
– Exploration and Reserve and
Resource replacement
Outlook
The Company has implemented
the ‘Hochschild Safety
Transformation’ plan, has
migrated to the latest
management information systems
and has achieved received annual
safety certification from DNV.
Risks
– Health and safety
Outlook
The Company has implemented
the ‘Hochschild Safety
Transformation’ plan, has
migrated to the latest
management information systems
and has achieved received annual
safety certification from DNV.
Risks
– Health and safety
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 22
Operating review
A world-class
portfolio in
Latin America
In 2017, Hochschild once again exceeded its full year
production target, a record 513,598 gold equivalent
ounces or 38.0 million silver equivalent ounces, comprising
254,932 ounces of gold and 19.1 million ounces of silver.
Operations
Production
The overall production target for 2018 is 514,000 gold equivalent ounces
(38.0 million silver equivalent ounces).
Total group production
Silver production (koz)
Gold production (koz)
Total silver equivalent (koz)
Total gold equivalent (koz)
Silver sold (koz)
Gold sold (koz)
Year ended
31 Dec 2017
Year ended
31 Dec 2016
22,301
304.16
44,809
605.52
22,295
300.21
20,562
292.63
42,217
570.50
21,088
298.96
Total production includes 100% of all production, including production
attributable to Hochschild’s joint venture partner at San Jose.
Attributable group production
Silver production (koz)
Gold production (koz)
Silver equivalent (koz)
Gold equivalent (koz)
Year ended
31 Dec 2017
Year ended
31 Dec 2016
19,141
254.93
38,006
513.60
17,284
246.08
35,493
479.64
Attributable production includes 100% of all production from Arcata,
Inmaculada, Pallancata and 51% from San Jose.
2018 Production forecast split
Operation
1 Inmaculada
2 Arcata
3 Pallancata
4 San Jose
Total
Gold production
(oz approx)
Silver production
(m oz approx)
160,000
10,000
27,000
100,000
297,000
5.6
3.3
7.5
6.5
22.9
Note: silver/gold equivalent production and cost figures assume a gold/silver ratio of 74:1. Hochschild
has increased the use of gold equivalent figures throughout the release to provide comparability to the
gold industry peer group and due to the Company’s Inmaculada mine being a majority gold producer.
Annual Report & Accounts 2017 Hochschild Mining plc 23
2018 AISC forecast split
Operation
1 Inmaculada
2 Arcata
3 Pallancata
4 San Jose
1 $9.0-9.5 per silver equivalent ounce.
AISC ($/oz)
700-750 Au Eq1
18.0-18.5 Ag Eq
13.0-13.5 Ag Eq
14.5-15.0 Ag Eq
Costs
All-in sustaining costs from operations in
2017 was $910 per gold equivalent ounce
or $12.3 per silver equivalent ounce (2016:
$829 per gold equivalent ounce or $11.2 per
silver equivalent ounce) driven by Inmaculada’s
very competitive $721 per gold equivalent
ounce (2016: $644 per ounce) and Pallancata’s
low costs ($10.7 per silver equivalent ounce)
driven by better than forecast tonnage and
silver grades. Please see page 11 of the Financial
review for further details on costs.
The all-in sustaining cost from operations in
2018 is expected to be between $960 and
$990 per gold equivalent ounce (or $13.0
and $13.4 per silver equivalent ounce) which
includes a full year of the new detoxification
process at Inmaculada, further development
costs at the Pablo vein and an investment of
$14 million in a highly value accretive hydraulic
backfill project at San Jose. Arcata´s costs are
expected to be higher in line with its resource
base despite the implementation of significant
cost control measures. An intense drilling
campaign is expected to add higher quality
resources during the year in order to provide
continuity to the operation.
Peru
Pallancata
Inmaculada
Arcata
3
1
2
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 24
Operating review continued
Inmaculada
Peru
The 100% owned Inmaculada gold/silver
underground operation is located in the
Department of Ayacucho in southern Peru.
It commenced commissioning in June 2015.
Summary
Ore production (tonnes)
Average silver grade (g/t)
Average gold grade (g/t)
Silver produced (koz)
Gold produced (koz)
Silver equivalent produced (koz)
Gold equivalent produced (koz)
Silver sold (koz)
Gold sold (koz)
Unit cost ($/t)
Total cash cost ($/oz Au co-product)
All-in sustaining cost ($/oz Au Eq)
Production
In 2017, Inmaculada delivered record gold
equivalent production of 239,479 ounces, a 5%
improvement on 2016 (2016: 229,033 ounces)
and represents a very successful result following
the unexpected stoppage at the operation in the
first quarter of the year.
Year ended
31 Dec 2017
Year ended
31 Dec 2016
1,295,701
1,306,606
145
4.15
5,506
165.07
17,721
239.48
5,498
162.32
85.4
486
721
133
4.21
4,908
162.71
16,948
229.03
5,004
164.75
64.4
370
646
% change
(1)
9
(1)
12
1
5
5
10
(1)
33
31
12
Costs
All-in sustaining costs were in line with
expectations at $721 per gold equivalent ounce
or $9.7 per silver equivalent ounce (2016: $646
per ounce). Costs rose versus 2016 due to the
previously-disclosed investment in the expansion
of the tailings dam and other infrastructure as
well as reduced mined tonnage resulting from
the stoppage in the first quarter and budgeted
lower mined gold grades. These effects were
partially offset by the processing of a high grade
stockpile as well as operational efficiencies
versus plan.
239,479
Production
(gold equivalent oz)
$721
All-in sustaining cost
($/gold equivalent oz)
Strategy in action
Life-of-mine increases
and expansion potential
Links to
strategy
For the first time in six years Hochschild is
exploring at Inmaculada. We have always
aimed to invest in districts and we believe
there is significant potential in the area
surrounding the Angela vein where we are
currently mining. Despite only
commencing drilling in November 2017,
we are encouraged that early results are
proving the existence of a number of
other veins close to our current mine
infrastructure. As part of the brownfield
programme, we are targeting a life-of-
mine increase at this flagship deposit but
there is also a low cost opportunity to
expand the processing plant and increase
throughput if we find a sufficient level of
additional resources.
Annual Report & Accounts 2017 Hochschild Mining plc 25
Arcata
Peru
The 100% owned Arcata underground operation is
located in the Department of Arequipa in southern
Peru. It commenced production in 1964.
Summary
Ore production (tonnes)
Average silver grade (g/t)
Average gold grade (g/t)
Silver produced (koz)
Gold produced (koz)
Silver equivalent produced (koz)
Gold equivalent produced (koz)
Silver sold (koz)
Gold sold (koz)
Unit cost ($/t)
Total cash cost ($/oz Ag co-product)
All-in sustaining cost ($/oz Ag Eq)
Year ended
31 Dec 2017
Year ended
31 Dec 2016
499,385
677,309
308
1.07
4,391
15.15
5,512
74.49
4,357
14.96
124.8
14.5
18.4
337
1.24
6,343
22.54
8,011
108.26
6,346
22.03
101.1
11.0
13.7
% change
(26)
(9)
(14)
(31)
(33)
(31)
(31)
(31)
(32)
23
32
34
Production
Production for the year was 5.5 million silver
equivalent ounces (2016: 8.0 million ounces),
a result which reflected significantly reduced
tonnage and lower grades following a revision of
the mine plan to accommodate a lower number
of available stopes and narrower veins.
Costs
In 2017, as expected, Arcata’s all-in sustaining
cost rose substantially versus 2016 to $18.4 per
silver equivalent ounce (2016: $13.7 per ounce)
reflecting the significantly reduced tonnage
(affecting unit costs) and grades resulting from
the above mentioned revised mine plan as well as
the increased investment in the mine’s
brownfield exploration programme.
5.5m
$18.4
Production
(silver equivalent oz)
All-in sustaining cost
($/silver equivalent oz)
Strategy in action
Securing a recovery through
a comprehensive brownfield
exploration programme
Links to
strategy
Arcata is a complex dispersed vein
deposit and in its long history has often
experienced periods of more challenging
mining conditions. However, we still
believe there to be significant geological
potential in the area and, now that we
have secured the requisite permits, we
are implementing an aggressive drilling
programme that we are hopeful will
secure the mine’s future. In 2017, we
have added over 10 million ounces of
resources and also executed a number
of long horizontal drill holes that are
giving us a clearer underground geological
map. We expect these to help us in our
2018 brownfield campaign that aims to
improve the quality and quantity
of the mine’s resources.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 26
Operating review continued
Pallancata
Peru
The 100% owned Pallancata silver/gold property is
located in the Department of Ayacucho in southern
Peru. Pallancata commenced production in 2007.
Ore from Pallancata is transported 22 kilometres
to the Selene plant for processing.
Summary
Ore production (tonnes)
Average silver grade (g/t)
Average gold grade (g/t)
Silver produced (koz)
Gold produced (koz)
Silver equivalent produced (koz)
Gold equivalent produced (koz)
Silver sold (koz)
Gold sold (koz)
Unit cost ($/t)
Total cash cost ($/oz Ag co-product)
All-in sustaining cost ($/oz)
Production
The full year result was 7.7 million silver
equivalent ounces, a 118% improvement on
2016 (2016: 3.5 million ounces) driven by better
than forecast tonnage and silver grades.
Year ended
31 Dec 2017
Year ended
31 Dec 2016
470,903
244,765
442
1.78
5,956
23.47
7,693
103.95
5,940
23.29
101.5
7.8
10.7
381
1.86
2,620
12.37
3,536
47.78
2,660
12.41
131.0
12.4
16.3
% change
92
16
(4)
127
90
118
118
123
88
(23)
(37)
(34)
Costs
All-in sustaining costs at Pallancata in 2017 fell by
34% versus the same period of 2016 to $10.7
per silver equivalent ounce (2016: $16.3 per
ounce). The reduction was due to higher than
expected tonnage and silver grades resulting
from the accessing of high grade ancillary veins
with the wider but lower grade Pablo vein
forecast to provide the majority of the ore in
2018. Costs were also reduced due to Pablo
development capex being delayed into 2018,
which is expected to increase all-in sustaining
costs to be between $13.0 to $13.5 per silver
equivalent ounce.
7.7m
$10.7
Production
(silver equivalent oz)
All-in sustaining cost
($/silver equivalent oz)
Strategy in action
Changing the exploration picture
in the Pallancata district
Links to
strategy
In 2015, Hochschild discovered the Pablo
vein which has boosted the mine’s
long-term prospects and in 2018 we
expect to ramp up production
throughout to 2,800 tonnes per day.
The Pablo discovery initiated a
reinterpretation of the whole Pallancata
district and further discoveries have
included the ancillary Pablo Pisos veins as
well as the Marco vein to the north of
Pablo. We have also continued mapping
activities at the outcropping Cochaloma
vein to the west of Pallancata and further
mapping and geophysics studies have
yielded two additional targets similar to
Pablo in Pallancata South and at Farallon
to the north west. We are aiming to test
these in 2018.
Annual Report & Accounts 2017 Hochschild Mining plc San Jose
Argentina
The San Jose silver/gold mine is located in Argentina,
in the province of Santa Cruz, 1,750 kilometres
south-south west of Buenos Aires. San Jose
commenced production in 2007 and is a joint venture
with McEwen Mining Inc. Hochschild holds a controlling
interest of 51% in the mine and is the mine operator.
Summary*
Ore production (tonnes)
Average silver grade (g/t)
Average gold grade (g/t)
Silver produced (koz)
Gold produced (koz)
Silver equivalent produced (koz)
Gold equivalent produced (koz)
Silver sold (koz)
Gold sold (koz)
Unit cost ($/t)
Total cash cost ($/oz Ag co-product)
All-in sustaining cost ($/oz)
* The Company has a 51% interest in San Jose.
Production
The overall production results for 2017 were
6.4 million ounces of silver and 100,474 ounces
of gold, which is 13.9 million silver equivalent
ounces, a slight improvement on 2016.
6.4m
Year ended
31 Dec 2017
Year ended
31 Dec 2016
532,676
536,024
436
6.71
6,448
100.47
13,883
187.60
6,501
99.63
240.1
10.5
14.0
444
6.28
6,691
95.01
13,721
185.42
7,081
99.76
202.4
9.7
11.5
% change
(1)
(2)
7
(4)
6
1
1
–
19
8
22
Costs
At San Jose, all-in sustaining costs increased to
$14.0 per silver equivalent ounce (2016: $11.5 per
ounce) mainly due to the Q4 2016 elimination of
the Patagonian port rebate which had lowered
costs significantly. In addition, lower than expected
currency devaluation in Argentina in 2017 only
partially offset ongoing high local inflation.
In December 2017, the Argentine government
sanctioned a series of fiscal measures that include
a reduction in the 35% rate of corporate income
tax, taking it to 30% for the years 2018 and 2019,
and then to 25% for 2020 onwards. In addition, a
withholding tax was imposed on dividends at a
rate of 7% for 2018 and 2019, increasing to 13%
from 2020. It is expected that the overall net
effect on profitability will be positive.
$14.0
Production
(silver equivalent oz)
All-in sustaining cost
($/silver equivalent oz)
27
Strategy in action
Exploring a rich area
Links to
strategy
We have not conducted exploration
at our high grade deposit in southern
Argentina for a number of years due to
the political and economic situation in the
country under the previous government.
However, a new brownfield programme
has begun in the area that is aiming to
secure short-term, high quality resources
but also look for longer-term potential
outside of the main San Jose mining area.
In 2017, we discovered the Agua Vivas
orebody to the north west which contains
not only silver and gold but also significant
quantities of zinc and lead. In addition, we
acquired a package of land from Coeur
Mining situated between our joint venture
and Goldcorp’s Cerro Negro deposit to
the south.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
Pallancata
At Pallancata, 1,000m of resource drilling was carried out in the Marco vein,
a structure identified close to the Pablo vein with just over 1 million ounces
of silver equivalent resources identified. Selected results are below:
Vein
Marco
Results
DLYU-A92A: 1.4m @ 0.7g/t Au & 235g/t Ag
DLYU-A88: 1.1m @ 2.2g/t Au & 1,108g/t Ag
DLNE-A05: 0.6m @ 1.1g/t Au & 470g/t Ag
DLYU-A92A: 2.0m @ 0.7g/t Au & 169g/t Ag
DLNE-A07: 0.6m @ 1.1g/t Au & 152g/t Ag
During 2018, mapping and geophysics will be carried out at the Pablo South
area whilst an 8,400m potential drilling programme will be carried out to
test continuity between the Marco and the Farallon veins to the north west
of Pablo.
28
Operating review continued
Brownfield exploration
Arcata
27,662m of resource drilling and 11,200m of potential drilling was carried
out at Arcata in 2017 and centred on the Tunel 3, Tunel 4, Paralela 3,
Paralela Sur, Ramal Marion, Michele, Soledad, Baja, Ramal 4, Ruby 2 and
Ruby 3 veins. In addition, long horizontal drilling for potential resources was
also executed in the Pamela and Paralelas vein systems.
Selected results are provided in the table below:
Vein
Results
Ramal Marion
Paralela
Paralela 1
Paralela 2
Paralela 3
DDH-018-GE-17: 1.0m @ 1.0g/t Au & 326g/t Ag
DDH-023-GE-17: 0.8m @ 0.6g/t Au & 154g/t Ag
DDH-049-EX-17: 0.8m @ 0.6g/t Au & 146g/t Ag
DDH-054-EX-17: 0.8m @ 0.4g/t Au & 201g/t Ag
DDH-023-GE-17: 0.8m @ 0.9g/t Au & 246g/t Ag
DDH-043-EX-17: 1.2m @ 0.3g/t Au & 159g/t Ag
DDH-058-EX-17: 1.0m @ 2.1g/t Au & 712g/t Ag
DDH-066-EX-17: 1.3m @ 0.4g/t Au & 167g/t Ag
DDH-018-GE-17: 1.2m @ 2.6g/t Au & 1,229g/t Ag
DDH-023-GE-17: 0.8m @ 1.0g/t Au & 227g/t Ag
DDH-043-EX-17: 0.8m @ 0.2g/t Au & 477g/t Ag
DDH-058-EX-17: 0.9m @ 0.5g/t Au & 309/t Ag
DDH-043-EX-17: 0.8m @ 0.2g/t Au & 132g/t Ag
DDH-052-EX-17: 0.8m @ 0.4g/t Au & 106g/t Ag
DDH-066-EX-17: 1.2m @ 1.1g/t Au & 408g/t Ag
DDH-018-GE-17: 0.8m @ 0.9g/t Au & 303g/t Ag
DDH-023-GE-17: 1.1m @ 3.8g/t Au & 1,025g/t Ag
DDH-036-GE-17: 0.8m @ 4.9g/t Au & 605g/t Ag
DDH-038-GE-17: 0.8m @ 1.5g/t Au & 198g/t Ag
DDH-048-DI-17: 0.4m @ 3.9g/t Au & 389g/t Ag
DDH-074-DI-17: 1.2m @ 1.8g/t Au & 176g/t Ag
DDH-056-DI-17: 0.8m @ 1.5g/t Au & 177g/t Ag
DDH-036-GE-17: 0.8m @ 5.2g/t Au & 692g/t Ag
DDH-038-GE-17: 0.8m @ 1.4g/t Au & 240g/t Ag
DDH-048-DI-17: 0.8m @ 6.6g/t Au & 765g/t Ag
DDH-057-DI-17: 1.1m @ 3.0g/t Au & 244g/t Ag
DDH-028-GE-17: 0.9m @ 2.6g/t Au & 226g/t Ag
DDH-056-DI-17: 1.1m @ 2.1g/t Au & 331g/t Ag
DDH-074-DI-17: 1.8m @ 12.2g/t Au & 1,339g/t Ag
DDH-041-DI-17: 1.3m @ 1.4g/t Au & 173g/t Ag
DDH-038-GE-17: 0.8m @ 1.7g/t Au & 117g/t Ag
DDH-107-DI-17: 1.3m @ 1.9g/t Au & 192g/t Ag
Socorro+800
DDH-074-DI-17: 2.5m @ 12.2g/t Au & 399g/t Ag
Tunel 4
DDH-087-GE-17: 0.8m @ 1.6g/t Au & 850g/t Ag
DDH-097-DI-17: 1.8m @ 0.9g/t Au & 397g/t Ag
DDH-103-DI-17: 0.8m @ 0.8g/t Au & 126g/t Ag
DDH-109-DI-17: 1.3m @ 4.2g/t Au & 636g/t Ag
DDH-555-S-17: 0.4m @ 1.6g/t Au & 516g/t Ag
DDH-557-S-17: 1.9m @ 1.5g/t Au & 205g/t Ag
DDH-576-S-17: 0.6m @ 1.0g/t Au & 268g/t Ag
DDH-579-S-17: 2.8m @ 1.1g/t Au & 276g/t Ag
Alexia Techo 2
DDH-094-ST-17: 1.0m @ 1.4g/t Au & 454g/t Ag
Ruby 2
Ruby 3
DDH-155-DI-17: 1.0m @ 0.4g/t Au & 241g/t Ag
DDH-190-EX-17: 1.3m @ 1.2g/t Au & 551g/t Ag
DDH-155-DI-17: 2.0m @ 0.7g/t Au & 250g/t Ag
DDH-184-DI-17: 1.3m @ 0.3g/t Au & 207g/t Ag
DDH-198-EX-17: 1.1m @ 0.5g/t Au & 407g/t Ag
DDH-197-DI-17: 1.7m @ 1.3g/t Au & 735g/t Ag
In 2018, an intensive 32,000m resource drilling campaign is scheduled for
all areas surrounding the main mining area.
Annual Report & Accounts 2017 Hochschild Mining plc 29
San Jose
At San Jose, 8,624 m of drilling for potential resources was carried out
during the year at the Aguas Vivas zone with results indicating an
intermediate sulphide deposit with associated zinc and lead mineralisation.
A further 3,000 metres of drilling at Aguas Vivas is scheduled for Q1 2018.
In addition, 5,000 metres of further resource and potential drilling was
carried out during the year in the Molle, Odin, Ramal Ayelen and Frea E-W
veins with selected results of both campaigns shown below:
Vein
Results
Aguas Vivas NW SJD-1627: 2.6m @ 0.1g/t Au, 43g/t Ag, 8.2% Pb & 5.5% Zn
SJD-1616: 2.8m @ 0.3g/t Au, 40g/t Ag, 7.0% Pb & 6.0% Zn
SJD-1686: 1.1m @ 3.6g/t Au, 86g/t Ag, 19.0% Pb & 10.3% Zn
SJD-1686: 1.5m @ 1.0g/t Au, 29g/t Ag, 1.1% Pb & 2.9% Zn
SJD-1687: 0.4m @ 0.2g/t Au, 65g/t Ag, 3.1% Pb & 7.2% Zn
SJD-1687: 1.0m @ 6.5g/t Au, 14g/t Ag
Molle
SJD-1651: 0.8m @ 8.4g/t Au & 141g/t Ag
SJM-320: 2.5m @ 5.2g/t Au & 427g/t Ag
SJM-321: 1.2m @ 46.7g/t Au & 2,256g/t Ag
SJD-1696: 2.9m @ 3.8g/t Au & 913g/t Ag
SJD-1697: 1.3m @ 92.3g/t Au & 2,429g/t Ag
SJM-340: 0.6m @ 5.5g/t Au & 316g/t Ag
SJM-341: 0.6m @ 0.6g/t Au & 31g/t Ag
SJM-342: 1.1m @ 9.9g/t Au & 496g/t Ag
Odin
SJM-338: 1.4m @ 1.0g/t Au & 472g/t Ag
Ramal Ayelen
Ramal Ayelen SE
Frea (E-W)
SJM-339: 0.6m @ 0.7g/t Au & 329g/t Ag
SJM-339: 1.0m @ 0.8g/t Au & 461g/t Ag
SJD-1689: 0.6m @ 1.2g/t Au & 49g/t Ag
SJD-1690: 0.5m @ 0.8g/t Au & 225g/t Ag
SJM-331: 0.6m @ 15.9g/t Au & 405g/t Ag
SJM-333: 1.2m @ 3.3g/t Au & 262g/t Ag
SJD-1693: 1.6m @ 13.8g/t Au & 184g/t Ag
In 2018, mapping and geophysics will continue on the Aguas Vivas zone as
well as approximately 3,000m of both potential and resource drilling.
Inmaculada
At Inmaculada, following receipt of the requisite permits from the
government in the fourth quarter, a 56,000 metre surface drilling
programme began in early November with four drill rigs onsite. Results in
the area to the south west of the Angela vein have so far confirmed the
presence of nine new veins close to the existing mine infrastructure. The
first results from almost 5,000 metres of drilling are detailed below and
show, in particular, the potential of the Millet vein. The current campaign
will continue throughout 2018 and will include further potential drilling as
well as infill drilling and resource conversion. The Company expects to
provide further updates on drill results throughout the year.
In addition, mine development during the third quarter allowed a
reinterpretation of the geological model at the deposit and identified a
further 9.7 million silver equivalent ounces of resources.
Vein
Millet
Thalia
Alessandra
Barbara
Results
MIL-17-002: 36.5m @ 3.3g/t Au & 73g/t Ag
MIL-17-003: 3.8m @ 3.8g/t Au & 109g/t Ag
MIL-17-004A: 3.0m @ 1.4g/t Au & 80g/t Ag
MIL-17-005: 38.5m @ 4.4g/t Au & 96g/t Ag
MIL-17-006: 1.2m @ 1.8g/t Au & 88g/t Ag
MIL-17-007: 2.5m @ 2.0g/t Au & 19g/t Ag
MIL-17-009: 13.0m @ 6.8g/t Au & 68g/t Ag
MIL-17-001: 1.1m @ 3.0g/t Au & 125g/t Ag
BAR17-017: 1.5m @ 11.0g/t Au & 67g/t Ag
LIA17-001: 0.7m @ 2.3g/t Au & 174g/t Ag
LIA17-002: 3.0m @ 5.1g/t Au & 60g/t Ag
BAR17-001: 3.9m @ 1.6g/t Au & 119g/t Ag
BAR17-003: 1.3m @ 2.4g/t Au & 419g/t Ag
BAR17-004: 3.0m @ 2.6g/t Au & 175g/t Ag
BAR17-008: 4.3m @ 10.0g/t Au & 751g/t Ag
BAR17-009: 3.6m @ 1.9g/t Au & 348g/t Ag
BAR17-010: 6.0m @ 15.2g/t Au & 3,042g/t Ag
BAR17-011: 2.7m @ 6.6g/t Au & 780g/t Ag
BAR17-012: 3.8m @ 6.5g/t Au & 692g/t Ag
BAR17-013: 4.1m @ 11.1g/t Au & 1,449g/t Ag
BAR17-014: 3.5m @ 16.2g/t Au & 1,227g/t Ag
BAR17-017: 2.05m @ 1.38g/t Au & 82g/t Ag
BAR17-018: 3.6m @ 3.5g/t Au & 132g/t Ag
BAR17-019: 2.25m @ 3.55g/t Au & 242g/t Ag
BAR17-020: 1.2m @ 7.9g/t Au & 665g/t Ag
BAR17-021: 0.8m @ 1.1g/t Au & 92g/t Ag
BAR17-022: 1.2m @ 1.7g/t Au & 720g/t Ag
DLNE-A04: 0.9m @ 1.7g/t Au & 569g/t Ag
DLPP-A04: 0.9m @ 11.7g/t Au & 2,253g/t Ag
DLPP-A12: 0.6m @ 1.8g/t Au & 491g/t Ag
DLPP-A01: 0.8m @ 2.4g/t Au & 721g/t Ag
DLPP-A15: 0.8m @ 0.7g/t Au & 172g/t Ag
DLPP-A18: 0.6m @ 3.6g/t Au & 481g/t Ag
DLPP-A14: 2.7m @ 0.9g/t Au & 220g/t Ag
Ramal Barbara
BAR 17-019: 1.0m @ 1.7g/t Au & 314g/t Ag
Xiomara
BAR17-017: 1.0m @ 1.0g/t Au & 45g/t Ag
BAR17-018: 1.5m @ 2.1g/t Au & 76g/t Ag
BAR17-019: 1.8m @ 3.6g/t Au & 242g/t Ag
BAR17-020: 2.1m @ 2.5g/t Au & 123g/t Ag
BAR17-021: 0.7m @ 0.6g/t Au & 16g/t Ag
BAR17-022: 1.0m @ 5.7g/t Au & 122g/t Ag
During 2018, mapping and geophysics is planned for the Inmaculada East
zone whilst a programme of 4,500 metres of drilling for potential as well as
53,000 metres of resource drilling is scheduled in the same area.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 30
Financial review
Strong financial performance
and cash generation
The reporting currency of Hochschild Mining plc is US dollars.
In discussions of financial performance the Group removes
the effect of exceptional items when indicated.
The income statement results are shown both pre and post such
exceptional items. Exceptional items are those items, which due to their
nature or the expected infrequency of the events giving rise to them, need
to be disclosed separately on the face of the income statement to enable a
better understanding of the financial performance of the Group and to
facilitate comparison with prior years.
Revenue
Gross revenue
Gross revenue from continuing operations increased by 5% to $759.1
million in 2017 (2016: $722.0 million) driven by an increase in sales
resulting from increases in production from the Company’s Inmaculada and
Pallancata mines as well as a rise in gold prices.1
Gold
Gross revenue from gold increased 5% in 2017 to $381.3 million (2016:
$363.4 million) mainly as a result of a 4% rise in the average gold price as
well as a small increase in the total amount of gold ounces sold in 2017.
The increase in gold sales came from the recovery in the Pallancata mine
offsetting a fall in gold sales from the Arcata mine.
Silver
Gross revenue from silver increased by 5% in 2017 to $377.8 million
(2016: $358.7 million) as a result of a 6% increase in the total amount of
silver ounces sold to 22,295 koz (2016: 21,088 koz) driven by a recovery
at the primarily silver mine of Pallancata as well as increased sales from
Inmaculada. This was partially offset by a 31% decrease in the silver sales
from the Arcata operation.
Gross average realised sales prices
The following table provides figures for average realised prices (which are
reported before the deduction of commercial discounts and include the
effects of the hedging agreements in place during the prior year) and
ounces sold for 2017 and 2016:
Commercial discounts
Commercial discounts refer to refinery treatment charges, refining fees and
payable deductions for processing concentrate, and are deducted 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 2017, the Group recorded commercial discounts of $36.9 million (2016:
$34.1 million). The increase is explained by the higher production of
concentrate mainly from the Pallancata mine. The ratio of commercial
discounts to gross revenue in 2017 was 5% (2016: 5%).
Net revenue
Net revenue increased by 5% to $722.6 million (2016: $688.2 million),
comprising net gold revenue of $372.3 million and net silver revenue of
$349.8 million. In 2017, gold accounted for 52% and silver 48% of the
Company’s consolidated net revenue (2016: gold 51% and silver 49%)
with the increase in the gold contribution mainly due to the increase in
the gold price received.
Revenue by mine2
$000
Silver revenue
Arcata
Inmaculada
Pallancata
San Jose
Commercial discounts
Net silver revenue
Gold revenue
Arcata
Inmaculada
Pallancata
San Jose
Year ended
31 Dec 2017
Year ended
31 Dec 2016 % change
74,452
91,943
100,285
111,088
(27,926)
349,842
19,183
204,651
29,877
127,602
(8,998)
372,315
415
106,206
83,642
44,500
124,316
(25,139)
333,525
25,717
196,466
14,994
126,174
(8,993)
354,358
359
722,572
688,242
(30)
10
125
(11)
11
5
(25)
4
99
1
–
5
16
5
Average realised prices
Silver ounces sold (koz)
Avg. realised silver price ($/oz)
Gold ounces sold (koz)
Avg. realised gold price ($/oz)
Year ended
31 Dec 2017
Year ended
31 Dec 2016
22,295
16.9
300.21
1,270
21,088
17.0
298.95
1,215
Commercial discounts
Net gold revenue
Other revenue
Net revenue
1 Excludes revenue from services.
2 Reconciliation of gross revenue by mine to Group net revenue.
Annual Report & Accounts 2017 Hochschild Mining plc
31
Revenue
Adjusted EBITDA
Profit before income tax
$722.6m
(2016: $688.2m)
$300.8m
(2016: $329.0m)
$64.1m
(2016: $108.3m)
Adjusted basic
earnings per share
$0.08
(2016: $0.09)
Costs
Total cost of sales was $549.0 million in 2017 (2016: $487.7 million).
The direct production cost excluding depreciation was higher at
$345.4 million (2016: $293.8 million) explained by higher backfill and
detoxification costs at Inmaculada and the impact of the net inflation in
Argentina. Depreciation in 2017 was $195.7 million (2016: $185.7 million)
with the increase due to Pallancata’s higher tonnage extraction. Other items
was higher at $3.2 million in 2017 (2016: $1.8 million) due to costs related
to the community stoppage at Pallancata in January. Change in inventories
was $4.7 million in 2017 (2016: $6.5 million).
$000
Direct production cost
excluding depreciation
Depreciation in production cost
Other items
Change in inventories
Cost of sales
Year ended
31 Dec 2017
Year ended
31 Dec 2016 % change
345,436
196,241
3,241
4,131
293,810
185,655
1,750
6,487
549,049
487,702
18
5
85
(28)
13
Unit cost per tonne
The Group reported unit cost per tonne at its operations of $125.0 per
tonne in 2017, an 18% increase versus 2016 ($106.2 per tonne) mainly as
a result of new detoxification and backfill processes at Inmaculada,
stoppages at Pallancata and Inmaculada, local inflation in Argentina and
higher costs at Arcata, partially offset by reduced costs at Pallancata.
Unit cost per tonne by operation (including royalties)3:
Operating unit ($/tonne)
Year ended
31 Dec 2017
Year ended
31 Dec 2016 % change
Peru
Arcata
Inmaculada
Pallancata
Argentina
San Jose
Total
97.7
124.8
85.4
101.5
240.1
125.0
83.2
101.1
64.4
131.0
202.4
106.2
17
23
33
(23)
19
18
Cash costs
Cash cost reconciliation4:
$000 unless otherwise
indicated
Year ended
31 Dec 2017
Year ended
31 Dec 2016 % change
Group cash cost
(+) Cost of sales
(–) Depreciation and
403,552
549,049
358,800
487,702
amortisation in cost of sales
(196,150)
(180,317)
(+) Selling expenses
(+) Commercial deductions5
Gold
Silver
Revenue
Gold
Silver
Others
Ounces sold
Gold
Silver
Group cash cost ($/oz)
Co product Au
Co product Ag
By product Au
By product Ag
11,024
39,629
9,256
30,373
722,572
372,315
349,842
415
300.2
22,295
693
8.8
78
1.0
14,175
37,240
11,486
25,754
688,242
354,358
333,525
359
298.9
21,088
618
8.2
(2)
(0.3)
12
13
9
(22)
6
(19)
18
5
5
5
16
–
6
12
7
(4,000)
(430)
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.
3 Unit cost per tonne is calculated by dividing mine and treatment production costs (excluding depreciation) by extracted and treated tonnage respectively.
4 Cash costs are calculated to include cost of sales, treatment charges, and selling expenses before exceptional items less depreciation included in cost of sales.
5 Includes commercial discounts (from the sales of concentrate) and commercial discounts from the sale of doré.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
32
Financial review continued
All-in sustaining cost reconciliation
Year ended 31 Dec 2017
$000 unless otherwise indicated
(+) Production cost excluding depreciation
(+) Other items in cost of sales
(+) Operating and exploration capex for units
(+) Brownfield exploration expenses
(+) Administrative expenses (excl depreciation)
(+) Royalties and special mining tax6
Sub-total
Au ounces produced
Ag ounces produced (000s)
Ounces produced (Ag Eq 000s oz)
Sub-total ($/oz Ag Eq)
(+) Commercial deductions
(+) Selling expenses
Sub-total
Au ounces sold
Ag ounces sold (000s)
Ounces sold (Ag Eq 000s oz)
Sub-total ($/oz Ag Eq)
All-in sustaining costs ($/oz Ag Eq)
All-in sustaining costs ($/oz Au Eq)7
Arcata Inmaculada Pallancata
46,874
109,005
62,340
San Jose
127,217
Main
operations
345,436
Corporate
& others
–
–
17,557
3,029
880
–
83,806
15,146
4,391
5,512
15.2
15,695
1,931
17,626
14,963
4,357
5,464
3.2
18.4
1,362
–
52,903
1,127
3,351
2,987
169,373
165,074
5,506
17,721
9.6
2,134
1,118
3,252
162,323
5,498
17,510
0.2
9.7
721
1,461
19,186
1,279
1,362
1,214
71,376
23,471
5,956
7,693
9.3
9,633
1,298
10,931
23,287
5,940
7,663
1.4
10.7
792
1,780
33,998
3,407
8,701
–
175,103
100,474
6,448
13,883
12.6
12,167
6,677
18,844
99,634
6,501
13,874
1.4
14.0
1,036
3,241
123,644
8,842
14,294
4,201
499,658
304,165
22,301
44,809
11.2
39,629
11,024
50,653
300,207
22,296
44,511
1.1
12.3
910
–
453
4,041
35,425
2,229
42,148
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
345,436
3,241
124,097
12,883
49,719
6,430
541,806
304,165
22,301
44,809
12.1
39,629
11,024
50,653
300,207
22,296
44,511
1.1
13.2
977
6 Royalties arising from revised royalty tax schemes introduced in 2011 and included in income tax line.
7 Calculated using a gold silver ratio of 74:1.
Annual Report & Accounts 2017 Hochschild Mining plc 33
Year ended 31 Dec 2016
$000 unless otherwise indicated
(+) Production cost excluding depreciation
(+) Other items in cost of sales
(+) Operating and exploration capex for units
(+) Brownfield exploration expenses
(+) Administrative expenses (excl depreciation)
(+) Royalties and special mining tax6
Sub-total
Au ounces produced
Ag ounces produced (000s)
Ounces produced (Ag Eq 000s oz)
Sub-total ($/oz Ag Eq)
(+) Commercial deductions
(+) Selling expenses
(–) Export credits
Sub-total
Au ounces sold
Ag ounces sold (000s)
Ounces sold (Ag Eq 000s oz)
Sub-total ($/oz Ag Eq)
All-in sustaining costs ($/oz Ag Eq)
All-in sustaining costs ($/oz Au Eq)
Arcata Inmaculada Pallancata
33,650
83,796
68,155
San Jose
108,209
Main
operations
293,810
Corporate
& others
–
462
20,819
1,305
1,441
–
92,182
22,541
6,343
8,011
11.5
15,383
1,973
–
17,356
22,043
6,343
7,977
2.2
13.7
1,014
506
54,199
1
3,420
3,243
145,165
162,710
4,908
16,948
8.6
1,650
1,130
–
2,780
164,754
5,004
17,196
0.2
8.7
644
241
16,130
733
674
639
52,067
12,374
2,620
3,536
14.7
5,038
721
–
5,759
12,407
2,660
3,578
1.6
16.3
1,206
541
1,750
32,670
123,818
1,691
8,180
–
151,291
95,006
6,691
13,721
11.0
15,169
10,351
3,730
13,715
3,882
440,705
292,631
20,562
42,216
10.4
37,240
14,175
(19,029)
(19,029)
6,491
99,761
7,081
14,463
0.4
11.5
851
32,386
298,965
21,088
43,214
0.7
11.2
829
–
255
2,806
32,932
3,869
39,862
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
293,810
1,750
124,073
6,536
46,647
7,751
480,567
292,631
20,562
42,216
11.4
37,240
14,175
(19,029)
32,386
298,965
21,088
43,214
0.7
12.1
895
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 34
Financial review continued
Administrative expenses
Administrative expenses increased by 7% to $51.3 million (2016: $48.0
million) primarily due to increased share-based compensation affecting
personnel expenses.
Exploration expenses
In 2017, exploration expenses increased to $17.2 million (2016: $9.2
million) in line with the overall rise in the Company’s investment in
brownfield exploration. In addition, the Group capitalises part of its
brownfield exploration, which mostly relates to costs incurred converting
potential resource to the Inferred or Measured and Indicated category. In
2017, the Group capitalised $2.3 million relating to brownfield exploration
compared to $1.3 million in 2016, bringing the total investment in
exploration for 2017 to $19.5 million (2016: $10.5 million).
Selling expenses
Selling expenses decreased by 22% versus 2016 to $11.0 million (2016:
$14.2 million) mainly due to the elimination of export duties at San Jose.
Selling expenses in 2017 consisted mainly of logistic costs for the sale of
concentrate whilst 2016 expenses also included approximately 1.5 months
of export duties on concentrate until their elimination on 12 February
2016. Previously, export duties in Argentina were levied at 10% of revenue
for concentrate.
Other income/expenses
Other income before exceptional items was $10.2 million
(2016: $33.1 million). The reduction is mainly due to the elimination
of the Patagonian port rebate (2016: $16.7 million) in the fourth
quarter of 2016.
Other expenses before exceptional items were reduced to $11.5 million
(2016: $13.9 million).
Adjusted EBITDA
Adjusted EBITDA decreased by 9% over the period to $300.8 million
(2016: $329.0 million) driven primarily by production costs.
Finance income
Finance income before exceptional items of $5.9 million increased from
2016 ($1.1 million) primarily due to the impact of a higher net present
value of the Patagonian port rebate ($1.9 million) which was discounted in
2016 but collected in 2017. The remainder consists of interest received on
deposits ($1.6 million) and other financial income ($2.4 million) which
included a gain on sale of shares ($1.4 million) and a gain on derivative
instruments ($0.6 million).
Finance costs
Finance costs decreased from $30.5 million in 2016 to $26.1 million in
2017, principally due to the reduction of interest resulting from the
repayment of Scotiabank medium term loan in H1 2016 and from lower
average short-term borrowings.
Foreign exchange losses
The Group recognised a foreign exchange loss of $5.3 million (2016:
$1.8 million loss) as a result of exposures in currencies other than the
functional currency – primarily the Argentinean Peso.
Income tax
The Group’s pre-exceptional income tax charge was $13.5 million (2016:
$47.6 million). The substantial decrease in the charge is explained by the
Group’s decrease in profitability in the year in addition to a deferred tax
credit recognised as a result of a progressive tax rate reduction in Argentina
from 35% to 30%.
The effective tax rate for the period was 20.2% (2016: 40.7%). The
reduction in the effective tax rate is mainly due to the positive deferred tax
impact of the Argentina tax rate reduction which is non-recurring.
Exceptional items
Exceptional items in 2017 totalled a $0.5 million gain after tax (2016:
$6.4 million loss). Exceptional items principally included impairment
reversals of $31.9 million for Pallancata and $8.4 million at San Felipe
partially offset by a $43.0 million impairment of Arcata.
Adjusted EBITDA is calculated as profit from continuing operations before
exceptional items, net finance costs and income tax plus non-cash items
(depreciation and changes in mine closure provisions) and exploration
expenses other than personnel and other exploration related fixed expenses.
The tax effect of exceptional items amounted to a $3.3 million tax charge
(2016: $2.2 million tax credit) although this did not include the impairment
reversal at San Felipe, which did not attract a deferred tax liability as no tax
asset arose when the impairment was originally carried out.
$000
unless otherwise indicated
Year ended
31 Dec 2017
Year ended
31 Dec 2016 % change
Profit from continuing operations before
exceptional items, net finance cost,
foreign exchange loss and income tax
Depreciation and amortisation in cost
of sales
Depreciation and amortisation in
administrative expenses
Exploration expenses
Personnel and other exploration related
fixed expenses
Other non-cash income8
Adjusted EBITDA
Adjusted EBITDA margin
92,255
148,188
(38)
196,150
180,317
1,564
17,199
(5,395)
(1,023)
300,750
42%
1,331
9,193
(3,947)
(6,068)
329,014
48%
9
18
87
37
(83)
(9)
8 Adjusted EBITDA has been presented before the effect of significant non-cash (income)/expenses related to changes in mine closure provisions and the write-off of property, plant and equipment.
Annual Report & Accounts 2017 Hochschild Mining plc 35
Year ended
31 Dec 2017
Year ended
31 Dec 2016
256,988
139,979
(291,955)
(291,073)
(67,863)
(36,312)
(102,830)
(187,406)
Cash flow and balance sheet review
Cash flow
Net debt
$000
Cash and cash equivalents
Long-term borrowings
Year ended
31 Dec 2017
Year ended
31 Dec 2016
Change
233,919
316,073
(82,154)
Short-term borrowings9
(121,054)
(127,364)
6,310
Net debt
$000
Net cash generated from
operating activities
Net cash used in investing
activities
Cash flows generated/(used in)
in financing activities
Net increase in cash and cash
equivalents during the year
4,919
(132,165)
137,084
117,784
56,544
61,240
The Group reported net debt position was $102.8 million as at 31
December 2017 (2016: $187.4 million). The reduction in 2017 is mainly
due to the operating cash generated mainly in Inmaculada and Pallancata.
Capital expenditure10
$000
Arcata
Pallancata
San Jose
Inmaculada
Operations
Other
Total
Year ended
31 Dec 2017
Year ended
31 Dec 2016
17,557
19,186
36,288
52,903
125,934
2,614
128,548
20,819
16,130
35,311
54,199
126,459
5,186
131,645
2017 capital expenditure of $128.5 million (2016: $131.6 million) mainly
comprised of operational capex of $125.9 million (2016: $126.5 million),
with the small decrease versus 2016 comprising decreases at Inmaculada
and Arcata partially offset by an increase in capital expenditure at Pallancata.
Operating cash flow decreased from $316.1 million in 2016 to $233.9
million in 2017. Lower operating cash flow is mainly due to: (i) income tax
payments in 2017 of $26 million in Argentina, of which $17 million
corresponded to income tax from 2016 and the rest to income tax
advances for the 2017 period; (ii) the reduction of working capital
achieved in 2016 (excluding the income tax effect) of $37 million and
maintained during 2017; (iii) higher production costs and exploration
expenses partially offset by stronger revenue.
Net cash used in investing activities decreased to $121.1 million in 2017
from $127.4 million in 2016 mainly due to reduced capital expenditure at
Arcata, Inmaculada and care and maintenance expenditure at the Azuca
and Crespo projects, partially offset by an increase in Pallancata investment.
Finally, cash flows generated from financing activities resulted in a net
inflow of $4.9 million in 2017 from $132.2 million used in 2016. In 2016, the
$132.2 million used was due to $107.4 million of debt repayment and the
remainder by equity dividends of $7.0 million paid to Hochschild
shareholders and also $13.0 million to McEwen Mining. The change in
2017 is primarily due to the net increase in short-term credit lines of
$31.5 million ($25 million repaid in January 2017 in Peru, $50 million
raised in December 2017 in Peru to re-purchase the bonds and $6.5 million
raised in Argentina during the year). This was partially offset by dividends
paid to Hochschild’s shareholders of $14.0 million and to minority
shareholders in Argentina of $12.3 million. As a result, total cash flows
resulted in a net increase of $117.8 million from $56.5 million in 2016
($61.2 million improvement).
Working capital
$000
Trade and other receivables
Inventories
Other financial assets/(liability)
Income tax receivable/(payable)
Year ended
31 Dec 2017
Year ended
31 Dec 2016
88,553
56,678
2,591
15,442
93,837
57,056
(1,726)
(9,025)
Trade and other payables and provisions
(228,170)
(211,277)
Working capital
(64,906)
(71,135)
The Group’s working capital position changed by $6.2 million to
$64.9 million in 2017 from $71.1 million in 2016. Key drivers were: higher
income tax receivable ($24.5 million) resulting from $24.2 million of tax
payments in Argentina; a negative movement in other financial assets/
(liability) of $4.3 million from a liability position in 2016, to an asset
position in 2017 resulting from the embedded derivative associated with
provisional pricing and higher trade. These were partially offset by: an
increase in trade and other payables and provisions of $(16.9) million
mainly due to Pallancata’s trade payables in line with its higher production.
9 Includes pre-shipment loans and short-term interest payables.
10 Includes additions in property, plant and equipment and evaluation and exploration assets (confirmation of resources) and excludes increases in the expected closure costs of mine asset.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 36
Sustainability
Our success brings
responsibility
2017 was a year of strong performance in terms
of community engagement and the environment,
and one of a reinforced commitment to safety.
81%
Workforce trained
(2016: 89%)
$5.6m
Amount spent supporting
social and community
welfare activities
(2016: $4.4m)
Managing our
environmental
impact
Page 43
Our
people
Page 41
Our
guiding
principles
Safety
Pages 38 & 39
Working
with our
communities
Page 42
Health &
Hygiene
Page 40
Annual Report & Accounts 2017 Hochschild Mining plc 37
Governance of Corporate Social Responsibility
(‘CSR’)
The Board has ultimate responsibility for establishing Group
policies relating to sustainability and the CSR Committee has
been established with the responsibility of focusing on
compliance and ensuring that appropriate systems and
practices are in place.
What is Hochschild Mining’s approach
to sustainability?
The Company has adopted a number of policies demonstrating
our commitment to:
– a safe and healthy workplace;
– managing and minimising the environmental impact of our
operations; and
– encouraging sustainability by respecting the communities of the
localities in which we operate;
all in compliance with applicable laws, regulation and the
Company’s own standards.
For further information on how we prioritise our resources
and the Committee’s terms of reference, please visit
www.hochschildmining.com/en/sustainability.
Management of sustainability
The Board has ultimate responsibility for establishing Group
policies relating to sustainability and ensuring that appropriate
standards are met. The CSR Committee has been established
as a formal committee of the Board with delegated
responsibility for various sustainability issues, focusing on
compliance and ensuring that appropriate systems and
practices are in place Group-wide to ensure the effective
management of sustainability-related risks.
As Chairman of the CSR Committee, Graham Birch has Board
level responsibility for sustainability issues to whom the Vice
President of Operations and the Vice President of Legal and
Corporate Affairs report for sustainability issues.
The CSR Committee’s work in 2017
During the year, the CSR Committee:
– considered the investigations into the fatal accidents
during the year and monitored the implementation of
corrective actions;
– approved the 2016 Sustainability Report for inclusion in
the 2016 Annual Report;
– monitored the execution of the yearly plan in each of the
four key areas of focus including progress updates;
– considered the priorities of the environmental team
and their work plan;
– considered the status of the Group’s community
initiatives; and
– reviewed the environmental and community relations
related risks and related work plans.
Given the exposure of the Group’s strategy to Sustainability
Risks (comprising Health & Safety, Community Relations
and Environmental risks), the full Board received regular
presentations on how such risks are managed. Furthermore,
the Board received presentations from management on the
accidents that resulted in the fatalities during the year. Further
details of these accidents can be found in the Safety section of
this report.
Reporting of targets and indicators
As part of the Company’s ongoing strategy to make more
information available online, detailed sustainability related
performance indicators as well as targets for 2018 are
available on the Company’s website.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 38
Sustainability continued
I am pleased to be able to introduce Hochschild’s
Sustainability Report following my appointment
as Chairman of the CSR Committee in May 2017.”
Dear Shareholder
2017 was a successful year from an
operational perspective as well as with
regards to the sheer number of
environmental and community initiatives
that we were able to pursue. However, it
is with great regret that the accident that
we announced early last year was followed,
in July, by a second accident at Arcata,
which claimed the lives of two drill workers.
These incidences brought to an end three
consecutive years without any fatalities.
The Company Chairman, in his statement
earlier in this Report, conveyed the Board’s
condolences to the families of those involved
which I wish to reiterate. The Board, and
indeed, the CSR Committee are wholly
committed to doing all we can to ensure
that safety comes first. For this reason,
we wholeheartedly support management
in the implementation of the Safety Culture
Transformation Plan. This is a multi-faceted
strategy to meet our Zero Accident target.
Further details on the accidents are provided in
the Safety section of this report.
Our communities
In 2017, we continued to promote community
projects that fall within our chosen areas of
focus; Education, Health and Socio-Economic
Development. These include smaller versions of
the Digital Centre that was established in our
flagship Chalhuanca Project, which are being
installed, jointly with other commercial partners,
in rural locations. We also supported schools, by
not only facilitating innovative teaching methods
but also by supplying lunch kits. This ensured
that children benefited from a healthy meal and
learnt the benefits of a balanced and nutritious
diet. Further details on these initiatives, as well as
those of our Argentinian operation, can be found
in this report and on our website.
Our environment
With regards to our environmental performance, I
am delighted to report on the success of the
inaugural year of the use of the Environmental
Corporate Objective (‘ECO’). The ECO
score for the year, which is explained in the
Environment section of the Report, was higher
than the most stretching target approved by the
Board, demonstrating an environmentally
conscious approach across the organisation.
The ECO score was incorporated as one of the
corporate objectives and therefore eligible
employees will, justifiably, see some recognition
for this impressive achievement. For further
details, please see the final page of this report.
I hope you will find this report informative. If
you should have any questions or comments,
please do not hesitate to contact me at
sustainability@hocplc.com
Graham Birch
Chairman, Corporate Social
Responsibility Committee
Safety HOC
The Hochschild Safety team has developed a tool
which compiles all safety findings in a database
designed to aid risk management and generate
management reports.
The tool has three modules with the planned
addition of the Accident Investigations and
Management Inspections modules. A version for
installation as an app on a smartphone is in the
process of being developed.
Safety
Given the inherently high risk
profile of mining, safety is our
highest priority.
2017 highlights
– Launch of the Safety Culture Transformation
Plan following the fatal accidents during the
year (see below for further details)
– Development of the internally-developed
safety software tool, ‘Safety HOC’
(see opposite)
The Hochschild approach to safety
Mining has an inherently high risk profile and
safety is our highest priority. Ensuring the safety
of the Group’s employees is considered crucial in
measuring the successful implementation of
corporate strategy to which the Board and
management are committed.
Annual Report & Accounts 2017 Hochschild Mining plc 39
Our achievements in 2017
– Decisive steps taken in response to the fatal
accidents during the year (see below)
– Restructuring of the emergency response
teams; resulting in operating efficiencies
– All operating units secured Level 6 certification
of the rating system issued by Det Norske
Veritas GL (‘DNV’) (7th edition)
Accidents in 2017
After three consecutive years without any
fatalities, it is with regret that there were two
fatal accidents over the course of 2017 which
resulted in four fatalities. In this section of the
report, we have summarised the details of each
incident and the remedial actions taken.
January 2017: Inmaculada
Overview: After the blasting of a stope,
contractors were instructed to apply shotcrete
to support the area. Inspections of the area were
carried out some days after the blasting and
support work commenced. During this process,
the ceiling collapsed, as a result of which two
contractors sustained fatal injuries.
The investigation resulted in a number of actions
being taken, including:
– reiterating compliance with the Company’s
protocols on stope expansion and geotechnical
support within prescribed timescales;
– engagement of consultants for an immediate
audit of stopes, and ongoing monitoring; and
– more frequent mine planning sessions with the
participation of all technical departments.
July 2017: Arcata
Overview: Two drill workers were overcome by
carbon monoxide fumes in the process of
inspecting and clearing a stope.
The resulting investigation prompted the
following actions (among others):
– reiterating compliance with the Company’s
safety protocols including the need to carry
back-up emergency equipment at all times;
– restructuring the emergency response teams
by converting the nature of the positions from
voluntary to full-time positions;
– enhancing the provision of detection
equipment; and
– reinforcing various protocols including the
mandatory use of air injection paths for access.
Response to 2017 Accidents
In light of the findings into
the causes of the two serious
accidents during the year, a
programme comprising short-
term actions and longer-term
actions, to be implemented over
three years, was put in place.
Immediate Action Plan
– Messaging from senior management on the
non-negotiable zero tolerance to accidents
– Safety top management leadership meetings
– World-renowned consultancy, DuPont,
were engaged to conduct a safety culture
assessment with the participation of 750
employees. Concluded that HOC had the
potential to achieve industry-leading status
– Increased safety supervision implemented
– Clinical psychologists recruited at all sites
– Re-allocation of work between employees
on the basis that ‘expert workers are
safer workers’
Long-term Action Plan:
The Safety Culture Transformation Plan
Risk Management System (RMS)
– Review Hochschild RMS and upgrade
to latest DNV version 7.0 ISRS
(International Safety Regulations System)
– External audit, by DNV, of RMS across all
operations completed in mid-February
– Review of all HOC protocols and
procedures in process for completion
by the end of 2018
Mines’ Annual Training Programme
– Redesigned structure and content of
weekly training sessions. Training
sessions for mine workers comprise
3 modules of c. 5 hours per week in
the areas of practical safe working, use
of technology and safety leadership
Syste m
T
r
aining
Lea
d
e
r
s
HOC Plan
h
i
p
n
m unicatio
m
C o
Leadership Programme
– New safety committee with
senior management involvement in the
review of potential high impact events
– Coaching programme for operations
management team led by DuPont
– 10-month leadership programme for
mine supervisors
– Independent safety promoters have
been hired at all mines
Safety Plan communications support
– Activities detailed herein, together
with safety achievements and risks
communicated to all individuals through
a corporate communication plan
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 40
Sustainability continued
Health & Hygiene
The work of Health & Hygiene is to
provide an integrated approach to
employee welfare.
2017 highlights
– Participation in the design of the Safety
Cultural Transformation Plan
– Liaison with mining peers and
governmental authorities on new laws
affecting health and safety at work
– Holding of the inaugural family welfare
event in Arequipa
– Doubling the number of occupational
psychologists to cater for the provision
of counselling
The Hochschild approach
to health and hygiene
Underlining the importance we place on our
people and their wellbeing, the Group’s Health &
Hygiene department is tasked with providing an
integrated approach to employee welfare. Whilst
the Health team is focused on ensuring that
employees have access to the relevant services
and infrastructure to ensure that treatment can
be provided, the Hygiene team looks to reinforce
the importance of the quality of life at work
through the prevention of occupational illness.
Family welfare event
The Health & Hygiene team held the inaugural
family welfare event in Arequipa aimed at
providing mineworkers’ families with support
and advice.
The sessions provided families with the
opportunity to share their experiences. Medically
trained staff gave presentations with advice on
dealing with the pressures of shift-working on
family life.
Given the nature of the work and the two-week
shift patterns which result in frequent periods of
absence from families, the Group recognises the
importance of ensuring the mental wellbeing of
its employees. For this reason, the Group’s
Health & Hygiene teams are also trained in
occupational psychology.
Our Health & Hygiene teams undertake their
work in line with the following guiding principles:
– Prevention comes first
– Maximising quality of life
– Adopting measures for the long-term benefit
of our people
– Proactively identifying and controlling hazards
at source
– Contributing to the continuous improvement
in the Group’s Health & Safety culture
Our achievements in 2017
The Health team, in collaboration with other
departments, including the Safety team,
continued to go beyond its traditional area of
prevention and sought to influence the way that
employees approach their tasks.
During the year:
– senior members of the team participated
in discussions with respect to new legal
requirements and provided training to
team members;
– a comprehensive programme aimed at
minimising, if not eradicating, exposure to
harmful levels of noise was implemented
during the year. This involved:
– the procurement of specialist monitoring
equipment to gauge the level of exposure;
– the medical examination of workers at all
operations; and
– the preparation of informational material
highlighting the risks and encouraging the
use of protective equipment which is
readily available.
Annual Report & Accounts 2017 Hochschild Mining plc 41
People indicators
Gender diversity statistics1
Number of employees
Male
Female
Number of senior managers2
Male
Female
Number of Board members
Male
Female
2017
2016
2015
2014
3,849
235
3,859
222
3,492
237
3,468
229
36
1
7
1
35
1
8
1
34
2
8
0
31
2
8
0
1 As at 31 December.
2 Defined as those who qualify under the UK statutory definition of ‘senior manager’ as at 31 December.
Activities in 2017
The people-focused initiatives during the year
included the following:
Developing our people
In light of the limited budgetary resources,
training and development programmes were
targeted on key technical areas. In Peru,
managers from across the mining units
participated in various technical and leadership
based courses.
Managing our talent
The People Review process was undertaken
which maps talent within the organisation and
identifies key positions and succession plans.
Creating a better place to work and
Enhancing the Working Environment
The Group continues to make use of an
Organisational Climate Survey which has been
widely acknowledged as a key tool to measure
levels of satisfaction amongst employees and to
identify opportunities for further development.
At the end of the year, the Company initiated the
2017 Climate Survey. Its results will be used to
improve conditions in our mining units and
administrative offices. Results will be reported on
in the 2018 Annual Report.
The Group continually reviews its offering of
non-financial benefits which currently comprise
flexible working hours for Head Office staff over
the summer period and the holding of regular
social events.
Our people
Hochschild Mining’s success
relies on its people.
2017 highlights
– Workforce trained: 81% (2016: 89%)
– Workforce from local communities: 21%
(2016: 20%)
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 our ongoing objective is therefore to attract
and retain high quality personnel. The Company’s
Human Resource team seeks to achieve this by
providing competitive remuneration, a positive
working environment through the promotion of
social and recreational activities, and ongoing
professional development.
Group values, labour relations
and human rights
Amongst the primary responsibilities of the
Human Resources team is the clear
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 undertakings to treat all employees fairly and
to respect 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 58% of our total workforce is
represented by a trade union or similar body. As
a signatory of the Global Compact of the United
Nations, Hochschild Mining respects the human
rights of all of the Company’s stakeholders
including those of our employees, our
contractors and suppliers, as well as the
members of our local communities.
The importance placed by the Company on
human rights is reflected in the Group’s training
programme which seeks to ensure that all
employees are aware of their rights and the
Company’s commitments.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 42
Sustainability continued
Working with our communities
2017 highlights
– Reviewed and updated strategies for
Community Relations and social support
– Using the Chalhuanca Project as a
blueprint, implemented smaller urban
digital centres
– Continued support of causes located close
to the Group’s Argentinian joint venture
Our view of working with
our communities
Through a long-standing collaboration, we have
tailored our approach so that we interact with
each community by respecting their customs
and social dynamics. By doing so, the Community
Relations team can focus on prioritising their
specific needs and hence the Group’s efforts and
its intervention strategies.
Our achievements in 2017
Further details of some of the high impact
initiatives pursued during the year are
provided below.
Education
Elementary education
Contributing to the education of community
members living close to our operations has been
an established part of our social support. Each
year we evaluate programmes and direct our
efforts to those where we maximise value for
students, teachers and parents.
In 2017, we decided to support extra-curricular
activities which combined the teaching of
academic subjects with play. This was
complemented by the delivery of lunch kits that
will not only improve the provision of school
lunches but will also facilitate concentration
during school hours and also teach children the
importance of a well-balanced, nutritious diet.
This year almost 300 students and over 60
teachers were supported across 11 schools.
Secondary education
Hochschild has continued to support programmes
that promote personal development and basic
economic/business awareness to equip those in
secondary education for their early adult years.
Argentina
The Group has also promoted, in conjunction
with its joint venture partner, a number of
initiatives at its San Jose operation in Argentina.
These have included:
– scholarship opportunities;
– the training of students from the town of
Perito Moreno, located close to the mine, in
the areas of drilling and explosives handling and
who were subsequently employed by the
Group; and
– supporting local cultural causes,
including funding a local museum and its
showcasing of the cave paintings from the
Cueva de los Manos.
For further information on the projects
supported by the Group, please visit:
http://www.hochschildmining.com/en/
sustainability/case_studies
Over the course of 2017, we have collaborated
with over 500 secondary students and almost
100 teachers across seven educational
establishments.
Digital centres
After the success of the Group’s flagship
Chalhuanca Project, Hochschild has worked with
TECSUP, IDAT and CISCO, to establish digital
centres to promote online literacy. A training
programme is being implemented in 2018 to
ensure that full advantage can be taken of the
equipment provided.
Health
Medico de Cabecera
(the Travelling Doctor programme)
This programme enables the Group to bring a
mobile health service to those living in the most
remote locations. Valued by the young and the
old, the Travelling Doctor programme brings
coverage that local state health services cannot
provide. In 2017 a total of 8,000 medical
attendances were facilitated.
Socio-economic development
Business networks
This successful programme has seen over 250
agricultural and livestock producers flourish in
their trade. Having been established in 2013,
with only 25 beneficiaries, there has been an
impressive level of take-up of the support
provided by the Group. The project was originally
set up with community members living close to
the Inmaculada mine and, today, they are
suppliers to the mine’s catering contractors.
Annual Report & Accounts 2017 Hochschild Mining plc 43
Managing our environmental impact
We are committed to becoming
a leader in sourcing minerals
with the least environmental
footprint possible.
2017 highlights
– Exceeding target for our in-house designed
corporate objective (see below)
– Continued focus on water management
and treatment across all operations
The Hochschild approach to
environmental management
Hochschild Mining is committed to being a
leading global mining company in environmental
performance, sourcing minerals with the least
environmental footprint possible.
Hochschild recognises that environmental and
social responsibility extends beyond the life of our
operations and as a result, mine closure plans are in
place to restore areas where mining activity has
ceased and the Company operates a policy of
progressively closing historic mine components.
During the year, a review of a number of these
plans was undertaken with the support of
internationally recognised consultants.
Greenhouse gas emissions data1
(tonnes of CO2e)
Emissions from combustion of fuel and operation of
facilities (tCO2e)
Emissions from purchased electricity (tCO2e)
Emissions intensity, per thousand ounces of total
silver equivalent produced (CO2e/k oz)3
Our achievements in 2017
– Year-on-year reductions in the number of
findings by the Peruvian environmental
regulator falling steadily from 50 in 2014
to 7 in 2017
– 2017 ECO score of 4.75, exceeding the most
stretching environmental performance target
set by the Board for 2017 of 3.5 (see box
below on what this score reflects)
– Launched integrated waste management
service in collaboration with a specialist
contractor which will incorporate the following:
» Integrated waste management plans across
all operations
» Waste minimisation
» On-site waste collection
» Disposal of hazardous waste and sale
of marketable waste
» Management of on-site waste facilities
– Overhaul of water treatment plants across all
Peruvian operations
Mission of the Environmental Team
In order to achieve the Company’s environmental
mission, the Environmental team is committed to:
– ensuring compliance with all legal and
environmental regulations in place;
– setting an annual environmental performance
goal for all Company employees;
– requiring an efficient use of resources, aiming
for savings by implementing the best industrial
and mining practices, modern technologies and
solid procedures for environmental
management and control;
– requiring all Company employees to adopt
an environmentally conscious culture;
– providing all Company employees with the
necessary resources and training to take
environmentally appropriate decisions;
– promoting innovative and forward thinking
in the development and execution of new
concepts and designs related to environmental
management; and
– requiring those that perform activities for
Hochschild Mining to abide by the Corporate
Environmental Policy.
2017 2
2016 2
2015
2014
47,305
94,249
45,909
88,646
46,790
78,163
73,244
69,933
4.036
4,140
5,531
5,533
1 Method used based on ISO 14064-1 Standard and GHG Protocol Corporate Accounting and Reporting Standard.
2 Includes data for the whole year for Ares, Arcata, Selene, Pallancata, Inmaculada, San Jose and office locations.
3 Total production includes 100% of all production, including that attributable to the joint venture partner at San Jose.
Environmental Corporate
Objective (‘ECO’ score)
The ECO score was developed
in order to align all employees
with one common environmental
mission, thereby making everyone
accountable for their actions.
The ECO score is used in the annual bonus
scorecard for all eligible employees and is
based on measurable and transparent
environmental metrics. The scorecard was
trialled in 2016 to create a baseline, and
therefore 2017 was the first year that a
target ECO score has been implemented.
The ECO score is calculated by monitoring
performance across all operations and reflects
each of the following:
– Zero tolerance to non-compliance with
discharge limits and environmental incidents,
such as spillages
– The number of observations received from
the environmental regulator in Peru
– Good environmental management measured
on the basis of:
» Water consumption per worker
» Amount of non-recyclable waste generated
per worker
» Proportion of recyclable/industrial waste
that is commercialised
» Corporate Performance Indicator
which tracks the number of compliance
inspections that are passed with over 95%
These KPIs are reported on a monthly basis by
each mining operation and communicated to all
Company employees. Through this monthly
publication, we try to foster healthy competition
amongst the mining units, an effort called Green
Challenge or ‘Reto Verde’ in Spanish.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 44
Risk management & viability
Managing risk on
behalf of the Board
The system of risk management is embedded in the
business to protect the Group’s resources and to
facilitate the achievement of our strategic objectives.
Identify
Measure
Manage
Monitor
Report
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 which could adversely affect the
performance of the Group. The Group’s risk
management framework is premised on the
continued monitoring of the prevailing
environment, the risks posed by it, and the
evaluation of potential actions to mitigate
those risks.
Change in risk profile vs 2016:
Unchanged
Higher
Lower
The Risk Committee is responsible for
implementing the Group’s policy on risk
management and monitoring the effectiveness
of controls in support of the Group’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 reviewed which maps the significant
risks faced by the business and updated at each
Risk Committee meeting, and the most
significant risks as well as potential actions to
mitigate those risks are reported to the Group’s
Audit Committee, which has oversight of risk
management on behalf of the Board.
2017 Risks
The key business risks affecting the Group set
out in this report remain largely unchanged
compared to those disclosed in the 2016 Risk
Management report with the exception that:
– in light of events during the year, the discussion
on Health & Safety risks also considers the
specific risks associated with the transporting
and handling of hazardous materials by both
employees and contractors; and
– management identified risks associated with
the failure of critical processes supported by
information systems during the course of the
year and has therefore been identified as a new
risk. The commentary also treats the subject
of cybersecurity risk.
Reasons for the year-on-year change in the
profile of a specific risk can be found in the
commentary section of the relevant risk which
also provides an outlook on the risk for the
current financial year.
Risk heat map
To assist the reader in assessing the relative
significance of each risk discussed in this section,
the heat map below indicates the Board’s
assessment of the likelihood of the unmitigated
risk occurring as well as the extent of the impact
on the Group.
Risks
1. Commodity price
2. Operational performance
3. Business interruption
4. Information security
and cybersecurity
5. Exploration and resources
replacement
6. Personnel: recruitment
and retention
7. Personnel: labour relations
8. Political, legal and regulatory
9. Health and safety
10. Environmental
11. Community relations
h
g
H
i
t
c
a
p
m
I
w
o
L
Low
1
9
5
10
3
2
8
11
7
6
4
Probability
High
Annual Report & Accounts 2017 Hochschild Mining plc 45
Financial risks
Risk
Impact
Mitigation
Commentary
1. Commodity
price
Adverse movements in
precious metal prices could
materially impact the Group
in various ways beyond a
reduction in the financial
results of operations. These
include impacts on the
feasibility of projects, the
economics of mineral
resources and heightened
personnel retention and
sustainability related risks.
– Constant focus on maintaining a
low all-in sustaining cost of
production and an efficient level
of administrative expense
– Flexible hedging policy that
allows the Company to contract
hedges to mitigate the effect of
price movements taking into
account the Group’s asset mix
and forecast production
– Policy to maintain low levels of
leverage to ensure flexibility
through price cycles
See the Market Review on pages 10
to 11 for further details
The focus on conserving capital and optimising cash flow continued in 2017
through:
– controlling operating and administrative costs;
– optimising sustaining capital expenditure;
– debt reduction and refinancing; and
– maintaining low working capital
In relation to debt reduction and the refinancing of debt, the Company
announced in 2017 the early redemption of its bonds, which was
subsequently completed in early 2018. By doing so, debt has been reduced
by approximately $95 million and the balance replaced with shorter-term
debt on significantly better terms, saving the Group approximately $7m in
interest expenses in 2018 and approximately $20m per year thereafter.
As reported earlier in this report, the Inmaculada mine had a record year in 2017
in terms of production but also as the lowest cost operation in the Group’s
portfolio. It has been key in reducing overall average production costs.
Even though currently no part of 2018 production has been hedged, the Group’s
flexible policy enables the Board to approve hedging contracts to protect cash
flow as and when appropriate
Operational risks
Risk
Impact
Mitigation
Commentary
2. Operational
performance
Failure to meet production
targets and manage the cost
base could adversely impact
the Group’s profitability.
In 2017 the Group exceeded its production target by 1m attributable silver
equivalent ounces with particularly strong performances at Inmaculada,
Pallancata and San Jose.
2017 budgets across the Group continued to focus on maintaining controlled
levels of administrative expenses and sustaining capital expenditure. As
reported in the Financial review, the all-in sustaining cost from operations was
kept within guidance issued at the beginning of the year at $12.3 per silver
equivalent ounce.
Management has been closely monitoring performance of the high cost Arcata
mine to ensure that production is optimised while at the same time maintaining
the asset´s optionality with regards to prices, exploration results and cost
efficiencies.
– Close monitoring of operational
performance, costs and capital
expenditure as well as the overall
profitability at all stages of the
mining value chain
– Management closely monitors
the wide range of risks that could
affect operational performance
to, among other things, ensure
the adequacy and safety of key
mining components such as
tailing dams, waste rock deposits,
pipelines to service ongoing
operations. Close liaison between
relevant departments ensures
that procurement, construction
and any permitting are
undertaken as appropriate
Risk
Impact
Mitigation
Commentary
3. Business
interruption
Assets used in the Group’s
operations may break down
and cause stoppages with
material effects (in
particular, at Inmaculada).
– Insurance coverage to protect
Mitigating actions during the year include the following:
against major risks
– Management reporting systems
to support appropriate levels of
inventory
– Annual inspections by insurance
brokers and insurers assist
management’s efforts to
understand and mitigate
operational risks
– Insurance advisers conducted site visits and completed a full review of
operational risks to ensure that adequate property damage and business
interruption risk management processes and insurance policies are in
place at our operations
– Management reporting systems ensured that an appropriate level of
inventory of critical parts is maintained
– Adequate preventative maintenance programmes, supported by the SAP
Maintenance Module, are in place at the operating units
Risk
Impact
Mitigation
Commentary
4. Information
security and
cybersecurity
Failure of any of the Group’s
business critical information
systems, whether as a result
of design/maintenance or
unauthorised access by third
parties, may affect the
Group’s ability to operate.
– Currently compliant with
ISO 27001, an internationally
recognised certification to
evaluate information security
management systems
– Dedicated team within the
IT department focused on
preventing cyber-attacks
– Audits performed by the internal
audit department and third
parties to test systems and issue
recommendations
During the year management identified vulnerabilities in certain automated
processes. This prompted a wide-ranging review of the procedures
deployed in the testing of system updates which also incorporated
mitigating steps to counter the risk from external unauthorised access.
This review included:
– the engagement of external and internal Auditors to identify
improvements to the Group’s procedures;
– additional manual controls introduced to supplement automated processes;
– in addition, the Audit Committee has set objectives for 2018 to:
– further explore information vulnerabilities, benchmarking of our
protection systems and recommend mitigation procedures; and
– improve the Group´s protocols in case of a crisis.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
46
Risk management & viability continued
Operational risks continued
Risk
Impact
Mitigation
Commentary
5. Exploration
and reserve
and resource
replacement
The Group’s future
operating margins and
profitability depend upon its
ability to find mineral
resources and to replenish
reserves.
– Implementing and maintaining an
annual exploration drilling plan
– Ongoing evaluation of
acquisition and joint venture
opportunities to acquire
additional ounces
– High-end technology
implemented to improve the
estimate of mineral resources
The progress of the 2017 brownfield exploration programme in Peru was
subjected to delays due to extended timelines in obtaining the requisite
governmental permits.
As a direct result, a Permitting Committee was established during the year
comprising personnel from the Legal, Environmental and Community
Relations teams as well as members of senior management to plan and
execute a co-ordinated effort to address the administrative delays.
All permits required for the 2018 brownfield exploration programme at our
operating units have been secured.
Following the drilling campaign in the vicinity of the Inmaculada mine,
significant potential was discovered at the Millet vein system. For further
details, refer to page 29.
Greenfield exploration and the appraisal of acquisition/joint venture
opportunities restarted in 2017 in light of the Group’s improved financial
position. These have resulted in:
– the Group securing geographically diverse greenfield optionality; and
– arrangements to partner with other mining companies to bolster
exploration efforts at projects considered to have geological potential.
The Group has engaged P&E Consultants to undertake the annual audit of
mineral reserve and resource estimates.
See page 153 for further details
Reserves stated in this
Annual Report are estimates.
– Engagement of independent
experts to undertake annual
audit of mineral reserve and
resource estimates
– Adherence to the JORC code
and guidelines therein
Risk
Impact
Mitigation
Commentary
6. Personnel:
recruitment
and retention
Inability to attract or retain
personnel through a
shortage of skilled personnel.
– The Group’s approach to
recruitment and retention
provides for the payment of
competitive compensation
packages, well defined career
plans and training and
development opportunities
Due to increased investment in the sector, turnover in 2017 was slightly
higher than in previous years but not to a material extent.
The Group has continued with its initiatives to improve the retention of
employees. These include the use of non-financial benefits (e.g. flexible
working arrangements for Head Office staff) and tailored personal
development plans. In addition, a programme of new initiatives in the
employee value proposition are also scheduled for implementation. These
include the launching of initiatives related to causes that are valued by
potential employees; providing them with the opportunity to contribute to
innovation, community relations and environmental performance.
Retention plans for senior executives in the form of the Company’s
Long-Term Incentive Plan and Restricted Share Plan are also in place.
Risk
Impact
Mitigation
Commentary
7. Personnel:
labour
relations
Failure to maintain good
labour relations with workers
and/or unions may result in
work slowdown, stoppage or
strike.
– Development of a tailored labour
relations strategy focusing on
profit sharing, working
conditions, management style,
development opportunities,
motivation and communication
– Monthly meetings with
mineworkers and unions to
ensure a complete
understanding of expectations
and to keep all parties updated
on the Group’s financial
performance
Given the level of investment at the Inmaculada mine, the Group´s Peruvian
operation does not generate taxable income and therefore there is no
entitlement to statutory profit sharing for Peruvian mineworkers. The
Company has, however, implemented an additional bonus to compensate for
this situation.
As part of the salary increases agreed with the Peruvian labour unions, a new
bonus framework was put in place to promote safety and productivity.
The uncertainty with regards to the ongoing viability of the Arcata mine has
adversely impacted morale among workers at the operation. During 2017,
regular meetings were therefore scheduled and held with union
representatives to understand concerns which continue into the current year.
Early in 2018, approximately 165 workers were made redundant from the
Arcata operation following consultation with workers and the labour union.
Annual Report & Accounts 2017 Hochschild Mining plc
47
Macro-economic risks
Risk
Impact
Mitigation
Commentary
8. Political,
legal and
regulatory
Changes in the legal, tax and
regulatory landscape could
result in significant additional
expense, restrictions on or
suspensions of operations
and may lead to delays in the
development of current
operations and projects.
– Local specialist personnel
continually monitor and react, as
necessary, to policy changes
– Active dialogue with
governmental authorities
– Participation in local industry
organisations
Despite a pro-business administration in Peru, significant delays were
encountered during 2017 in the securing of permits to facilitate exploration
activity. These were primarily the result of increased bureaucracy introduced
by the previous Administration. Simplification measures were adopted by
the Government towards the end of 2017 and the permitting process
timelines are expected to reduce over time.
At the legislative level, the Peruvian Congress, which comprises a majority
from the non-governing parties, continues to implement populist measures
that could adversely affect the mining industry. Such measures include new
laws on the protected nature of headwaters which may oblige mining
companies with operations in the Andes to relocate.
The Peruvian Government’s implementation of certain treaty obligations,
including the framework for the prior consultation law has been challenged
and which, may, lead to a review of the validity of mining concessions.
In terms of social conflicts, the governmental authorities remain sensitive
to conflicts between communities and mining companies and are reluctant
to intervene with decisiveness.
In Argentina, 2017 was marked by congressional elections where the ruling
party did not secure a majority. The Government has sought to promote
investment through, most notably, a phased reduction in the corporate
tax rate.
The ongoing inflationary environment which exceeds the rate of devaluation
of the Argentinian Peso relative to the US dollar has led to an increase in
costs for the Group as an exporter.
Sustainability risks
Risk
Impact
Mitigation
Commentary
9. Health and
safety
Group employees working in
the mines may be exposed
to health and severe safety
risks.
– Health & Safety operational
policies and procedures reflect
the Group’s zero tolerance
approach to accidents
Having recorded three consecutive years of compliance with our ongoing
Zero Fatalities objective, the Group sadly reported four fatalities during 2017,
which resulted from two separate accidents, one at Inmaculada and one
at Arcata.
Failure to manage these risks
may result in occupational
illness, accidents, a work
slowdown, stoppage or
strike and/or may damage
the reputation of the Group
and hence its ability to
operate.
– Use of world-class DNV safety
management systems as well as
Dupont´s consultancy services
– Dedicated personnel to ensure
the safety of employees at the
operations via stringent controls,
training and prevention
programmes
– Rolling programme of training,
communication campaigns and
other initiatives promoting safe
working practices
– Use of reporting and
management information
systems to monitor the
incidence of accidents and
enable preventative measures to
be implemented
An extensive programme, the HOC Culture Transformation Plan, is being
implemented by management in response to these accidents in order to
materially reinforce the Group’s commitment to safety.
The Plan comprises the following pillars:
– Leadership, with senior management involved in a full review of all high
risk activities
– Communications, focusing on initiatives to motivate and incentivise safe
working practices
– Training, with all personnel receiving five hours of on-site learning
every week
– Technical, with the migration to the latest version of risk information
management systems and a review of the Company’s procedures
For further details, please refer to the safety section of the Sustainability
Report on pages 38 and 39.
Following an audit on the transportation and handling of hazardous
materials, a plan of action to mitigate the risk of injury was put in place
which involved:
– a review of procedures on the routes to be used to transport such
substances;
– a review of contracts with transporters to ensure compliance with the
Group’s safety policy and to manage accident responses; and
– the installation of specialist brigades at the Peruvian operations to
attend to accidents involving hazardous substances.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
48
Risk management & viability continued
Sustainability risks continued
Risk
Impact
Mitigation
Commentary
– The Group has a dedicated team
responsible for environmental
management
– The Group has adopted a
number of policies and
procedures to limit and monitor
its environmental impact
The Group may be liable
for losses arising from
environmental hazards
associated with the Group’s
activities and production
methods, ageing
infrastructure, or may be
required to undertake
corrective actions or
extensive remedial
clean-up action or
pay for governmental
remedial clean-up actions
or be subject to fines and/
or penalties.
10. Environmental
(a) In relation to
those risks arising
from the Group’s
environmental
performance/
infrastructure:
(b) In relation to
those risks arising
from the increased
oversight of the
environmental
regulator:
Environmental permitting and agency oversight in Peru remained rigorous
during the year.
In 2017, the Group performed highly in its ECO score, which was developed
in-house and which focuses on:
– compliance with discharge limits;
– minimising the number of environmental incidents such as spills;
– minimising the number of findings from the regulator; and
– specific aspects of environmental management including water
consumption and waste generation.
For further details, please refer to the environmental section of the
Sustainability report on page 43.
In addition, during the year, the Group:
– launched an integrated waste management service in conjunction with
specialist contractors;
– focused on improving the water treatment plants at the Peruvian
operations;
– supported the business by securing the approval of permits such as with
regards to the Pablo vein at Pallancata, new components and plant
capacity increases across the Peruvian operations and for exploration
at Inmaculada
Risk
Impact
Mitigation
Commentary
11. Community
relations
– The Group has a dedicated team
responsible for Community
Relations
– Constructive engagement with
local communities
– Community Relations strategy
focuses on promoting education,
health and nutrition, and
sustainable development
– Allocation of budget and
personnel for the provision of
community support activities
– Policy to actively recruit workers
from local communities
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.
These actions may result
loss of productions,
increased costs and
decreased revenues, longer
lead times, additional costs
for exploration and have an
adverse impact on the
Group’s ability to obtain
the relevant permits.
As previously reported, protests by a community close to the Pallancata
mine resulted in a blockade from November 2016 until mid-January 2017.
The blockade did not impact the mine’s targeted production as the
operations were at the time in the permitting process and transitioning to
the new Pablo vein. Dialogue and new agreements between the Company
and community representatives resulted in the lifting of the blockade.
The Group continues to actively engage with other local communities
to understand their needs and to implement action plans in order to
anticipate and mitigate potential conflicts.
The risk of additional stoppages or blockades will continue to be present
if the working groups do not reach long-term agreements between the
parties involved.
Looking ahead to 2018:
– the overall political and social climate may be adversely impacted by the
regional elections in Peru in October; and
– at Arcata, the declining production profile of the asset has led to
redundancies and lower economic activity in the area, which may also
result in social unrest.
Further details on the Group’s activities to mitigate sustainability risks can be
found in the Sustainability report on pages 38 to 43.
Annual Report & Accounts 2017 Hochschild Mining plc
49
Conclusion
While it is always possible that combinations of
weak precious metal prices and adverse
operational risks could threaten the solvency and
liquidity of the Company over the next three
years, the Directors have a reasonable
expectation that the Company will be able to
continue in operation and meet its liabilities as
they fall due over three years being the period of
their assessment.
The Strategic report, as set out from the inside
front cover to page 49, has been reviewed and
approved by the Board of Directors and signed
on its behalf by:
Ignacio Bustamante
Chief Executive Officer
20 February 2018
Viability
In accordance with provision C.2.1 of the Code,
the Directors have assessed the viability of the
Group taking into account the Group’s current
position and the potential impact of the principal
risks which could threaten the business model,
future performance, solvency or liquidity of the
Group.
Period of Viability Statement
As per provision C2.2, the Directors have
reviewed the length of time to be covered by the
Viability Statement, particularly given its primary
purpose of providing investors with a view of
financial viability that goes beyond the period of
the Going Concern statement.
It has been concluded that three years is the
appropriate time horizon in light of:
i. the inherent uncertainty of longer-term
forecasting in a cyclical industry which, in the
case of precious metals, is largely driven by
global macro-economic factors; and
ii. the large number of external variables
that need to be taken into account in
establishing any meaningful forecast
of the Group’s business.
Approach to assessing viability
In assessing the Group’s viability, the Directors
have considered the principal risks to which the
Group is exposed as set out in the earlier part of
this report. This includes those where either the
likelihood of the risk has increased, or the impact
of the risk has become more severe. In particular,
the Directors have considered forecasts which
reflect the impact of:
– Depressed precious metal price scenarios. This
is a key input for stress-testing and involved the
preparation of forecasts using (i) below spot
$16/Au oz and $1,100/Ag oz; and (ii) spot
prices of $17/Au oz and $1,300/Ag oz.
Should prices fall further than the lowest of
these scenarios, the Board would oversee the
implementation of contingency actions, such
as the elimination of discretionary expenditure
e.g. exploration expenditure, the reduction if
not the elimination of dividend distributions
and other initiatives to reduce costs across the
business so as to maximise the production
of profitable ounces.
– Risks that severely threaten forecast
production levels. The principal risks that could
jeopardise production are those arising from
(a) geological risk that could result in the
variability of our reserves and production
volume and grades; (b) temporary stoppages
resulting from the occurrence of a
sustainability-risk i.e. those associated with
health & safety, environmental and community
relations; (c) industrial unrest that could also
temporarily affect an operation’s production
schedule; and (d) delays in obtaining
operational permits.
Management prepares operational and
financial forecasts based on a life-of-mine plan
assuming only reserves and resources which
have an adequate degree of certainty. For this
reason, forecasts do not reflect the potential
of incremental resources added as a result of
exploration activity which could be easily
converted to actual production given the
availability of spare capacity at its plants.
This state of preparedness, together with the
mitigating actions described above, have been
designed to control the impact of production
risks or facilitate the swift recovery from the
impact of those risks; and
– Plausible future contingencies for example,
governmental/regulatory action such as
environmental liabilities, controls against which
are described in the table above.
The viability statement analysis has also taken
into account other mitigating actions available to
the Group upon the occurrence of one or more
of the principal risks. Such actions include:
– hedging the price at which sales contracts
are settled;
– operational strategies to anticipate, minimise
and overcome production-related risks;
– the implementation of cost and capital
expenditure reduction programmes;
– working capital management; and
– active debt financing management.
For examples of the mitigating actions taken by
the Board during the year under review, please
refer to the commentary in the Risk Management
section of this report.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 50
Board of Directors
A strong and
experienced team
Eduardo Hochschild
Chairman
Ignacio Bustamante
Chief Executive Officer
Dr Graham Birch
Independent
Non-Executive Director
Jorge Born Jr.
Independent
Non-Executive Director
Experience
Eduardo Hochschild joined the
Hochschild Group in 1987 as Safety
Assistant at the Arcata unit, becoming
Head of the Hochschild Mining Group in
1998 and Chairman in 2006. Eduardo is
the Company’s majority shareholder
with a c.51% interest.
Other Directorships
Commercial: Cementos Pacasmayo
S.A.A. (Chairman), COMEX Peru, Banco
de Crédito del Perú.
Non-Profit: UTEC (Chairman), TECSUP,
Sociedad Nacional de Minería y Petróleo,
Conferencia Episcopal Peruana.
Experience
Ignacio joined the Board as CEO in April
2010 having previously served as Chief
Operating Officer and General Manager
of the Group’s Peruvian operations. He
served as Chief Financial Officer of
Cementos Pacasmayo S.A.A., an affiliate
of the Company, between 1998 and
2003, and as a Board member from
2003 to 2007.
Other Directorships
Commercial: Profuturo AFP,
Scotiabank Peru S.A.A.
Experience
Jorge joined the Board in 2006.
Previously, he served as a Director and
Deputy Chairman of Bunge Limited
having served as Head of European
operations from 1992 to 1997 and as
Head of its UK operations from 1989
to 1992.
Other Directorships
Commercial: Consult & Co. (President
and CEO), Caldenes S.A., Dufry AG
Zurich.
Non-Profit: Bunge and Born Charitable
Foundation (President).
Experience
Graham joined the Board in 2011. Up
until his retirement in 2009, he was a
Director of BlackRock Commodities
Investment Trust plc and manager of
BlackRock’s World Mining Trust and
Gold and General Unit Trust. He
previously worked at Kleinwort Benson
Securities and 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.
Other Directorships
Commercial: ETF Securities Limited.
Audit Committee
CSR Committee
Nominations Committee
Remuneration Committee
Chair
Annual Report & Accounts 2017 Hochschild Mining plc
51
Eileen Kamerick
Independent
Non-Executive Director
Michael Rawlinson
Senior Independent
Director
Dionisio Romero Paoletti
Non-Executive Director
Sanjay Sarma
Independent
Non-Executive Director
Raj Bhasin
Company Secretary
Experience
Raj joined Hochschild in
October 2007 as Company
Secretary and UK Counsel.
He is a solicitor and Chartered
Secretary with almost 20 years’
experience gained in FTSE-listed
companies. Raj previously served
as Deputy Company Secretary
and Commercial Counsel at
Burberry Group plc.
Experience
Michael joined the Board in
2016 and was appointed Senior
Independent Director on
1 January 2018. He was formerly
the Global Co-Head of Mining
and Metals at Barclays
investment bank (2013-2017)
and prior to that, he worked at
a number of banks as a
corporate financier and
research analyst. Most recently
he helped found the boutique
investment bank, Liberum
Capital, in 2007. Prior to that
Michael worked at Flemings
and Cazenove.
Other Directorships
None.
Experience
Eileen joined the Board on
1 November 2016 having
formerly served as CFO of
ConnectWise. Previously Eileen
served as CFO in various
industries including healthcare
consultancy Press Ganey
Associates, investment bank
Houlihan Lokey and BP Amoco
Americas. Eileen lectures on
corporate finance and
governance at several
US universities.
Other Directorships
Commercial: Associated
Banc-Corp. (Chair of the
Nominating and Governance
Committee and member of the
Compensation Committee),
Legg Mason Closed End Mutual
Funds (Chair of the Audit
Committee), AIG Funds and
Anchor Series Trust (Audit
Committee Financial Expert).
Non-Profit: Eckerd Connects.
Experience
Dionisio was appointed to the
Board on 1 January 2018 as a
nominee of the Company’s
majority shareholder. Dionisio
is Chairman and CEO of
Credicorp and its subsidiary,
Banco de Crédito del Peru
(‘BCP’), Peru’s largest bank.
Mr Romero has served as a
board member of BCP since
2003 and was appointed Vice
Chairman in 2008 and
Chairman in 2009.
Other Directorships
Commercial: Numerous
directorships held including
Credicorp Group companies
Banco de Crédito de Bolivia,
El Pacifico-Peruano Suiza Cia.
De Seguros y Reaseguros S.A.
and El Pacifico Vida Cia. De
Seguros y Reaseguros S.A.
Alicorp S.A.A, Inversiones
Centenario, Cementos
Pacasmayo S.A.A and
Sierra Metals Inc.
Non-Profit: Fundacion
Romero.
Experience
Sanjay joined the Board on 1
January 2017 and is Professor of
Mechanical Engineering at
Massachusetts Institute of
Technology (‘MIT’) and the Vice
President for Open Learning at
MIT. Sanjay was the founder and
Chief Technology Officer of
OATSystems (subsequently
acquired by Checkpoint
Systems) and has worked at
Schlumberger Oilfield Services
and at the Lawrence Berkeley
Laboratories. Sanjay also advises
several national governments
and global companies.
Other Directorships
Commercial: Top Flight
Technologies.
Non-Profit: G1S US and edX,
the entity set up by MIT and
Harvard to facilitate the
distribution of free online
education worldwide.
Tenure of Independent
Directors
Balance of independence
on the Board
0-3 years 3
3-6 years 1
6 years+ 1
Independent Directors 5
Non-independent Directors 3
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
52
Senior management
Isac Burstein
Vice President,
Exploration & Business
Development
Experience
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. Isac
assumed responsibility for the
Group’s exploration activities in
February 2014. Isac 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.
Ramón Barúa
Chief Financial Officer
Experience
Ramón Barúa was appointed
CFO of Hochschild Mining
on 1 June 2010. Prior to his
appointment, he served in
various positions with other
companies associated with the
Group, namely CEO of Fosfatos
del Pacifico S.A., General
Manager for Hochschild
Mining’s Mexican operations
and Deputy CEO and CFO of
Cementos Pacasmayo. Prior to
joining Hochschild, Ramon was
a Vice President of Debt Capital
Markets with Deutsche Bank
and a sales analyst with Banco
Santander. Ramón is an
economics graduate of
Universidad de Lima and holds
an MBA from Columbia
Business School. Ramon serves
as an Independent Director of
Goldspot Discoveries Inc, a
technology company that
supports mineral exploration
activity in which Hochschild
Mining is an investor.
Eduardo Landin
Chief Operating Officer
José Augusto Palma
Vice President, Legal &
Corporate Affairs
Eduardo Villar
Vice President,
Human Resources
Experience
José Augusto Palma joined
Hochschild in July 2006 after a
13-year legal career in the
United States, where he was a
partner at the law firm of
Swidler Berlin, and
subsequently at the World
Bank. He also served two years
in the Government of Peru.
José has law degrees from
Georgetown University and the
Universidad Iberoamericana in
Mexico and is admitted to
practise as a lawyer in Mexico,
New York and the District of
Columbia. Prior to his current
role, José served as VP Legal.
Experience
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. In addition,
Eduardo has postgraduate
qualifications in Business from
IESE Business School and
Harvard Business School and in
Human Resources from
London Business School and
the University of Michigan.
Experience
Eduardo Landin was appointed
COO of Hochschild Mining in
March 2013. Eduardo joined
Hochschild in January 2008
as General Manager of the
Company’s operations in
Argentina. In 2011 he became
General Manager of Projects
with direct responsibility over
the development of the
Inmaculada and Crespo
Advanced Projects. Before
joining Hochschild, Eduardo
held the position of Corporate
Development Manager at
Cementos Pacasmayo and,
prior to that, he worked in the
Peruvian Ministry of Energy and
Mines. Eduardo began his
career at Repsol S.A where he
worked for over 10 years in
England, Spain and Peru.
Eduardo is a Chartered
Mechanical Engineer and
holds a B.Eng (Honours) in
Mechanical Engineering from
Imperial College, London and
an Executive MBA from the
Universidad de Piura, Peru.
Annual Report & Accounts 2017 Hochschild Mining plc
53
As required by the Listing Rules, the Directors
confirm that, with respect to the year under
review:
i. the Company has complied with the
independence provisions included in the
Relationship Agreement; and
ii. so far as the Company is aware:
a. the independence provisions included
in the Relationship Agreement have
been complied with by the Controlling
Shareholders or any of their associates; and
b. the procurement obligation included in the
Relationship Agreement has been complied
with by the Controlling Shareholders.
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
necessary. 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.
Directors’ Report
The Directors present their report for the year
ended 31 December 2017.
Information in Directors’ Report
The Directors’ Report comprises the Corporate
Governance Report from pages 55 to 66, this
Report on pages 53 and 54, and the
Supplementary Information on pages 67 to 69.
Other information that is relevant to the
Directors’ Report, and which is incorporated by
reference comprises:
– Greenhouse gas emissions included in the
Sustainability Report on page 43; and
– Policy on Financial Risk Management in note 36
to the consolidated financial statements.
For the purposes of compliance with Disclosure
Guidance and Transparency Rules 4.1.5R(2) and
4.1.8R, the Strategic Report and this Directors’
Report (including the other sections of the
Annual Report incorporated by reference)
comprise the Management Report.
Dividend
The Directors declared an interim dividend of
1.38 US cents per ordinary share in the year ended
31 December 2017 and is recommending a final
dividend of 1.965 cents per ordinary share subject
to approval at the forthcoming Annual General
Meeting (‘AGM’), making a total dividend
of $17 million (2016 total dividend: $14 million).
Dividend waiver
The trustee of the Hochschild Mining Employee
Share Trust (‘the Employee Trust’) has waived,
on an ongoing basis, the right to dividend
payments on shares held by the Employee Trust.
Directors
The names, functions and biographical details of
the Directors serving at the date of this report
are given on pages 50 and 51. With the exception
of Dionisio Romero Paoletti, who was appointed
to the Board on 1 January 2018, all other
Directors were in office for the duration
of the year under review.
Roberto Dañino and Nigel Moore retired from
the Board at the conclusion of the 2017 AGM
and Enrico Bombieri retired from the Board on
31 December 2017.
Each of the Directors will be retiring and seeking
re-election by shareholders at the 2018 AGM in
line with the UK Corporate Governance Code.
Directors’ and officers’
liability insurance
The Company’s Articles of Association 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 his/
her duties as Director 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/her 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 judgment is given
against him/her.
The Company has purchased and maintains
liability insurance for its Directors and officers as
permitted by law.
Political and charitable donations
The Company does not make political donations.
During the year, the Group spent $5.623 million
on supporting social and community welfare
activities surrounding its mining units (2016:
$4.389 million).
Relationship agreement
Pelham Investment Corporation (the ‘Major
Shareholder’), Eduardo Hochschild (who,
together with the Major Shareholder are
collectively referred to as the ‘Controlling
Shareholders’) and the Company entered into
a relationship agreement (‘the Relationship
Agreement’) in preparation for the Company’s
IPO in 2006 and which was amended and
restated during 2014.
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.
Further details of the Relationship Agreement
with regard to the conduct of the Major
Shareholder are set out in the Corporate
Governance Report on page 56 and, with regard
to the right to appoint Directors to the Board,
are set out on page 69.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 54
Directors’ Report continued
Statement of Directors’
responsibilities
The Directors confirm that to the best
of their knowledge:
– the financial statements, prepared in accordance
with the applicable set of accounting standards,
give a true and fair view of the assets, liabilities,
financial position and profit of the Company and
the undertakings included in the consolidation
taken as a whole; and
– the Management Report includes a fair review
of the development and performance of the
business and the position of the Company and
the undertakings included in the consolidation
taken as a whole, together with a description
of the principal risks and uncertainties that
they face.
Disclaimer
Neither the Company nor the Directors
accept any liability to any person in relation
to this Annual Report except to the extent
that such liability could arise under English law.
Accordingly, any liability to a person who has
demonstrated reliance on any untrue or
misleading statement or omission shall be
determined in accordance with Section 90A
of the Financial Services and Markets Act 2000.
On behalf of the Board
Raj Bhasin
Company Secretary
20 February 2018
Going concern
The Group’s business activities, together with
the factors likely to affect its future development,
performance and position are set out in the
Strategic Report from the Inside Front Cover
to page 49. The financial position of the Group,
its cash flows, liquidity position and borrowings
are described in the Financial Review on pages
30 to 35. In addition, note 36 to the financial
statements includes the Group’s objectives,
policies and processes for managing its capital;
its financial risk management objectives; details
of its financial instruments; and its exposure to
credit risk and liquidity risk.
As described in the Market Review on pages 10
and 11, 2017 saw an increase in the price of gold
of c.13% and silver relatively underperformed,
ending 2017 just under 5% higher.
The Group has achieved record levels of
attributable production of 38 million silver
equivalent ounces (513.6k gold equivalent
ounces) with strong contributions from
Inmaculada and the Group’s joint venture,
San Jose. With the increase in production and
the positive gold and silver price performance,
the Group generated robust cash flow during the
year despite a fall in profitability due to the
expected rise in overall costs.
As part of its risk management responsibilities,
the Board continually reviews its capital
structure, initiatives to reduce operating costs
and, furthermore, contingency measures that
can be implemented in the event that precious
metal prices conditions deteriorate.
In conclusion, having considered financial
forecasts and projections which take into
account (i) possible changes in commodity price
scenarios; and (ii) the contingency measures that
could be taken to alleviate pressure on the balance
sheet in the event of a fall in prices, the Directors
have a reasonable expectation that the Group and
the Company have adequate resources, including
access to contingent resources, that would see it
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 12th AGM of the Company will be held
at 3 pm on 25 May 2018 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 of the
business to be considered at the meeting.
Auditor
A resolution to reappoint Ernst & Young LLP
as Auditor will be put to shareholders at the
forthcoming AGM.
Statement on disclosure
of information to Auditor
Having made enquiries of fellow Directors and of
the Company’s Auditor, each Director confirms
that, to the best of his/her knowledge and belief,
there is no relevant audit information of which the
Company’s Auditor is unaware. Furthermore,
each Director has taken all the steps that he/she
ought to have taken as a Director in order to
make himself/herself aware of any relevant audit
information and to establish that the Company’s
Auditor is 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 with respect
to the Annual Report and financial
statements
As required by the UK Corporate Governance
Code, the Directors confirm that they consider
that the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the
information necessary for shareholders to assess
the Company’s performance, business model
and strategy.
Annual Report & Accounts 2017 Hochschild Mining plc Corporate Governance Report
Your Board is committed to ensuring
good governance to not only protect
shareholder value but to enhance it.”
Board evaluation
In 2017, we continued with our internally-led
Board evaluation process which last year was
managed by Michael Rawlinson, as our Senior
Independent Director-Designate. The process,
which is described in more detail in this
report, reviewed many aspects of the
functioning of the Board, the Committees and
the roles played by the Directors. In addition,
the opportunity was taken to identify topics
of interest for incorporation of presentations
by speakers into the annual board calendar.
Equipping the Board with the necessary skills
and knowledge of the sector and the global
environment in which we operate is key, and
I look forward on reporting on these aspects
in next year’s report.
If you should have any queries arising from
this report, please do not hesitate to contact
me at Chairman@hocplc.com.
Eduardo Hochschild
Chairman
Dear Shareholder
I am delighted to present the Corporate
Governance Report for 2017.
In this section of the Annual Report, we
report on the Company’s compliance with
the provisions of the 2016 edition of the UK
Corporate Governance Code and the
application of its principles. Your Board is
committed to ensuring good governance to
not only protect shareholder value but to
further enhance it by the implementation of a
robust framework of controls and practices.
I would like to highlight the following activities
in this crucial area undertaken by the
Directors during the year.
Succession planning
As highlighted in last year’s report, a number
of changes at Board level were anticipated
and so I am delighted that despite having lost
the long-standing support of three
Non-Executive Directors, we were well placed
to ensure continuity at Board level. In
addition, we were delighted to announce the
appointment of Dionisio Romero Paoletti as a
Non-Executive Director. Dionisio joined the
Board on 1 January 2018 and brings a vast
wealth of business experience in Latin
America, as the Chairman and CEO of the
Credicorp financial group.
Succession planning was not only limited to
the Board. During the year, the Nominations
Committee considered the status of the
succession plans for the Group’s senior
executives. This process involved a review
of the key positions below Board level and
identifying the rising talent across all
functions. The Committee considered
specific development plans which, supported
by the allocation of the necessary resources,
will further strengthen the Group’s ability
to accomplish our operational and
strategic objectives.
55
Introduction
This report, together with the Directors’
Remuneration Report, describes how the
Company has applied the Main Principles of the
UK Corporate Governance Code (‘the Code’)
(2016 edition) in respect of the year ended
31 December 2017. A copy of the Code is
available on the website of the Financial
Reporting Council (‘FRC’) 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 Guidance and Transparency Rules are
provided in the Supplementary Information
section on pages 67 to 69.
Statement of compliance
The Board confirms that, in respect of the year
under review, the Group has complied with the
provisions contained in the Code with the
following exceptions:
i. the Company did not fully comply with the
requirement that performance-related
incentive schemes should include
arrangements to recover or withhold variable
pay when appropriate to do so (i.e. clawback
or malus); and
ii. an externally facilitated evaluation of the
Board has not been undertaken.
In relation to (i) above, as stated in last year’s
Directors’ Remuneration Report, the Company
reviewed the use of clawback which, following
legal advice, was concluded to be unenforceable
in the countries in which the Company primarily
operates. As reported in this year’s Directors’
Remuneration Report, the Remuneration
Committee reviewed the malus policy during
2017 and agreed to widen its remit beyond
adverse events in relation to safety, environment,
community and legal compliance so as to also
include trigger events including material
misstatement, material failure of risk
management, action or omission resulting in
serious reputational damage. The revised malus
provisions will apply to all incentives, including
the annual bonus, effective from 2018.
In relation to (ii) above, please refer to the
Board Evaluation section below for further
details on the internally-led approach to the
Board’s performance evaluation.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 56
Corporate Governance Report continued
A crucial part of the role of the Senior
Independent Director is to meet with major
shareholders if concerns have not been
addressed by the executive team. No such
meetings were held during the year.
Non-Executive Directors
The Company’s Non-Executive Directors hold, or
have held, senior positions in the corporate
sector with the exception of Sanjay Sarma who
has a background in academia in the field of
mechanical engineering and technology. They all
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 of the tenure of appointment of
Non-Executive Directors are provided in the
Directors’ Remuneration Report.
Independence of Non-Executive Directors
The Board considers that all of the Non-
Executive Directors serving during the year were
independent of the Company with the exception
of Roberto Dañino given his previous role as an
Executive Director of the Company and that, up
until his retirement from the Board in May 2017,
he was also engaged as a Special Adviser to the
Chairman and senior management team.
In reaching its conclusion on the independence
of the Non-Executive Directors serving at the
end of the year, the Board considered:
i. Jorge Born’s tenure on the Board of over
nine years; and
ii. Sanjay Sarma’s position as a director of Top
Flight Technologies, a company in which
Eduardo Hochschild has a 1.25% shareholding
and a convertible note investment.
Notwithstanding the above, the Board
collectively feels that the above circumstances
are not considered to be of a nature to materially
interfere with the exercise of the respective
Director’s independent judgement.
The Board
The Board is responsible for approving the
Company’s strategy and monitoring its
implementation, for overseeing the management
of operations 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
At all times during the year, the Board comprised
a majority of Independent Non-Executive
Directors. At the end of the year, the Board
comprised the Chairman, the Chief Executive
Officer and six Non-Executive Directors, all of
whom were considered, by the Board, to be of
independent judgement and character.
Chairman and Chief Executive
The Board is led by the Chairman, Eduardo
Hochschild, who is also the majority shareholder
of the Company with a c.51% holding.
The Board has approved a document which sets
out the division of responsibilities between the
Chairman and Chief Executive Officer.
As Chairman, Eduardo Hochschild is responsible
for leading the Board of Directors and ensuring
that the Board is enabled to play a full and
constructive part in the development and
determination of the Group’s strategy and overall
commercial objectives.
Ignacio Bustamante, as the Chief Executive
Officer, is responsible for the formulation of the
vision and long-term corporate strategy of the
Group, the approval of which is a matter for the
full Board.
The Chief Executive Officer is responsible for
leading an executive team in the day-to-day
management of the Group’s business.
Status of the Chairman
In light of his majority shareholding, the
Chairman is not considered to be independent.
However, during the one-to-one interviews
conducted with each Board member, the
Directors continue to assert that no undue
influence is exercised.
The reasons for this are twofold. Firstly, the
composition of the Board ensures that the
significant presence of Independent Directors
ensures that the views of minority shareholders
are well represented. Secondly, the undertakings
provided in the Relationship Agreement (as
described below) ensure that the Company and
its subsidiaries are capable of carrying on their
business independently of Eduardo Hochschild
and his associates.
The Relationship Agreement was reviewed by the
Board in 2014 following the implementation of
new Listing Rules applicable to listed companies
with controlling shareholders (the ‘New Listing
Rules’). As a result, an amended and restated
Relationship Agreement was approved and
adopted which, in addition to being the subject
of a general update, incorporated revised
independence provisions reflecting the language
of the New Listing Rules.
Under the terms of the agreement, each of
Eduardo Hochschild and Pelham Investment
Corporation (being the entity through which
Mr Hochschild holds his shares in the Company)
(the ‘Major Shareholder’) undertakes that:
i. all transactions with the Company (and its
subsidiaries) will be conducted at arm’s
length and on normal commercial terms;
ii. neither of them (nor their associates)
(the ‘Relevant Parties’) will take any action
that would have the effect of preventing the
Company from complying with its obligations
under the Listing Rules;
iii. the Relevant Parties will not propose, and
neither will they procure the proposal of, a
shareholder resolution intended or which
appears to be intended to circumvent the
proper application of the Listing Rules; and
iv. the Relevant Parties will not take any action
that would preclude or inhibit any member of
the Group from carrying on its business
independently of any of them.
Certain confirmations are required to be given by
the Board under the New Listing Rules with
regards to the Company’s compliance with the
independent provisions which can be found in
the Directors’ Report on page 53.
Senior Independent Director
Enrico Bombieri was the Senior Independent
Director during the year under review until his
retirement from the Board at the end of the year
when he was succeeded by Michael Rawlinson.
During that time Mr Bombieri acted as a central
point of contact for the Non-Executive Directors
collectively but he also served as a conduit
between the Non-Executive Directors and the
executive management team.
Annual Report & Accounts 2017 Hochschild Mining plc 57
Board meetings held in 2017
During the year, four scheduled Board meetings
were held which were attended by all Directors.
Directors usually receive a full pack of papers for
consideration at least five working days in
advance of each scheduled Board meeting. In the
event a Director is unable to attend a Board or
Committee meeting, comments are encouraged
to be fed back to the Chairman of the relevant
meeting who ensures that the absent Director’s
views are represented.
Senior executives of the organisation are invited
to attend Board meetings and to make
presentations on their areas of responsibility.
In addition to the regular updates from across
the business, the principal matters considered by
the Board during 2017 were:
Safety
– reports on the two accidents that occurred
during the year resulting in four fatalities and
the management actions to be taken in light of
the findings of the internal investigations; and
– the implementation of a Safety Culture
Transformation plan to embed a safety-
conscious culture across the organisation.
Financial
– stress-tested financial projections in support of
the going concern and viability statements;
– considered recommendations of the Audit
Committee to adopt the 2016 Annual Report
and Accounts and the 2017 Half-Yearly Report
including the recommended 2016 final
dividend and the 2017 interim dividend;
– the Group’s ongoing financial position and
alternative re-financing options to fund the
early redemption of the Group’s high-yield
bonds; and
– the 2018 budget.
Strategy
– the Group’s strategic plan; and
– the long-term trends impacting the markets for
metals and minerals to identify potential areas
of growth for the future.
Business performance
– detailed updates on the operations with regular
updates on the operational viability of the
Arcata mine;
– consideration of business development
projects;
– consideration of unbudgeted strategic
initiatives;
– presentations from the Group’s senior field
geologist on performance against the Group’s
brownfield objectives;
– review of the Group’s methodology of
measuring Reserves & Resources; and
– opportunities to partner with other mining/
exploration companies to earn-in an interest in
prospective locations.
Risk
– the significant risks faced by the Group and the
corresponding mitigation plans; and
– the robustness of the Group’s IT systems and
vulnerability to access by unauthorised third
parties or cyber-attacks.
Governance
– regular updates from the Company Secretary
on relevant developments in corporate
governance including the regulatory framework
governing listed companies;
– an update on the implementation of the 2016
Board evaluation recommendations, the
outcome of the 2017 Board evaluation and the
form of the 2018 process;
– the annual reviews of Directors’ conflicts of
interest and independence of Non-Executive
Directors;
– changes to the composition of the Board
committees in light of retirements from the
Board;
– the appointment of Dionisio Romero Paoletti
as a Non-Executive Director; and
– the fees for the Non-Executive Directors.
Sustainability
– reviews of the social and political climate in
Peru and Argentina and their potential impact
on the Group;
– review of the community-led blockade which
temporarily prevented access to the Pallancata
mine; and
– performance of the Group against the
internally-designed environmental corporate
scorecard.
Personnel
– the implementation of a talent development
programme for c.80 employees; and
– the status of negotiations with the
labour unions.
In between Board meetings, Directors are kept
informed of latest developments through
monthly management reports on the Company’s
operations, exploration activity and financial
situation.
Appointments and re-election
of Directors
Board nominations are recommended to the
Board by the Nominations Committee. There
were no new appointments during the year.
The Company has adopted the practice of
requiring Directors to seek annual re-election by
shareholders in keeping with the UK Corporate
Governance Code. The biographies of the
Directors can be found on pages 50 and 51.
Under the terms of the Relationship Agreement,
the Major Shareholder has (i) 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 (ii) 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% of the issued share
capital or voting rights of the Company.
The Major Shareholder exercised this right for
the first time through the appointment of
Dionisio Romero Paoletti who joined the Board
on 1 January 2018.
Board development
It is the responsibility of the Chairman to ensure
that the Directors update their knowledge and
their skills and are provided with the necessary
resources to continue to do so. This is achieved
through the various means described as follows.
Induction
New Board appointees are offered the
opportunity to meet with key management
personnel and the Company’s principal
advisers as well as undertaking visits to the
Group’s operations.
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 area of corporate
governance. In addition, the Directors have
ongoing access to the Company’s officers
and advisers.
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
continuous improvement which is achieved
in particular by the internally led Board
evaluation process.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information External Board evaluation
Since the process was introduced, the Directors
unanimously consider that the internally-led
evaluation has resulted in a number of
recommendations that have improved the way
the Board and the Committees function. For this
reason, an externally led evaluation was not
undertaken during the year. The Board
acknowledges the benefits of an external
appraisal of the overall governance structure and
processes and, while it is minded to continue
using an internal evaluation, the format of the
2018 evaluation will be kept under review.
The Board’s Committees
The Board has delegated authority to the Audit
Committee, CSR Committee, Nominations
Committee and Remuneration Committee.
Reports from each of these committees on their
activities during the year appear on the following
pages. Further information on the activities of
the CSR Committee and Remuneration
Committee can be found in the Sustainability
Report and Directors’ Remuneration Report
respectively.
58
Corporate Governance Report continued
2017 Board evaluation
In keeping with past practice, the 2017
Board evaluation process was undertaken
internally through one-to-one interviews
conducted by the Senior Independent
Director-designate assisted by the
Company Secretary.
The interviews were structured to seek
Directors’ views on a number of subject
areas including those outlined below.
The Committees
– Composition and overall workings of the
main Board Committees, including
specific aspects of the performance of
the Audit Committee, as well as of the
Brownfield Working Group established
to review the Group’s progress in this
vital source of potential growth
– Specific aspects of each Committee’s
role and scope of responsibilities
The Board
– The composition of the Board, focusing
on the skills mix after the retirements
from the Board
– The workings of the Board
– Strategic planning, governance
and evaluation
Risk and culture
– A review of the process of managing risk
– Seeking views on the Group’s corporate
culture and the behaviours that it
promotes
In addition to the above, Directors were
requested to provide feedback on the
performance of the Chairman and fellow
Board members.
Implementation of 2016 Board evaluation
A number of actions were taken during the year
following the 2016 Board evaluation process.
These included:
– more detailed reporting to the Board on the
work of the Remuneration Committee;
– a presentation from management looking back
critically at the steps taken in response to the
significant falls in precious metal prices in 2013
as a means of ensuring preparedness for future
such volatile market conditions; and
– suggestions on the content of the monthly
Board reports to convey, among other things,
investor sentiment to the industry in general.
2017 Board evaluation
Evaluation of the Board and Committees
The findings relating to the evaluation of the
Board and the Committees were considered
collectively by the Chairman and Michael
Rawlinson as the Senior Independent Director-
Designate and the resulting recommendations
were discussed and, where appropriate,
approved by the Board.
Evaluation of the Chairman
The findings of the Chairman’s performance
evaluation were collated by Michael Rawlinson
and discussed between the Non-Executive
Directors before being relayed to the Chairman.
Outcome
The principal recommendations arising from the
2017 Board evaluation process can be
summarised as follows:
– closer supervision of the management of
CSR-related risks by the CSR Committee;
– further process enhancements to assist the
flow of information between the Remuneration
Committee and the full Board;
– scheduling of additional meetings of the
Directors outside of formal Board meetings, to
promote closer co-operation particularly in
light of recent Board changes;
– the reinstatement of a physical Board meeting
in August rather than via video conference; and
– incorporation of progress updates against
brownfield objectives in the monthly
Board reports.
Annual Report & Accounts 2017 Hochschild Mining plc 59
Key roles and responsibilities
– To monitor the integrity of the Company’s
financial statements
– To monitor the effectiveness of the Company’s
internal controls and risk management systems
– 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
– Oversight of the Internal Audit function and
review of its annual work plan
– To oversee the relationship with the Company’s
external Auditor
– To review the effectiveness of the external
audit process
– To report to shareholders annually on the
Committee’s activities including details of the
significant audit issues encountered during the
year and how they have been addressed
Membership
The Audit Committee was chaired by Nigel
Moore until his retirement from the Board on
11 May 2017. Nigel had extensive and substantial
financial experience gained in his previous role as
a partner with Ernst & Young between 1973 and
2003 where he was responsible for services to a
number of significant companies, including audit
responsibilities. In addition, Nigel had acted as
Audit Committee Chairman for a number of
other listed companies.
Eileen Kamerick succeeded to the chair of the
Audit Committee on 11 May 2017. Eileen was
formerly a Chief Financial Officer of a number of
US-based companies and currently serves as the
Audit Committee Financial Expert for the AIG
Funds and Anchor Series Trust (US mutual
funds) and Audit Committee Chair of the Legg
Mason Closed End Mutual Funds.
Michael Rawlinson’s career in banking specialised
in the mining sector having initially worked as an
analyst and corporate financier, serving most
recently as Global Co-Head of Mining and Metals
at Barclays Investment Bank from 2013 until his
retirement from that role in June 2017.
Graham Birch was appointed to the Committee
on 11 May 2017 and is a former director of
BlackRock Commodities Investment Trust plc
and manager of BlackRock’s World Mining Trust
and Gold and General Unit Trust.
The Committee members who served
during the year under review are considered
to be Independent Directors and the
Committee is satisfied that it has, as a whole,
competence relevant to the sector in which
the Company operates.
For further details on the skills and experience of
the Committee members, please refer to the
biographical details on pages 50 and 51.
Audit Committee Report
The Audit Committee undertakes
a crucial role in overseeing financial
reporting and the framework of
internal controls and risk management.”
Dear Shareholder
Having assumed the Chair of the
Committee in May, I am pleased to
introduce my first report of the Audit
Committee in respect of its activities
during 2017.
The Audit Committee undertakes a
crucial role in overseeing, on behalf of the
Board, the quality of the Group’s financial
reporting as well as the robustness of the
framework of internal controls and risk
management. This purpose is fulfilled
through frequent and periodic reporting
from management and auditors (internal
and external), the review of judgements
on subjectivities as well as ensuring the
implementation of the necessary policies
and procedures. The report that follows
describes the various means by which
these responsibilities were fulfilled in
2017. In addition, the following aspects
were also considered.
Review of Assurance Map
The Committee reviewed the Group’s
Assurance Map which identifies and
grades each source of assurance provided
to the Committee with respect to its key
functions. This exercise not only facilitates
a gap analysis but it also tests the
robustness of each source in terms of the
provision of complete, accurate and,
where necessary, corroborated data.
Whistleblowing
The UK Corporate Governance Code requires
the Committee to ensure that the Group has
provided employees with a facility to report
impropriety in confidence. As described later,
the Committee is satisfied that such provision
is made though, in the early part of 2017, we
commissioned a survey to gauge the
awareness of employees as to its availability
and purpose. While the results were
encouraging, the survey revealed a need to
raise awareness on how reports could be
submitted and to provide reassurance to
employees that adequate follow-up action
would be taken. Please refer to the
description of the ‘Activity During the Year’
section of the report below for details on the
resulting action plan that was implemented.
Tax Compliance Strategy
In line with a new requirement, the Audit
Committee considered a policy document
describing the Group’s approach to the
management of its UK tax affairs. With
Hochschild’s mining operations all located
outside of the UK, our UK tax footprint is
understandably small. However, our
commitment in respect of all tax matters is
firm; to deal transparently with all relevant
authorities and in a responsible manner in
relation to tax planning. A copy of the full
document can be obtained from the
Responsibility section of our website.
Eileen Kamerick
Committee Chair
Members*
Nigel Moore
(Non-Executive Director and Committee Chairman until 11 May 2017)
Eileen Kamerick
(Non-Executive Director and, from 11 May 2017, Committee Chair)
Michael Rawlinson (Non-Executive Director)
Graham Birch (Non-Executive Director)
* during the year ended 31 December 2017.
There were four meetings of the Audit Committee during the year.
Maximum
possible
attendance
Actual
attendance
2
4
4
2
2
4
4
2
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 60
Corporate Governance Report continued
The performance of the Committee was
considered as part of the annual Board evaluation
process which was considered by the whole Board.
Attendees
The lead partner of the external Auditor, 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
The following matters featured amongst those
considered by the Committee during the year:
– Financial reporting – The 2016 Annual
Report and Accounts and the 2017 Half-Yearly
Report were reviewed by the Committee
before recommending that they be adopted by
the Board. In its review of these financial
reports, the Audit Committee reviewed
accounting policies, estimates and judgements
applied in preparing the relevant statements
and the transparency and clarity of disclosures
contained within them.
– Review of audit plans – In line with its usual
practice, the Committee considered reports
from the external Auditor on the scope and
structure of the review of the half-yearly results
and audit of the annual results.
– Risk management – Consideration and
challenge 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 45 to 48
for a description of the principal risks and
uncertainties faced by the Group during
the year.
– Internal audit – The Audit Committee
continued to oversee and challenge the
Group’s adoption of a risk-based approach to
internal audit. The Audit Committee Chairman
receives a quarterly report from the Head of
Internal Audit which sets out specific areas
covered, improvements being recommended
and introduced, and proposals for the
programme over the following three months.
The CEO and CFO also receive copies of this
report and robustly support the activities of
the Internal Audit function.
– 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.
– Whistleblowing – The Audit Committee
reviewed the adequacy of the Group’s
Whistleblowing Policy taking into account the
reports received through the various online
and offline channels established by the Group.
(See box below for more information)
– Fraud and bribery – The Audit Committee
continued to review and challenge the actions
taken by management to promote ethical and
transparent working practices.
The Group has adopted a Code of Conduct
which describes the values and standards of
behaviour expected of our employees and our
business partners. In addition, the Group has
adopted a specific anti-bribery and anti-
corruption policy to reflect the Board’s zero
tolerance of these types of act. This policy is
circulated to all employees by the CEO on a
periodic basis, highlighting the reputational
damage and criminal proceedings that could
result. The 2017 communications campaign
followed certain high-profile cases of alleged
corruption in Peru so as to maximise impact.
– External audit –The Audit Committee oversees
the relationship with the external Auditor who
was reappointed following a tender process
undertaken in Q1 2016. As part of this
responsibility, the Audit Committee reviewed
the findings of the external Auditor and
management letters, and reviewed and agreed
audit fees. The Audit Committee evaluates the
Auditor’s performance each year taking into
account written feedback prepared by the CFO,
the Group Financial Controller and relevant
finance managers from the operations. The
issues raised are considered in detail at the Audit
Committee meeting held mid-year resulting in an
action plan, the execution of which is assessed in
the following year’s auditor evaluation.
– Auditor objectivity – The Audit Committee
has adopted a Policy on the Use of External
Auditors for the Provision of Non-Audit
Services (see later section for more details).
– Governance and evaluation – The Audit
Committee received updates from the Auditor
and the Company Secretary on regulatory and
other developments impacting the Committee’s
role. In relation to the evaluation of the
Committee’s performance, this was carried out
as part of the annual Board evaluation. Specific
questions were put to each Board member on
various aspects of the performance of the Audit
Committee including its responsibilities in
relation to risk management and internal
control. General feedback on the Committee’s
performance was also sought and fed back to
the Committee Chair.
– Committee objectives – The Audit
Committee has continued its initiative of
setting specific objectives for itself and
management with a view to ensuring the
diligent fulfilment of its responsibilities.
The objectives for 2017 resulted in:
– supervision of the process of preparation of
the 2016 financial statements in preparation
for the expedited reporting timetable for the
2017 financial statements;
– a focused and tailored induction programme
for Eileen Kamerick in preparation for
the succession to the Chair of the Audit
Committee. This resulted in a number of
briefings with the external Auditors and
relevant internal personnel such as the
CFO, the Head of Internal Audit and the
Company Secretary;
– an internal communication campaign
highlighting the Group’s anti-bribery and
anti-corruption policies.
– Tax Compliance Strategy – As set out in the
introductory letter, the Audit Committee,
approved on behalf of the Board, a document
on the Group’s approach to UK tax matters.
The document can be located at:
http://www.hochschildmining.com/en/
responsibility/tax_compliance_strategy
During the year, the Committee members held
meetings with the external Auditor without
executive management to discuss matters
relating to the 2016 annual audit and the 2017
Half-Yearly Report. There were no matters of
significance to report from these meetings.
2017 Whistleblowing campaign
As mentioned in the Committee Chair’s
introductory letter, a survey was
commissioned during 2017 to gauge the
general employee awareness of the facility
which identified a need to highlight how
reports could be submitted and how reports
were handled. An internal publicity campaign
was rolled out in H1 2017 highlighting these
particular aspects and, in addition, a shortcut
to the online whistleblowing tool was installed
on the desktop of every company computer
to promote ease of access. A survey has been
scheduled in the current year to verify the
success of the 2017 campaign.
Annual Report & Accounts 2017 Hochschild Mining plc 61
Significant audit issues
As recommended by the Code, the following is
a summary of the significant issues considered
by the Committee in relation to the 2017
financial statements and how these issues
have been addressed.
Impairments
The Audit Committee assessed management’s
analysis which concluded that indicators of
impairment (or impairment reversals) in H2
2017 were present with regards to Arcata,
Pallancata and San Felipe and hence, were the
subject of a full impairment assessment.
The Audit Committee considered
i. with regards to Arcata,
a. management’s evaluation of the reserves
and resources volumes at Arcata noting
that exploration and mining activities did
not result in inferred resources being
converted into reserves. Furthermore, the
Committee considered that production
and costs at Arcata were negatively
affected by lower grades and tonnage;
b. certain key assumptions and the
associated sensitivity analysis used in the
recoverable value model of Arcata;
namely price forecasts, discount rates,
production volumes, costs and other
operating inputs; and
c. the basis of calculation of the recoverable
value of Arcata.
ii. with regards to San Felipe, the recoverability
assessment performed by management,
iii. with regards to Pallancata,
a. the conversion of inferred resources into
Reserves from the Pablo vein;
b. the better than expected grades and
tonnage from operations; and
c. the better than expected costs
and production.
In conclusion, the Audit Committee concurred
with management on the following for the full
year ending 31 December 2017:
– an impairment of $43 million with regards to
Arcata; and
– the impairment reversals with respect to
Pallancata of $31.9 million and with respect to
San Felipe of $8.4 million.
Going Concern Assessment
The Board and the Committee (under its
delegated authority) regularly considered
management forecasts on the Group’s financial
position and the ability of the Group to continue
as a going concern.
The Board has considered cash flow forecasts
and undertaken sensitivity analysis of the
key assumptions.
In addition, the Audit Committee corroborated
its assessment through consideration of the
processes undertaken by the Auditor in its
testing of management’s forecasts. In conclusion,
the Committee is content that the financial
statements are in accordance with relevant
accounting standards and guidance.
Please refer to the Directors’ Report on page 54
for its confirmation to shareholders on the
appropriateness of the Going Concern
assumption and the Risk Management section of
the Directors’ approach to the longer-term
Viability Statement.
Adequacy of tax provisions
The Audit Committee considered the potential
fines or losses that the Group may be subject to
in light of open tax reviews and the uncertainty
with respect to the quantum and timing of
these liabilities.
The Audit Committee considered management’s
assessment of these potential exposures.
In addition, the Committee considered the view
of independent experts as well as the work of the
external Auditor which focused on:
– corroborating management’s assessments; and
– changes to those assessments relative to
prior years and the appropriate treatment
in light thereof.
In conclusion and having had regard to
management’s assessment, the Committee
agrees with the treatment and disclosure of the
potential liabilities identified.
Mine rehabilitation provisions
The Audit Committee considered the judgement
exercised by management in assessing the
amounts required to be paid by the Company
to rehabilitate the Group’s mines which, with
regards to Pallancata, was prepared in
conjunction with an external consultant during
the year (to supplement the decommissioning
cost estimates prepared in 2016 with the same
third party on the Group’s other operations).
In its assessment of the analysis undertaken
by management (and, where relevant, the
independent third party), the Audit Committee
took into account:
– the basis of the estimation of future
rehabilitation costs;
– the discount rate applied;
– significant changes in estimates and the basis
and level of new costs; and
– the accounting for the changes in the provisions.
The Audit Committee concluded that the
provision is appropriate.
Revenue recognition
The Audit Committee reviewed management’s
approach to the accounting of revenue. In
addition, the Committee considered the
Auditor’s procedures which focused on:
– testing the key controls around the revenue
recognition process to confirm that they are
designed and operating effectively, supporting
the prevention and detection of material errors
in the reported revenue figures;
– the timing of sales; and
– the appropriate treatment of provisional pricing.
As a result, the Audit Committee has been able
to conclude that revenue has been recognised in
accordance with accounting standards and the
calculation of any provisional pricing adjustments
has been performed in accordance with the
Group’s accounting policies.
Auditor independence
The Audit Committee continues to oversee the
implementation of specific policies designed to
safeguard the independence and objectivity of
the Auditor, which includes the Group’s policy on
the provision of non-audit services.
Policy on the use of Auditor
for non-audit services
Following the issue of the new consolidated
Ethical Standard for Auditors by the Financial
Reporting Council, the Audit Committee adopted
a revised Policy in 2016 on the use of the Auditor
for non-audit services (the ‘Revised NAS Policy’).
The Revised NAS Policy lists those non-audit
services that the external Auditor is specifically
prohibited from providing. In summary, these
include (a) tax services; (b) bookkeeping; (c)
payroll services; (d) designing or implementing
internal control or risk management procedures
with regards to financial information or related
technology systems; (e) valuation services; (f)
certain legal services; and (g) corporate finance
type services. Certain of these services may be
provided by the Auditor subject to the
satisfaction of certain criteria ensuring the
Auditor’s objectivity and the Audit Committee’s
approval. The Revised NAS Policy requires
(i) the Audit Committee and Chief Financial
Officer to approve all non-audit services
undertaken by the external Auditor and
(ii) that the cost of non-audit services rendered
by the external Auditor, in any financial year,
cannot exceed 70% of the total audit fee for that
year. Please refer to the next section entitled
‘2017 Audit and non-audit fees’ for details on the
operation of this policy during the year.
Safeguards
Additional safeguards to ensure auditor
objectivity and independence include:
– six-monthly reports to the Audit Committee
from the Auditor analysing the fees for
non-audit services rendered; and
– an annual assessment, by the Audit Committee,
of the Auditor’s objectivity and independence
in light of all relationships between the
Company and the audit firm.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 62
Corporate Governance Report continued
2017 Audit and non-audit fees
Details of fees paid to the external Auditor
are provided in note 31 to the consolidated
financial statements.
Compliance Statement required under
Article 7.1 of the Statutory Audit
Services for Large Companies Market
Investigation (Mandatory Use of
Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014
(the ‘Order’)
The Company confirms that it has complied with
the Order save that certain engagements for
non-audit services of a recurring nature which
the external Auditors were permitted to provide
were noted and ratified by the Audit Committee
after they were rendered in breach of the Revised
NAS Policy. The average value of each such
engagement was c.$9k which, in the aggregate,
were worth $52k and, hence, are considered to
be of a trivial nature and were not considered to
have had any bearing on the independence of the
external Auditors. It is the Committee’s intention
to amend the Revised NAS Policy to include the
pre-approval of permitted services by the
external Auditors for specified recurring services
where the value of each such engagement does
not individually exceed $15,000 and which will be
subject to an overall cap of $50,000 in any one
calendar year.
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 in the context of a risk appetite that is
under continuous review. Internal controls are
managed by the use of formal procedures
designed to highlight financial, operational,
environmental and social risks and provide
appropriate information to the Board enabling
it to protect effectively the Company’s assets
and, in turn, maintain shareholder value.
The process used by the Audit Committee to
assess the effectiveness of risk management and
internal control systems comprises:
– reports from the Head of the Internal Audit
function;
– reviews 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;
– review of budgets and reporting against
budgets; and
– 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.
Audit Committee’s assessment
Based on its review of the process, the
Audit Committee is satisfied that the internal
controls are in place at the operational level
within the Group.
Board’s assessment
Risk management
Throughout the year, the Board considered its
risk appetite which was considered to be
appropriate. The Board confirms that its
assessment of the principal risks facing the
Company, including those that would threaten its
business model, future performance, solvency or
liquidity, and which are set out in the Risk
Management & Viability section, was robust.
Internal control
As detailed above, the Board, through the
delegated authority granted to the Audit
Committee, monitors the ongoing process by
which critical risks to the business are identified,
evaluated and managed. This process is consistent
with the FRC’s ‘Guidance on Risk Management,
Internal Control and Related Financial and
Business Reporting’ published in 2014.
The Directors confirm that, with the support of
the Audit Committee, the effectiveness of the
Company’s system of risk management and
internal controls has been reviewed during the
year under review. These covered material
controls, which included controls covering
operational, financial and compliance matters.
The controls operated effectively during the
financial year although, as is the case for many
large companies, additional controls were
implemented or further strengthened during
the year. The Audit Committee was made
aware of the control changes and there was
no significant impact on the financial results.
The Directors confirm that no significant failings
or weaknesses were identified as a result of the
review of the effectiveness of the Group’s system
of internal control.
Annual Report & Accounts 2017 Hochschild Mining plc 63
– the proposed nomination of Mr Dionisio
Romero Paoletti as a nominee director of the
Group’s major shareholder (controlled by
Eduardo Hochschild);
– the format of the 2017 Board evaluation
process. As explained earlier in this report,
it was decided that in light of the extensive
benefits that have been brought about by past
internally led-evaluations and the ongoing
focus on cost-control, the Board favoured the
continuation of this approach in 2017. The
format of the 2018 Board evaluation will,
however, be kept under review;
– the findings of the 2017 Board evaluation
process (see earlier section of the Corporate
Governance Report); and
– the nomination of Michael Rawlinson as the
Senior Independent Director to succeed Enrico
Bombieri following his retirement from the
Board at the end of 2017.
Appointments to the Board
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, taking into account the
challenges and opportunities facing the Company.
Mr Romero Paoletti is an acquaintance of
Mr Eduardo Hochschild and therefore, in relation
to his appointment as a nominee of the
Company’s major shareholder pursuant to
its rights under the Relationship Agreement,
neither search consultants nor open advertising
were used.
Diversity policy
The Board acknowledges that diversity brings
new perspectives which can drive superior
business performance and promote innovation.
However, as has been stated in past Annual
Reports, the Board is keen to commit to the
overriding principle that every Board member
and potential appointee must be able to
demonstrate the skills and knowledge to be able
to make a valued contribution to the Board. This
merits-based approach will continue to apply and
the Board does not intend to set diversity
targets. As demonstrated by the most recent
appointments, where the opportunity also arises
to increase Board diversity (whether of gender,
culture or professional background) this would
be considered to be an additional benefit.
Nominations Committee Report
In 2017 the Nominations Committee
focused on continuity in terms of the
Board’s committees and executive
succession planning.”
Dear Shareholder
The Nominations Committee’s focus on
succession saw it play an active role during
2017 on two fronts: firstly in ensuring the
continuity of the Board Committees in light
of the retirements during the year, and
secondly, by reviewing the succession plan
for the Group’s most senior executives. This
detailed exercise provided Committee
members with visibility of the rising talent of
executives at Hochschild Mining.
In terms of additions to the Board, I am
delighted to welcome Dionisio Romero
Paoletti as a Non-Executive Director who
joins as a representative director of Pelham
Investment Corporation, the entity through
which I hold my majority shareholding in the
Company. As Chairman and CEO of Peru’s
largest bank, Dionisio has built up vast
experience of doing business in Peru as well
as across Latin America. I and my fellow
Board members very much look forward to
working with him.
In addition, the Committee maintained its
focus on the development of the Directors’
knowledge through the provision of briefings
on various topics of relevance, including the
outlook for the commodity markets and
changes to law and regulation.
Eduardo Hochschild
Committee Chairman
Members*
Eduardo Hochschild (Committee Chairman)
Jorge Born (Non-Executive Director)
Enrico Bombieri (Non-Executive Director)
Sanjay Sarma (Non-Executive Director)
* during the year ended 31 December 2017.
Key roles and responsibilities
– Identify and nominate candidates for
Board approval
– Make recommendations to the Board on
composition and balance
– Oversee the succession planning of Board and
senior management positions
– Review the Directors’ external interests with
regards to actual, perceived or potential
conflicts of interest
Membership
Sanjay Sarma was appointed a member of the
Committee on 11 May 2017. Enrico Bombieri
stepped down as a member of the Committee on
retirement from the Board on 31 December 2017.
Graham Birch, Eileen Kamerick, Michael
Rawlinson and Dionisio Romero Paoletti were
appointed to the Committee on 1 January 2018.
The Company Secretary acts as Secretary to
the Committee.
Maximum
possible
attendance
Actual
attendance
4
4
4
2
4
4
4
2
Activity during the year
The principal matters considered during the
year were:
– under the authority delegated to it by the
Board, consideration of any conflicts (and if
present, the authorisation of such conflicts) in
relation to the proposed appointment of
Ignacio Bustamante to the Board of Scotiabank
Peru SAA as a Non-Executive Director;
– the composition of the Audit Committee in
light of Nigel Moore’s retirement from the
Board in May 2017 followed by a further review
of the composition of the Board’s committees
later in the year;
– the succession plan for the Group’s senior
executives which, in addition to identifying
potential successors, also mapped out the
development needs and the timelines of the
preparedness of each potential successor;
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 64
Corporate Governance Report continued
Corporate Social Responsibility Committee Report
2017 represented a year of many
achievements and our strengthened
resolve to safety.”
Dear Shareholder
2017 represented a year of many
achievements on our sustainability agenda,
but it was also a year of setback in terms of
our safety record. After three consecutive
years of zero fatalities, it is with great sadness
that two accidents across our operations
during 2017 resulted in four fatalities. The
Committee and, indeed the Board as a whole,
are deeply committed to ensuring the safety
of our colleagues and we are working to
ensure that safety comes first for everyone
through the implementation of a Safety
Culture Transformation Plan.
With regards to the environment, the Group
has implemented numerous initiatives to
mitigate the impact of our operations.
2017 was the inaugural year for the
implementation of a new scorecard to
measure our environmental performance
which is distilled into an ECO score and which
feeds through into the remuneration of our
senior employees. By achieving this
alignment, we are seeking to foster, and
promote, an environmentally-conscious
culture across the Group.
Details of the work we have done during the
year with local communities in the core areas
of education, health and economic
development as well as the matters
mentioned above can be found in the
Sustainability Report on pages 38 to 43.
Dr Graham Birch
Committee Chairman
Members*
Roberto Dañino (Committee Chairman until his retirement from
the Board on 11 May 2017)
Graham Birch (Non-Executive Director and Committee Chairman
from 11 May 2017)
Michael Rawlinson (Non-Executive Director)
Ignacio Bustamante (Chief Executive Officer)
* during the year ended 31 December 2017.
Maximum
possible
attendance
Actual
attendance
2
4
4
4
2
4
4
4
Key roles and responsibilities
– Evaluate the effectiveness of the Group’s
policies for identifying and managing health,
safety and environmental risks within the
Group’s operations
– Assess 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
– Evaluate and oversee, on behalf of the Board,
the quality and integrity of any reporting to
external stakeholders concerning health, safety,
environmental and community relations issues
Membership
Roberto Dañino stepped down as a member of
the Committee on 11 May 2017. Graham Birch
assumed the Chairmanship from that date.
The Vice President of Operations and the Vice
President of Legal and Corporate Affairs
attended each CSR Committee meeting by
invitation. The Company Secretary acts as
Secretary to the Committee.
Activity during the year
Details relating to the CSR Committee and the
Group’s activities in this area are set out in the
Sustainability Report on pages 36 to 43.
Annual Report & Accounts 2017 Hochschild Mining plc Remuneration Committee Report
The Remuneration Committee’s focus in
2017 was on the review of Hochschild’s
Remuneration Policy taking in best
market practice and achieving closer
alignment with strategy.”
Dear Shareholder
The focus of the Remuneration Committee
during 2017 was on our Directors’
Remuneration Policy which we are submitting
to shareholders for their approval at the
forthcoming AGM.
The review of our existing policy was a
wide-ranging one that took in all aspects of
remuneration at Hochschild Mining with a view
to (a) incorporating best market practice;
and (b) achieving closer alignment between
reward and the successful achievement of
the Group’s strategic objectives.
Further details on the Company’s
Remuneration Policy, the Committee’s work
in 2017 and how we seek to reflect the
experience of our wider stakeholders in
executive pay can be found in the Directors’
Remuneration Report from page 70.
Michael Rawlinson
Committee Chairman
Members*
Enrico Bombieri (Non-Executive Director & Committee Chairman)
Graham Birch (Non-Executive Director)
Nigel Moore (Non-Executive Director)
Michael Rawlinson (Non-Executive Director)
* during the year ended 31 December 2017.
Maximum
possible
attendance
Actual
attendance
4
4
2
2
4
4
2
2
65
Key roles and responsibilities
– Determine and agree with the Board the broad
policy for the remuneration of the Executive
Directors, other members of senior
management and the Company Secretary, as
well as their specific remuneration packages
– Regularly review the ongoing appropriateness
and relevance of the Remuneration Policy
– Approve the design of, and determine targets
for, any performance related pay schemes
operated by the Company and approve the total
annual payments made under such schemes
– Ensure that contractual terms on termination,
and any payments made, are fair to the
individual and the Company, that failure is not
rewarded, and that the duty to mitigate loss is
fully recognised
– Review and note annually the remuneration
trends across the Company or Group
Membership
Nigel Moore ceased to be a member of the
Committee following his retirement from the
Board at the 2017 AGM on 11 May 2017 and
Michael Rawlinson was appointed a member
on that same date. On 1 January 2018, Michael
Rawlinson assumed the Chair of the Committee
following Enrico Bombieri’s retirement from the
Board, and Eileen Kamerick was appointed a
member of the Committee.
The Company Secretary acts as Secretary
to the Committee.
Members of senior management attend
meetings at the invitation of the Committee.
During the year, such members included the
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 unless otherwise
directed by the Committee.
Activity during the year
Details of the Remuneration Committee’s
activities during the year are provided in the
Directors’ Remuneration Report from page 70.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 66
Corporate Governance Report continued
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 the
Company’s Senior Independent Director.
The Chief Executive Officer is responsible for
discussing strategy with the Company’s
shareholders and conveying their views to the
other members of the Board.
Other than through direct contact as detailed in
the table above, Directors are kept informed of
major shareholders’ views through copies of
(i) relevant analysts’ and brokers’ briefings,
(ii) voting recommendation reports issued by
institutional investor agencies, and
(iii) significant correspondence from
shareholders with respect to the business to be
put to shareholder vote at General Meetings.
2017 AGM
Notice of the 2017 AGM was circulated to all
shareholders at least 20 working days prior to
the meeting. Each of the Chairmen of the Board
Committees was available at the AGM 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 the inside
back cover 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 2017
The following table summarises the principal
means by which management communicated
with investors during the year:
Date
January, April,
July, October
Event
Conference calls following
the Quarterly Production Report
February
BMO Global Metals
& Mining Conference
March
May
2017 Annual Results presentation
UK Roadshow
Citi Resources Conference
BoA Merrill Lynch Global Metals,
Mining and Steel Conference
Annual General Meeting
August
2017 Half-Yearly Results presentation
September
UK Roadshow
Denver Gold Forum
December
NYC Roadshow
Scotia Capital Conference
An extensive Investor Relations schedule resulted
in management holding over 100 investor
meetings during the year.
Annual Report & Accounts 2017 Hochschild Mining plc Supplementary information
67
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 2017 was 507,232,310 ordinary shares
of 25 pence each (‘shares’). No shares were
issued during the year.
The Hochschild Mining Employee Share Trust
(‘the Trust’) is an employee share trust
established to hold shares 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
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.
Current share repurchase authority
The Company obtained shareholder approval at
the AGM held in May 2017 for the repurchase of
up to 50,723,231 shares which represented, at
that time, 10% of the Company’s issued share
capital (‘the 2017 Authority’). Whilst no
purchases have been made by the Company
pursuant to the 2017 Authority, it is intended
that shareholder consent will be sought on
similar terms at this year’s AGM when the 2017
Authority expires.
Additional share capital information
This section provides additional information as at
31 December 2017.
(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.
Substantial shareholdings
As at 31 December 2017, the Company had been
notified of the following interests in the
Company’s shares in accordance with Chapter 5
of the Financial Conduct Authority’s Disclosure
Guidance and Transparency Rules:
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
Eduardo Hochschild
Majedie Asset Management Limited
Vanguard Precious Metals and Mining Fund
Van Eck Associates Corporation
Number of
ordinary shares
258,565,3731
25,441,448
25,333,018
24,715,437
Percentage of
voting rights
(indirect)
–
5.02%
–
–
Percentage of
voting rights
(direct)
50.976%
–
4.994%
4.87%
1 The shareholding of Mr Eduardo Hochschild is held through Pelham Investment Corporation.
No further notifications have been received up until the date of this Annual Report.
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:
– registration of a transfer of an uncertificated
share may be refused in the circumstances set
out in the CREST Regulations and where, in the
case of a transfer to joint holders, the number
of joint holders to whom the uncertificated
share is to be transferred exceeds four;
– the Directors may, in their absolute discretion,
decline to register any transfer of any share
which is not a fully paid share. The Directors
may also decline to recognise any instrument
of transfer relating to a certificated share
unless the instrument of transfer:
(i) is duly stamped (if required) and is
accompanied by the relevant share
certificate(s) and such other evidence of
the right to transfer as the Directors may
reasonably require; and
(ii) is in respect of only one class of share.
The Directors may, in their absolute
discretion, refuse to register a transfer if it
is in favour of more than four persons
jointly; and
– the Directors may decline to register a transfer
of any of the Company’s shares by a person
with a 0.25% interest, if such a person has been
served with a notice under the Companies Act
after failure to provide the Company with
information concerning interests in those
shares required to be provided under the
Companies Act.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 68
Supplementary information continued
(b) $100m Credit Agreement
Under the terms and conditions of the $100
million Credit and Guaranty Agreement between,
amongst others, the Group and Scotiabank Peru
S.A.A, a Change of Control obliges the Group to
prepay all Advances (as defined in the
agreement) unless any Lender notifies the
Group that it is declining any such prepayment in
which case the Advances owing to such declining
Lender shall not be prepaid.
In summary, a Change of Control means an event
or series of events by which: (a) the Permitted
Holders (being Eduardo Hochschild, his spouse,
either of their descendants or estate or guardian
of any of the aforementioned, a trust for the
benefit of one or more of the aforementioned or
any entity controlled by any one or more of the
aforementioned or investment vehicle for the
primary benefit of any of them) shall for any
reason cease, individually or in the aggregate, to
control the Company; or (b) the Permitted
Holders shall for any reason cease, individually or
in the aggregate, to have the power to appoint at
least a majority of the members of the Board of
Directors or other equivalent governing body of
the Company; or (c) the Company shall for any
reason cease, directly or through one or more
of its Subsidiaries, to be the ‘beneficial owner’
as so defined) of more than 50% of the Equity
Interests in Compania Minera Ares S.A.C.
(c) Long-Term Incentive Plans
Awards made under the Group’s Long-Term
Incentive Plan, Enhanced Long-Term Incentive
Plan and Restricted Share Plan shall, upon a
change of control of the Company, vest early
unless a replacement award is made. Vesting will
be pro-rated to take account of the proportion
of the period from the award date to the normal
vesting date falling prior to the change of control
and the extent to which performance conditions
(and any other conditions) applying to the
award have been met.
(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:
– contains provisions restricting the Controlling
Shareholders’ rights to exercise their voting
rights to procure an amendment to the Articles
that would be inconsistent with the
Relationship Agreement; and
– contains an undertaking by the Controlling
Shareholders that they will, and will procure
that their Associates will, abstain from voting
on any resolution to approve a transaction with
a related party (as defined in the FCA 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.
(a) $350m 7.75% Senior Notes
Under the terms and conditions of the $350
million 7.75% Senior Notes due 2021 (which,
although in issue as at the balance sheet date,
were subsequently redeemed earlier this year),
upon the occurrence of a change of control
followed by a ratings downgrade which results in
a change of control repurchase event (as
defined in the indenture), the Company may be
required by each holder of the notes to offer to
purchase the notes at a price equal to 101% of
the principal amount of the notes, plus accrued
and unpaid interest and additional amounts, if
any, to the purchase date.
In summary, a Change of Control means the
occurrence of one or more of the following
events: (1) the disposition (other than by way
of merger or consolidation) of all or substantially
all of the assets of the Company and its
subsidiaries taken as a whole to any person other
than (i) to the Company or one of its
subsidiaries or (ii) to a Permitted Holder (being
Eduardo Hochschild or a permitted transferee);
(2) the consummation of any transaction
(including any merger or consolidation) the
result of which is that (i) any person other than
a Permitted Holder becomes the ‘beneficial
owner’ of more than 50% of the Company’s
outstanding Voting Stock (as defined) or (ii) the
Permitted Holders cease to be the beneficial
owners, directly or indirectly, of at least a
majority of the outstanding Voting Stock of the
Company; (3) the Company consolidates with,
or merges with or into any person, or any person
consolidates with, or merges with or into, the
Company, in any such event pursuant to a
transaction in which any of the outstanding
Voting Stock of the Company or such other
person is converted into or exchanged for cash,
securities or other property, other than any such
transaction where the shares of the Voting Stock
of the Company outstanding immediately prior
to such transaction constitute, or are converted
into or exchanged for, a majority of the Voting
Stock of the surviving person immediately after
giving effect to such transaction; (4) the first
day on which the majority of the members of the
Board of Directors of the Company cease to be
Continuing Directors (as defined); (5) the
Company shall for any reason cease to be the
beneficial owner (as defined) of 100% of the
Voting Stock of Compañía Minera Ares S.A.C.;
or (6) the adoption of a plan relating to the
liquidation or dissolution of Compañía Minera
Ares S.A.C.
Annual Report & Accounts 2017 Hochschild Mining plc 69
Additional disclosures
Disclosure table pursuant to Listing Rule 9.8.4C R
For the purposes of LR 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found
in the following parts of this Annual Report:
Section Matter
(1)
Interest capitalised
Location
Note 16 to the consolidated financial statements
(2)
(4)
(5)
(6)
(7)
(8)
(9)
Publication of unaudited financial information
Not applicable
Details of specified long-term incentive scheme
None
Waiver of emoluments by a Director
Directors’ Remuneration Report
Waiver of future emoluments by a Director
As (5) above
Non pre-emptive issues of equity for cash
None
Item (7) in relation to major subsidiary undertakings None
Parent participation in a placing by a listed subsidiary None
(10)(a)
Contract of significance in which a Director is interested None
(10)(b)
Contract of significance with controlling shareholder None
(11)
(12)
(13)
(14)
Provision of services by a controlling shareholder
Directors’ Report
Shareholder waivers of dividends
Shareholder waivers of future dividends
Agreement with controlling shareholder
Directors’ Report
Directors’ Report
Directors’ Report
Summary of constitutional
and other provisions
Appointment of Directors
Under the terms of the Articles
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.
Approach to appointment adopted
by the Board
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
adopted the recommendation of the UK
Corporate Governance Code that all Directors
should seek annual re-election by shareholders.
2014 Listing Rules
Following the implementation, in 2014, of new
Listing Rules by the Financial Conduct Authority
(in its capacity as the UK Listing Authority), as a
company with a controlling shareholder, the
election or re-election of any Independent
Director must be approved by: (i) all
shareholders of the Company; and (ii) the
independent shareholders of the Company
(i.e. any person entitled to vote on the election
of Directors of the Company that is not a
controlling shareholder).
If either shareholder resolution to elect or
re-elect the Independent Director is defeated,
the Company may propose a further resolution
to elect or re-elect the proposed Independent
Director provided that the further resolution
must not be voted on within 90 days from the
date of the original vote but it must then be
voted on within a period of 30 days from the end
of the 90 day period. It may then be passed by a
simple majority of the shareholders of the
Company voting as a single class.
Removal of Directors
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 grounds 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.
Relationship Agreement
In addition, under the terms of the Relationship
Agreement:
– for as long as the Major Shareholder has an
interest of 30% or more in the Company, it is
entitled to appoint up to two Non-Executive
Directors and to remove such Directors so
appointed; and
– for as long as the Major Shareholder has an
interest of 15% or more of the Company, it is
entitled to appoint up to one Non-Executive
Director and to remove such Director so
appointed.
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 their 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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 70
Directors’ Remuneration Report
Dear Shareholders
On behalf of the Board, I am pleased to present the Directors’
Remuneration Report for the year ending 31 December 2017 which is split
into three sections: this Annual Statement, the Directors’ Remuneration
Policy and the Annual Report on Remuneration.
From an operational perspective, 2017 was a successful year for the
Company, with a record level of production overall and two of our mines,
Inmaculada and our San Jose joint venture, having their best years to date.
Our brownfield exploration programme has made good progress with, in
particular, some encouraging new discoveries in the vicinity of the
Inmaculada mine.
It is with sadness, however, that the year also represented a setback in
terms of our safety record and, after investigation, it is clear that we must
continue to embed a safety-first culture across all of our operations. More
details on the programme that is being implemented can be found in the
Safety section of the Sustainability Report.
Remuneration Policy review
This year we are seeking shareholder approval for a revised Directors’
Remuneration Policy which appears on pages 71 to 76 and is the
culmination of a wide-ranging review by the Remuneration Committee that
took in all elements of executive remuneration at Hochschild Mining. The
focus has been on incorporating features of good practice in light of
specific investor feedback, as well as to reflect general trends in executive
remuneration through, among other things, reaction to the work of the
Executive Remuneration Working Group in its mission to simplify executive
remuneration among the UK’s larger companies.
I am pleased to be able to report on the resultant proposals which, subject
to shareholder approval, will take effect from the forthcoming AGM. In
particular, the new Remuneration Policy will extend the time horizon of the
Long-Term Incentive Plan (‘LTIP’) such that the cash awards, upon vesting
after three years, will be invested as to 50% in the Company’s shares and
will be required to be held for a further two years. In addition, we have
reviewed the structure of the annual bonus scheme and, as a result, the
level of payouts at the ‘threshold’ and ‘target’ levels of performance have
been reduced thereby further incentivising the highest levels of
performance. We have also increased the minimum shareholding
requirement for Executive Directors from 200% to 250% of salary and, in
recognition of prevailing best practice and the investor focus in this area,
we have widened the scope of the Group’s malus policy such that a wider
variety of acts (or failure to act) may be brought within the Remuneration
Committee’s discretion to reduce incentive payouts.
The new Policy will be put to a binding shareholder vote at the forthcoming
AGM, and the Annual Report on Remuneration will, as usual, be subject to
an advisory vote by shareholders.
Remuneration decisions in 2017
For 2017, the CEO will receive an annual bonus of 125% of salary
(equivalent to 83% of maximum). This bonus outcome reflects the
Company’s strong operational performance as set out above and, as
explained later in this report, takes into account the Group’s safety
performance. A summary of performance against the bonus scorecard
is included on page 80.
During 2017, the CEO was granted a Long-Term Incentive Plan award of
200% of salary. Vesting will be based on performance over the three
financial years to 31 December 2019. Consistent with our approach for
2016 awards, 2017 awards will vest to the extent that relative TSR targets
are achieved over the period.
Based on relative TSR performance to 31 December 2017, 100% of the
2015 LTIP award and 86.3% of the four-year tranche of the legacy 2014
Enhanced Long-Term Incentive Plan (‘ELTIP’) award will vest in early 2018.
The high levels of vesting reflect the Company’s strong long-term TSR
performance over the three- and four-year periods to 2017.
Implementation of proposed Remuneration Policy in 2018
For 2018, the maximum annual bonus opportunity will remain 150% of
salary. The bonus payment will be subject to performance against broadly
the same measures as those used in 2017. An LTIP award of 200% of salary
is proposed for 2018, in line with past years and while vesting will continue
to be based on relative TSR to the mining sector, the LTIP time horizon will
be extended as described above. Further detail on the implementation of
Policy for 2018 is included on page 82.
I trust that shareholders will be supportive of the proposed changes to
Remuneration Policy, and if you should have any queries or comments on
the Policy or any aspect of this year’s report, I would encourage you to
contact me through the Company Secretary.
I hope you find this report to be informative.
Michael Rawlinson
Chairman, Remuneration Committee
This report has been prepared according to the requirements of the
Companies Act 2006 (‘the Act’), Regulation 11 and Schedule 8 of
the Large and Medium-Sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013 and other relevant
requirements of the FCA Listing Rules. In addition, the Board has
applied the principles of good corporate governance set out in the
UK Corporate Governance Code, and has considered the guidelines
issued by its leading shareholders and bodies such as ISS
(Institutional Shareholder Services), the Investment Association and
the Pensions and Lifetime Savings Association.
The Remuneration Committee is seeking shareholder approval for
an updated Remuneration Policy at the 2018 AGM. The key changes
to the previous Policy are as follows:
– The overall LTIP time horizon to be extended such that 50% of
vested LTIP awards is paid immediately on vesting in cash (less
tax), and 50% (after tax) is invested in Company shares and
required to be held for a further two years
– Payout under the annual bonus for ‘threshold’ and ‘target’
performance to be reduced to up to 50% and up to 75% of
maximum opportunity, respectively
– Use of the discretion granted under Listing Rule 9.4.2R to be
limited to the maxima set out in the Policy Table (unless in relation
to a buy-out), and limited to recruitment
– Widening of the malus policy to include a more extensive list of
trigger events
– Clarification of the operation of Compensation for Time Services
(‘CTS’), as mandated by the Peruvian government
The Committee is also seeking shareholder approval for a new
Long-Term Incentive Plan at the AGM, as the 2008 LTIP is due to
expire in May 2018. The terms of the proposed LTIP are broadly
consistent with those of the 2008 Plan. No other material changes
to the Remuneration Policy are proposed at this time, though the
wording of the Policy has been reviewed to ensure consistency with
the relevant Plan Rules and clarity of its application. Subject to
shareholder approval, the new Policy will become effective from
the date of the 2018 AGM.
Annual Report & Accounts 2017 Hochschild Mining plc 71
Directors’ Remuneration Policy (unaudited)
The principal objectives of the Remuneration Committee’s agreed
Remuneration Policy are to:
– attract, retain, and motivate the Group’s executives and senior management;
– provide management incentives that align with and support the Group’s
business strategy; and
– 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 an annual performance-related bonus, which
rewards the achievement of a balanced mix of financial, operational and
other relevant performance measures, and the use of a Long-Term Incentive
Plan (‘LTIP’) which is linked to relative Total Shareholder Return (‘TSR’).
The Committee takes into consideration the remuneration arrangements
for the wider employee population in making its decisions on remuneration
for senior executives. Remuneration decisions are also driven by external
considerations, in particular relating to the global demand for talent in the
mining sector.
This section of the report sets out the Remuneration Policy for Directors, which
shareholders are asked to approve at the 2018 AGM. The Committee intends
that this Policy will formally come into effect from approval at the 2018 AGM.
Policy Table
The table below provides a summary of each element of the Remuneration Policy for Executive Directors.
Element: objective
and link to strategy
Operation
Base salary
To support recruitment
and retention
Salary is reviewed annually, usually in
March, or following a significant
change in responsibilities.
Salary levels are targeted to be
competitive and relevant to the global
mining sector, with reference to the
relative cost of living. The Committee
also takes into consideration general
pay levels for the wider employee
population.
Executive Directors receive
Compensation for Time Services
(‘CTS’) and profit share, both of
which are provided for by Peruvian
law, as well as certain allowances
which may include medical insurance,
the use of a car and driver, and
personal security.
Opportunity
Performance metrics
To avoid setting expectations, there is no
prescribed maximum salary.
None.
None.
In respect of existing Executive Directors, it is
anticipated that salary increases will generally
be in line with the wider employee population.
In exceptional circumstances (including, but
not limited to, a material increase in job size
or complexity, the reversal of a previous salary
reduction, or if a Director has not received
an increase for a number of years), the
Committee has discretion to make
appropriate adjustments to salary levels.
CTS is a legal entitlement for employees in
Peru which provides for a fund in the event of
termination of employment. CTS in respect of
base salary is calculated as one month’s wages
and is deposited biannually in an employee’s
interest-accruing bank account and prior to
the end of employment, employees can gain
access to the deposited amount to the extent
it exceeds four months’ wages. CTS in respect
of other forms of remuneration such as
incentive payouts, that are considered to be
‘non-extraordinary’, is currently calculated at a
rate of 1/24th.
For the profit share, an amount equal to 8% of
the relevant Peruvian company’s taxable income
for the year is distributable to its employees.
This amount is mandated by Peruvian law, and
any increases are not within the control of the
Group. The amount receivable by each
Executive Director is determined with reference
to annual base salary (plus the annual bonus, if
any) and the number of days worked during
the calendar year.
The value of the other benefits varies by role
and individual circumstances; eligibility and
cost are reviewed periodically.
The Committee retains the discretion to
approve a higher cost of benefits in exceptional
circumstances (for example relocation) or in
circumstances where factors outside the
Company’s control have changed materially
(for example increases in insurance premiums).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 72
Directors’ Remuneration Report continued
Element: objective
and link to strategy
Operation
Annual bonus
To achieve alignment
with the Group’s strategy
and commitment to
operating responsibly
Performance measures, targets
and weightings are set at the start
of the year. At the end of the year,
the Committee determines the
extent to which targets have been
achieved, taking into account
individual performance.
Bonus payments are normally delivered
in cash. The Committee has discretion
to defer all or a portion of the bonus,
payable in cash or Hochschild shares
under the Deferred Bonus Plan
(‘DBP’), for up to three years.
Deferred bonus is subject to malus,
i.e. forfeiture or reduction, in
circumstances such as material
misstatement or gross misconduct.
If deferral is applied, the Committee
retains the discretion to allow
dividends (or equivalent) to accrue
over the deferral period in respect
of the awards that vest.
Opportunity
Performance metrics
The maximum annual bonus opportunity
is 150% of salary.
For ‘threshold’ and ‘target’ levels of
performance, the bonus earned is up to 50%
and up to 75% of maximum, respectively.
Performance is determined by the Committee
by reference to Group financial measures as
well as the achievement of personal/strategic
objectives. The personal/strategic objectives
are typically weighted no higher than 30%
of maximum.
The Committee retains discretion to vary
year-on-year the weightings for individual
measures, to ensure alignment with the business
priorities for the year. Performance targets are
generally calibrated with reference to the
Company’s budget for the year. Each objective
in the scorecard has a ‘threshold’, ‘target’ and
‘maximum’ performance target, achievement of
which translates into a score for each objective.
The Committee uses its judgement to determine
the overall scorecard outcome based on the
achievement of the targets and the Committee’s
broad assessment of Company and individual
performance. A review of the quality of earnings
is conducted by the Committee to determine
whether any adjustments should be made to
the reported profit for the purpose of bonus
outcomes. This ensures that bonus outcomes
are not impacted by unbudgeted non-recurring
or one-off items, or circumstances outside of
management’s control such as material changes
in commodity prices that could distort the
overall quality of earnings.
Malus provisions apply, i.e. the Committee has
the discretion to reduce bonus payments on
the occurrence of an adverse event that is
attributable (directly or indirectly) to an act
or failure to act by the executive. Such events
include those related to health and safety, the
environment or community relations.
Details of the measures, weightings and targets
applicable for the financial year under review
are provided in the Annual Report on
Remuneration, unless they are considered
to be commercially sensitive.
The current performance condition is TSR
performance relative to specific sector-based
comparator groups, although the Committee
has the discretion to adjust the performance
measures and/or comparator groups before each
cycle to ensure that they remain appropriate.
Malus provisions apply, i.e. the Committee
can reduce or prevent vesting if it determines
either that (i) the overall underlying business
performance of the Company is not satisfactory
or (ii) an act or failure to act, which is
attributable (directly or indirectly) to an
award-holder has resulted in, among other
things, an adverse event related to health and
safety, the environment or community relations.
Details of the TSR comparator groups and
targets used for specific LTIP grants are included
in the Annual Report on Remuneration.
Maximum annual award level is 200% of salary
(267% of salary in exceptional circumstances,
such as to aid the recruitment or retention of
an Executive Director).
Long-Term Incentive
Plan (‘LTIP’)
To directly incentivise
sustained shareholder
value creation through
operational performance
and to support the
recruitment of senior
positions and longer-term
retention
Awards are made annually, in the
form of cash, with vesting subject
to the attainment of specific
performance conditions and
continued employment.
Awards have a performance and
vesting period of at least three years.
For LTIP awards made in 2018 and
subsequent years, 50% of vested
awards is paid immediately on vesting
in cash (less tax), and 50% after tax
is invested in Company shares and
normally required to be held for a
further two years. Dividends, if any,
will accrue to shares during the
holding period.
In addition to the above elements of remuneration, the Committee may consider it appropriate to grant an award under a different structure, but within
the limits sets out in the Policy Table, in order to facilitate the recruitment of an individual, exercising the discretion available under Listing Rule 9.4.2R.
The Committee also retains discretion to make non-significant changes to the Policy without going back to shareholders. The Committee is satisfied that
the Remuneration Policy is in the best interests of shareholders and does not promote excessive risk-taking.
Annual Report & Accounts 2017 Hochschild Mining plc 73
Notes to the Policy Table
Payments from existing awards
Executive Directors are eligible to receive payment from any award made prior to the approval and implementation of the Remuneration Policy detailed in
this report (such as the vesting of Enhanced Long-Term Incentive Plan or Restricted Share Plan (‘RSP’) awards made under a previous Policy, or awards
made prior to appointment to the Board). Details of any such payments will be set out in the Annual Report on Remuneration as they arise.
Performance measurement selection and approach to target-setting
The measures used under the annual bonus are selected annually to reflect the Group’s main strategic objectives for the year and reflect both financial and
non-financial priorities.
Performance targets are set to be stretching and achievable, taking into account the Company’s strategic priorities and the economic environment in which
the Company operates. Targets are set taking into account a range of reference points including the Group’s strategic and operating plan.
The Committee considers relative TSR to be the most appropriate measure of long-term performance for the Company and together with the annual
bonus measures, provide a balance between absolute and relative performance, between short-term and long-term performance measures, and between
external and internal measures of performance. TSR aligns with the Company’s focus on shareholder value creation and rewards management for
outperformance of sector peers, and is transparent, visible and motivational to executives.
The Committee has discretion to vary the performance condition for in-flight awards in certain circumstances to ensure they continue to be fair,
reasonable and no more or less difficult to satisfy than originally intended. For example, in the event of corporate activity amongst the TSR comparator
group during a performance period, the Committee may make adjustments to the comparator group (for example, replacing that company with the
acquiring company, including a substitute for that company, or tracking the future performance of that company by reference to the median of the
remaining comparators). Other examples of special circumstances include but are not limited to rights issues, corporate restructuring, and special
dividends. The Committee will also review the appropriateness of the performance conditions prior to each LTIP grant and reserves the discretion to set
different targets for future awards without consulting with shareholders.
Remuneration Policy for other employees
The Committee takes into consideration the remuneration arrangements for the wider employee population in making its decisions on remuneration for
senior executives. The Company’s approach to annual salary reviews is consistent across the Group, with consideration given to the scope of the role, level
of experience, responsibility, individual performance and pay levels in comparable companies.
In general, the Remuneration Policy and principles which apply to other senior executives are broadly consistent with those set out in this report for the CEO.
Generally, remuneration is linked to Company and individual performance in a way that is ultimately aimed at reinforcing the delivery of shareholder value.
Senior employees above a specific grade are eligible to participate in an annual bonus scheme with a similar design to that for the CEO. Opportunities and
specific performance conditions vary by organisational level with business area-specific metrics incorporated where appropriate.
All Peruvian employees participate in the statutory profit share scheme whereby an amount equal to 8% of the relevant Peruvian company’s taxable income
for the year is distributable to its employees. The amount receivable by each employee is determined with reference to their annual base salary and bonus,
if any, and the number of days worked in the calendar year.
Selected senior employees participate in the LTIP and are required, subject to shareholder approval of the new plan, to invest 50% of the vested cash
award (on a tax net basis) in the Company’s shares and hold these shares for a further two years. These shares will count towards their target shareholding
(expressed as a percentage of salary, which will be set depending on seniority).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 74
Directors’ Remuneration Report continued
Pay scenario charts
The charts below provide an estimate of the potential future reward opportunities for the CEO, and the potential split between the different elements
of remuneration under three different performance scenarios: ‘minimum’, ‘on-target’ and ‘maximum’.
Potential reward opportunities are based on the proposed Remuneration Policy, applied to the CEO’s base salary as at 1 March 2018 of $700,000.
Performance scenario ($’000)
Maximum
On-target
Minimum
24%
40%
100%
33%
44%
3,338
42%
19%
1,971
786
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Fixed pay
Single-year variable
Multi-year variable
The charts above exclude the effect of any Company share price appreciation.
The ‘minimum’ scenario shows base salary and benefits (that is, fixed remuneration), and associated CTS. These are the only elements of the CEO’s
remuneration package which are not at risk.
The ‘on-target’ scenario reflects fixed remuneration as above, plus a target payout of 75% of the annual bonus and threshold vesting of 25% of the
maximum award under the LTIP, and associated CTS.
The ‘maximum’ scenario reflects fixed remuneration, plus full payout of all incentives, and associated CTS.
Approach to remuneration on recruitment or promotion
The Committee’s policy is to set the remuneration package for a new Executive Director in accordance with the approved Remuneration Policy at the time
of the appointment. The overarching aim is to ensure that the Company pays no more than is necessary to appoint individuals of an appropriate calibre.
In the cases of appointing a new Executive Director, the Committee may make use of any of the existing components of remuneration as set out in the
Policy Table. In determining the appropriate remuneration for a new Executive Director, the Committee will take into consideration all relevant factors
(including the nature of remuneration and where the candidate was recruited from) to ensure that arrangements are in the best interests of Hochschild
and its shareholders. Where an individual is appointed on an initial base salary that is below market, any shortfall may be managed with phased increases
over a period of time, subject to the individual’s development in the role. This may result in above-average salary increases during this period.
In addition to the components of remuneration as set out in the Policy Table, the Committee may also make an award in respect of a new appointment to
‘buy-out’ incentive arrangements forfeited on leaving a previous employer on a like-for-like basis, having regard to the fair value of the instruments. In doing
so, the Committee will consider relevant factors including any performance conditions attached to these awards and the likelihood of those conditions
being met. The Committee aims to use the current remuneration structure in making recruitment awards, but in some cases it may be required to use the
flexibility afforded by Listing Rule 9.4.2R, if appropriate, in relation to such buy-out awards.
In cases of appointing a new Executive Director by way of internal promotion, the Committee will determine remuneration in line with the Policy for
external appointees as detailed above. Where an individual has contractual commitments made prior to his or her promotion to the Board, the Company
will continue to honour these arrangements. Incentive opportunities for below-Board employees are typically no higher than for Executive Directors, but
measures may vary to provide better line-of-sight. For more details on the Remuneration Policy for other employees, see page 73.
Service contracts
Executive Director
Date of service contract
Ignacio Bustamante
1 April 2007
Executive Director service contracts, including arrangements for early termination, are carefully considered by the Committee.
Ignacio Bustamante was appointed a Director of the Company with effect from 1 April 2010 and is employed under a contract of employment with
Compañia Minera Ares S.A.C. (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. In addition to these provisions and to reflect Peruvian market practice, the Committee has
discretion to award Ignacio Bustamante up to an additional 12 months’ base salary on termination (other than for the prescribed reasons outlined above).
The prevailing circumstances will be taken into consideration at the time of termination.
Annual Report & Accounts 2017 Hochschild Mining plc 75
Leaver and change-of-control provisions
The table below summarises how the awards under the annual bonus and LTIP, as well as legacy plans, are typically treated in specific circumstances, with
the final treatment remaining subject to the Committee’s discretion. When considering the appropriate treatment, the Committee reviews all potential
incentive outcomes to ensure they are fair to both shareholders and participants. Leaver provisions for awards granted prior to 2018 under the ELTIP and
RSP are detailed in the previous Remuneration Policy.
Reason for leaving
Annual bonus
Retirement, ill health, disability, death or any
other reasons the Committee may determine
in its absolute discretion
Change-of-control and company/business sale
Treatment of awards
Timing of vesting
Cash bonuses will only be paid to the extent that
Group and personal objectives set at the beginning of
the year have been achieved. Any resulting bonus
would typically be pro-rated for time served during
the year.
The Committee has discretion to determine as to
whether deferral would be applied.
The Committee would determine the most
appropriate treatment in the circumstances.
The Committee has discretion to determine
as to whether deferral would be applied.
Normal payment date, although the Committee has
discretion to accelerate
On date of event
Any other reason
No bonus is paid.
Not applicable
LTIP
Retirement, ill health, disability, redundancy, injury
or any other reasons the Committee may determine
in its absolute discretion
Death
Change-of-control and company/business sale
Any outstanding awards will be pro-rated for time
and performance, unless the Committee determines
otherwise.
Any outstanding awards will be pro-rated for time and
performance, unless the Committee determines
otherwise.
Any outstanding awards will be pro-rated for time and
performance, unless the Committee determines
otherwise. On a change-of-control, Hochschild
awards may alternatively be exchanged for new
equivalent awards in the acquirer, where appropriate.
Normal vesting date, although the Committee has
discretion to accelerate
On date of event
On date of event
Any other reason
Awards lapse.
Not applicable
DBP
Death, ill health, disability, redundancy, injury,
retirement with agreement of the Director, or any
other reasons the Committee may determine in its
absolute discretion
Change-of-control and company/business sale
Any outstanding awards would typically be pro-rated
for time.
On date of event
Any outstanding awards would typically be pro-rated
for time. On a change-of-control, Hochschild awards
may alternatively be exchanged for new equivalent
awards in the acquirer, where appropriate.
On date of event
Any other reason
Awards lapse.
Not applicable
The Remuneration Committee has discretion to determine the most appropriate treatment of vested LTIP awards that are subject to a holding period,
based on the individual circumstances at the time.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 76
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 further three-year terms. Notwithstanding this, 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.
Details of the terms of appointment of the Company’s Non-Executive Directors serving during the year are shown in the table below. The appointment and
reappointment and the remuneration of Non-Executive Directors are matters reserved for the full Board.
Non-Executive Director
Eduardo Hochschild
Dr Graham Birch
Jorge Born Jr.
Eileen Kamerick
Michael Rawlinson
Sanjay Sarma
Dionisio Romero Paoletti
Letter of appointment dated
30 January 2015
Anticipated expiry of present term of
appointment (subject to annual re-election)
1 January 2019
20 June 2011
16 October 2006
9 September 2016
18 December 2015
13 December 2016
18 December 2017
1 July 2020
16 October 2018
1 November 2019
1 January 2019
1 January 2020
1 January 2021
The Non-Executive Directors are not eligible to participate in the Company’s performance-related incentive plans and do not receive any pension contributions.
As part of his change of role from Executive to Non-Executive Chairman on 1 January 2015, the Committee agreed that Mr Hochschild would retain his
eligibility for benefits received in respect of his time as an Executive Director, consisting primarily of personal security, car and driver, and medical insurance.
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.
Details of the Policy on fees paid to our Non-Executive Directors are set out in the table below:
Objective
Details
Opportunity
Performance metrics
To attract and retain
Non-Executive
Directors of the highest
calibre with broad
commercial and other
experience relevant
to the Company.
Fee levels are reviewed from time to time, with any
adjustments typically effective from 1 March each year.
The fee paid to the Chairman is determined by the
Committee, and base fees to Non-Executive Directors are
determined by the Board. Additional fees are payable for
acting as Chairman of the Board’s Committees and
as Senior Independent Director.
Fee levels are reviewed by reference to FTSE-listed
companies of similar size and complexity. Time commitment,
level of involvement required and responsibility are taken into
account when reviewing fee levels.
NED fees will typically only be increased during the
term of this Policy in line with general market levels
of NED fee inflation.
None.
In the event that there is a material misalignment
with the market or a change in the complexity,
responsibility or time commitment required to fulfil a
Non-Executive Director role, the Board has discretion
to make an appropriate adjustment to the fee level.
The maximum aggregate annual fee for all
Directors provided in the Company’s Articles
of Association is £3 million p.a.
In recruiting a new Non-Executive Director (‘NED’), the Committee will use the Policy as set out in the table above. A base fee would be payable for Board
membership, with additional fees payable for those acting as Chair of the Company’s Board Committees and as Senior Independent Director, as appropriate.
External appointments policy
The Board recognises that Executive Directors may be invited to serve as Directors of other companies, which can bring benefits to the Group. Executive
Directors are entitled to accept appointments outside the Company providing that the Chairman’s permission is sought and granted. The Policy is that fees
may be retained by the Director, reflecting the personal risk assumed in such appointments.
Details of external appointments and the associated fees received are included in the Annual Report on Remuneration.
Consideration of conditions elsewhere in the Company
The Committee does not currently consult with employees specifically on the effectiveness and appropriateness of the executive Remuneration Policy and
framework. However, the Company seeks to promote and maintain good relationships with employee representative bodies as part of its employee
engagement strategy and consults on matters affecting employees and business performance as required in each case by law and regulation in the jurisdictions
in which the Company operates. Although the Committee does not consult directly with employees on Directors’ Remuneration Policy, the Committee takes
into consideration the remuneration arrangements for the wider employee population in making its decisions on remuneration for senior executives.
Consideration of shareholder views
When determining remuneration, the Committee takes into account views of shareholders and best practice guidelines issued by institutional shareholder
bodies. The Committee will continue to monitor trends and developments in corporate governance and market practice to ensure the structure of the
executive remuneration remains appropriate.
The Committee is always open to feedback from shareholders on Remuneration Policy and arrangements, and commits to undergoing shareholder
consultation in advance of any significant changes to Remuneration Policy. Further details on the votes received in respect of remuneration resolutions
presented at last year’s AGM and any matters discussed with shareholders during the year are provided in the Annual Report on Remuneration.
Annual Report & Accounts 2017 Hochschild Mining plc 77
Annual Report on Remuneration
The following section provides details of how Hochschild’s 2015 Remuneration Policy was implemented during the financial year ending 31 December
2017, and how the Remuneration Committee intends to implement the proposed Remuneration Policy in 2018. Any information contained in this section
of the report that is subject to audit has been marked as such.
Remuneration Committee membership
The Remuneration Committee was chaired during the year under review by Enrico Bombieri, and its other members were Graham Birch and Nigel Moore
until his retirement from the Board on 11 May 2017. Michael Rawlinson was appointed to the Remuneration Committee on 11 May 2017, and was
subsequently appointed Chairman of the Committee from 1 January 2018 to succeed Enrico Bombieri. Eileen Kamerick was appointed a member of the
Committee on that same date. The Remuneration Committee has comprised, at all times, of only 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 Chairman, the CEO and the
Vice President of Human Resources. No Director or senior executive is present 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.
The Remuneration Committee met four times during the year (details of members’ attendance at meetings are provided in the Corporate Governance
Report on page 65) and undertook the items of business noted below.
Key activities of the Remuneration Committee in 2017:
– Considered external market developments and best practice in remuneration, and latest shareholder guidelines
– Reviewed and approved incentive outcomes for 2016 (2016 annual bonus and vesting of 2014 LTIP awards and the third tranche of 2011 ELTIP awards)
– Reviewed the CEO’s total remuneration, including salary for 2017
– Considered and approved the 2016 Directors’ Remuneration Report (‘DRR’)
– Considered investor feedback on the 2016 DRR
– Approved the opportunity/award level and performance targets for 2017 annual bonus and LTIP awards
– Reviewed the Remuneration Policy, LTIP and operation of the Annual Bonus Plan
– Reviewed and widened the malus policy for application across all incentives
– Considered and approved the CEO’s 2018 objectives
Advisers
During the year, in order to enable the Committee to reach informed decisions on executive remuneration, advice on market data and trends was obtained
from independent consultants, Mercer Kepler. Mercer Kepler reports directly to the Committee Chairman, and is a signatory to and abides by the Code of
Conduct for Remuneration Consultants (which can be found at www.remunerationconsultantsgroup.com). Other than advice on remuneration, no other
services were provided by Mercer Kepler to the Company (or any other part of the MMC group of companies with the exception of unrelated insurance
brokerage services). The fees paid to Mercer Kepler in respect of work carried out in 2017 (based on time and materials) totalled £44,405, excluding
expenses and VAT.
The Committee undertakes due diligence periodically to ensure that Mercer Kepler remains independent of the Company and that the advice provided is
impartial and objective. The Committee is satisfied that the advice provided by Mercer Kepler is independent.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 78
Directors’ Remuneration Report continued
Summary of shareholder voting at the 2017 AGM
The table below shows the results of the advisory vote on the 2016 Annual Report on Remuneration at the AGM on 11 May 2017:
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Note:
Votes withheld are not included in the final proxy figures as they are not recognised as votes in law.
Total number of votes
424,953,371
2016 Annual Report on Remuneration
% of votes cast
97.3%
11,934,005
436,887,376
104,922
2.7%
The Committee is committed to listening to and engaging with the views of our shareholders and takes an interest in voting outcomes. The Committee will
continue to be transparent in our remuneration decision-making and to engage with our shareholders on remuneration matters.
Single total figure of remuneration for Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by Ignacio Bustamante, the only Executive Director, for the year ended 31
December 2017 and the prior year:
Base salary1
Taxable benefits2
Single-year variable3
Multiple-year variable4
Restricted shares5
Profit share6
Compensation for Time Service (‘CTS’)7
Tax refunds
Total
2017
(US$000)
700
2016
(US$000)
702
26
875
1,737
1,064
–
2128
7
4,621
42
875
904
779
–
1659
7
3,47410
1 Figures disclosed include certain statutory payments accounted for internally within base salary (‘Statutory Supplements’) as follows. 2017: $300, 2016: $2k.
2 Taxable benefits include: use of a car and driver (2017: $20k; 2016: $36k) and medical insurance (rounded to nearest $000).
3 Payment for performance during the year under the Annual Bonus Plan. See following sections for further details.
4
2017 value comprises: (a) the 2015 LTIP award of $1m will fully vest based on performance to 31 December 2017 and subject to continued employment on the vesting date, and (b) the four-year tranche of the 2014
ELTIP will vest as to 86.3% ($737k using the three-month average share price for the period ending 31 December 2017 of 235.1p) based on performance to 31 December 2017 and subject to continued employment
on the vesting date. 2016 value comprises: 90.4% vesting from the 2014 LTIP award, and nil vesting from the six-year tranche of the 2011 ELTIP, based on performance to 31 December 2016.
2017 value comprises the second tranche of restricted shares granted on 30 December 2014 which vested on 30 December 2017 at a share price of 264p; the Committee determined that the individual
performance underpin had been met. 2016 value comprises the first tranche of restricted shares granted on 30 December 2014 which vested on 30 December 2016, at a share price of 211.5p.
5
6 All-employee profit share mandated by Peruvian law which, in light of the levels of taxable profit generated at the relevant entity level, has resulted in nil payout.
7 For further details on CTS, see page 71.
8 Comprises: CTS on base salary ($58k), 2017 bonus ($36k), 2015 LTIP ($42k), second tranche of vested RSP awards ($44k) and first tranche of the 2014 ELTIP ($31k) (all rounded to nearest $000).
9 Comprises: CTS on base salary ($58k), 2016 bonus ($36k), 2014 LTIP ($38k) and first tranche of vested RSP awards ($32k) (all rounded to nearest $000).
10 Restated to reflect CTS associated with each element of remuneration earned in respect of 2016 rather than CTS paid in 2016.
Annual Report & Accounts 2017 Hochschild Mining plc 79
Single total figure of remuneration for Non-Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Non-Executive Director for the year ended 31 December 2017 and the
prior year:
Eduardo Hochschild1
Dr Graham Birch
Jorge Born Jr3
Eileen Kamerick
Michael Rawlinson
Sanjay Sarma5
Former Directors
Enrico Bombieri6
Roberto Dañino7
Nigel Moore9
Base fee
(US$000)
2016
400
Additional fees
(US$000)
2016
–
2017
–
Taxable benefits
(US$000)
2016
5012
2017
555
68
68
10
68
n/a
68
68
68
–
–
104
–
–
12
1008
59
–
–3
–
–
n/a
–
2408
149
–
–
–
–
–
–
48
–
–
–
–
–
n/a
–
88
–
2017
400
74
74
74
74
74
74
23
23
Total
(US$000)
2016
901
68
68
10
68
n/a
68
316
82
2017
955
74
74
84
74
74
86
127
28
1
Eduardo Hochschild was an Executive Director until 31 December 2014, and as reported in the 2015 report, Eduardo Hochschild retained eligibility to receive benefits following his transition to the Non-Executive
Chairman role.
2 Restated to reflect the correct cost of personal security.
3 Jorge Born Jr originally waived his entitlement to an additional fee of £10,000 as Chairman of the Remuneration Committee in light of the challenging trading conditions faced by the Company at that time.
4 Eileen Kamerick received an additional fee upon assuming the role of Chair of the Audit Committee on 11 May 2017 (see below for further details).
5 Sanjay Sarma was appointed to the Board on 1 January 2017.
6
Enrico Bombieri originally waived his entitlement to additional fees in his capacity as Senior Independent Director and Chairman of the Remuneration Committee up until 1 September 2017 when they were
reinstated (see below for further details).
7 Roberto Dañino retired from the Board on 11 May 2017.
8
Pursuant to a contract between Mr Dañino and the Group dated 28 December 2010 in respect of his engagement as Special Adviser to the Chairman and the senior management team (a) an annual fee of
$240,000 was payable and (b) certain benefits were provided including medical insurance. The contract was terminated on Mr Dañino’s retirement from the Board.
9 Nigel Moore retired from the Board on 11 May 2017. Additional fees relate to the fees payable to Mr Moore as Chairman of the Audit Committee.
Salary and fee adjustments for the year ended 31 December 2017
Executive Director
The Committee reviewed the CEO’s salary in 2017 and determined that no increase would be awarded.
Executive Director
Ignacio Bustamante
Base salary from
1 March 2017
(US$000)
700
Base salary from
1 March 2016
(US$000)
700
Percentage
increase
0%
Base salaries above excludes CTS. Ignacio Bustamante’s salary is denominated in US dollars.
Non-Executive Directors
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. All Non-Executive Directors receive a base fee, and additional fees are typically paid for the role of Chairman of the Remuneration
Committee, Chairman of the Audit Committee and Senior Independent Director. The fees for the Non-Executive Directors excluding the Chairman were
reviewed during the year. The Board determined that as a result of improved trading conditions and as permitted under the Group’s Remuneration Policy,
fees for Non-Executive Directors were reinstated to their levels prior to August 2013, when fees were reduced as part of the Group’s cost-saving measures.
The revised fees took effect from 1 September 2017.
A summary of current fee levels is provided below:
Fee
Chairman fee
Base fee
Additional fees
Current fee
(effective from
1 September 2017)
US$400,000
£70,000
£14,000
Fee from
1 January 2017
US$400,000
£50,000
£10,000
Percentage
increase
0%
40%
40%
Enrico Bombieri had waived his right to the additional fees to which he was entitled as Chairman of the Remuneration Committee and Senior Independent
Director until 1 September 2017, when they were reinstated.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 80
Directors’ Remuneration Report continued
Incentive outcomes for the year ended 31 December 2017 (audited)
Annual bonus in respect of 2017 performance
Objectives for the 2017 bonus were set by the Committee at the beginning of the year and a provisional assessment of performance during the year was
undertaken at the November Committee meeting, which was confirmed in February 2018.
Further details of the bonus paid to the CEO for 2017, including the specific performance metrics, weightings and performance against each of the
metrics, are provided in the table below:
Objective
Profitable production
and financial results
KPI
Production
EBITDA1
Safety & Environmental
awareness
All-in sustaining cost (AISC)
Brownfields – inferred resources
(subject to permitting)
Frequency rate (LTIFR)
Accident Severity Index
ECO score2
Target
weighting
30%
15%
15%
10%
15%
10%
5%
Targets
Threshold
N/A
US$220m
US$13.5 Oz
Target
37m Oz Aq Eq
Maximum
37.9m Oz Aq Eq
Performance
assessment
38m Oz Ag Eq
US$241m
US$12.5 Oz
US$250m
US$242m
US$12.3 Oz
US$12.3 Oz
52m Oz Ag Eq
70m Oz Aq Eq
88m Oz Aq Eq
60.4m Oz Ag Eq
3.00
540
2.50
450
3.0 – 3.29
3.3 – 3.49
2.00
300
> 3.5
2.69
1,264
4.75
1 Adjusted as described in the final paragraph below.
2 Please refer to the Sustainability Report on page 43 for further details on the methodology of calculating the Group’s ECO score (the internally designed measurement of the Company’s environmental performance).
The determination of the bonus payout is at the discretion of the Committee, taking into account performance during the year against the above
scorecard. Each objective in the scorecard has a ‘threshold’, ‘target’ and ‘maximum’ performance target, achievement of which translates into a score for
each objective.
Objectives which are considered critical to the Group are given higher weightings, such that outperformance in these areas contributes more significantly
to the overall bonus outcome. The weighted average of the scores is calculated, and is translated into a bonus outcome of between 0% and 150% of salary
for the CEO, which is used in the Committee’s judgement in determining the actual bonus awarded.
The Committee assessed performance against the scorecard and the CEO’s performance in 2017. A number of adjustments were made in line with the
Company’s usual practice to (a) maintain the quality of earnings by primarily disregarding the impact of factors outside of management’s control such as
the price of silver and gold (as compared to the budgeted prices), the higher provision for vesting of LTIP awards (based on relative Total Shareholder
Return), and any budgetary additions approved by the Board, and (b) acknowledge other factors outside of management’s control which, in the context
of the Brownfields objective, meant the delays by the governmental authorities to process permitting applications for exploration activity. In addition, the
Committee considered the Group’s safety performance during the year and concluded that the impact on the CEO’s bonus entitlement resulting directly
from the failure to meet the objective on accident severity represented an appropriate reduction in remuneration. The Committee’s assessment of
performance resulted in the award of a bonus to the CEO of 125% of salary (83% of maximum).
2015 LTIP vesting
On 18 March 2015, Ignacio Bustamante was granted an award under the LTIP with a face value of US$1,000,000. Vesting was dependent on three-year
relative TSR performance against both a tailored peer group (70% of the total award) and the constituents of the FTSE350 Mining Index (30% of the total
award). There was no retesting of performance. Further details of the performance conditions are shown in the table below.
Performance measure
Relative TSR1 performance vs. tailored peer group2
Weighting
70%
Relative TSR1 performance vs. Constituents of the
FTSE350 Mining Index
30%
Performance targets
Upper quintile (80th percentile): full vesting
Upper tercile (67th percentile): 75% vesting
Median (50th percentile): 25% vesting
Straight-line vesting between these points
Median TSR +10% p.a.: full vesting
Median TSR: 25% vesting
Straight-line vesting between these points
1 TSR is calculated on the average of local and common currencies.
2
The 2015 LTIP peer group comprises: Acacia Mining, Agnico-Eagle Mines, Alamos Gold, AngloGold Ashanti, Barrick Gold, Centamin Egypt, Cia des Minas Buenaventura, Coeur Mining, Eldorado Gold, Fresnillo, Gold
Fields, Goldcorp, Hecla Mining, Highland Gold, IAMGOLD, Kinross Gold, Newmont Mining, Pan American Silver, Petropavlovsk, Polymetal, Randgold Resources, and Silver Standard Resources.
The Company’s TSR in the performance period between 1 January 2015 and 31 December 2017 ranked 86th percentile versus that for the tailored peer
group and outperformed the median of the constituents of the FTSE350 Mining Index by c.26% per annum. The Committee also considered the overall
underlying business performance of the Company over the period, and concluded that given the impact on the CEO’s 2017 bonus as a result of the Group’s
safety performance during the year, there should be no further adjustment to the formulaic vesting outcome in respect of the 2015 LTIP award. Therefore,
100% of the award will vest on 18 March 2018, subject to continued employment on that date.
Annual Report & Accounts 2017 Hochschild Mining plc 81
2014 ELTIP vesting
On 20 March 2014, Ignacio Bustamante was granted an award of 1,076,122 shares under the 2014 ELTIP (as adjusted for the rights issue in October
2015). Vesting was dependent on four-, five- and six-year relative TSR performance against a tailored peer group. There was no retesting of performance.
Further details of the performance conditions are shown in the table below:
Performance periods
1 January 2014 to 31 December 2017 in respect of 25% of the award
1 January 2014 to 31 December 2018 in respect of 25% of the award
1 January 2014 to 31 December 2019 in respect of 50% of the award
Vesting dates (subject to performance)
20 March 2018 in respect of 269,030 shares
20 March 2019 in respect of 269,030 shares
20 March 2020 in respect of 538,062 shares
Performance conditions
Relative TSR performance:
Upper decile (90th percentile): full vesting
Upper quartile (75th percentile): 75% vesting
Median (50th percentile): 25% vesting
Straight-line vesting between these points
TSR comparator group
Acacia Mining, Agnico-Eagle Mines, Alamos Gold, AngloGold Ashanti, Barrick Gold, Centamin Egypt, Cia des
Minas Buenaventura, Coeur Mining, Eldorado Gold, Fresnillo, Gold Fields, Goldcorp, Hecla Mining, Highland
Gold, IAMGOLD, Kinross Gold, Newmont Mining, Pan American Silver, Petropavlovsk, Polymetal, Randgold
Resources, and Silver Standard Resources
The Company’s TSR in the performance period between 1 January 2014 and 31 December 2017 ranked 82nd percentile versus that for the tailored peer
group. The Committee also considered the overall underlying business performance of the Company over the period, and concluded that given the impact
on the CEO’s 2017 bonus as a result of the Group’s safety performance during the year, there should be no further adjustment to the formulaic vesting
outcome in respect of this tranche of the 2014 ELTIP award. Therefore, 86.3% of the award will vest in March 2018, subject to continued employment on
the vesting date.
Scheme interests awarded in 2017 (audited)
On 8 March 2017, Ignacio Bustamante was granted a cash-settled award under the LTIP with a face value of $1.4 million.
Vesting is dependent on three-year relative TSR from 1 January 2017 to 31 December 2019, with 70% of the award based on TSR performance against a
tailored peer group and 30% of the award based on TSR performance against the constituents of the FTSE350 Mining Index.
Awards vest on the third anniversary of the date of grant, subject to continued employment, and are subject to potential malus if, before vesting, the
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. Awards are settled in cash
and the CEO will be required to invest at least 20% of any amount vesting into Hochschild shares, until such time as he has achieved the relevant
shareholding guideline.
Further details, including vesting schedules, are provided in the table below:
Executive Director
Ignacio Bustamante
Grant date
8 March 2017
Performance period
1 January 2017 to
31 December 2019
Face value of
award at grant
$1,400,000
Award value for
minimum performance
$350,000
Performance measure
Relative TSR1 performance vs. tailored peer group2
Weighting
70%
Relative TSR1 performance vs. constituents of the
FTSE350 Mining Index
30%
Performance targets
Upper quintile (80th percentile): full vesting
Upper tercile (67th percentile): 75% vesting
Median (50th percentile): 25% vesting
Straight-line vesting between these points
Median TSR +10% p.a.: full vesting
Median TSR: 25% vesting
Straight-line vesting between these points
1 TSR is calculated on the average of local and common currencies.
2
The 2017 LTIP peer group comprises: Acacia Mining, Agnico-Eagle Mines, Alamos Gold, AngloGold Ashanti, Barrick Gold, Centamin Egypt, Cia des Minas Buenaventura, Coeur Mining, Eldorado Gold, Endeavour
Silver, First Majestic Silver, Fortuna Silver Mines, Fresnillo, Gold Fields, Goldcorp, Hecla Mining, IAMGOLD, Kinross Gold, Newmont Mining, Pan American Silver, Petropavlovsk, Polymetal, Randgold Resources, Silver
Standard Resources, Tahoe Resources, and Volcan Compania Minera.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 82
Directors’ Remuneration Report continued
Exit payments made in the year (audited)
No exit payments were made to Directors in the year.
Payments to past Directors (audited)
No payments were made to past Directors in the year.
Implementation of Remuneration Policy for 2018
A summary of how the proposed Remuneration Policy will be applied for the year ended 31 December 2018, subject to shareholder approval,
is provided below.
Salary
The Committee reviewed the CEO’s salary and has determined that it shall remain unchanged at US$700k (excluding CTS).
Annual bonus
The maximum annual bonus opportunity for the CEO for the 2018 financial year will remain 150% of salary. The bonus payment will be subject to
performance against broadly the same measures as those used in 2017. Further disclosure of measures and targets, where not commercially sensitive,
will be provided in next year’s Annual Report on Remuneration. As referred to in the Chairman’s Statement and Remuneration Policy, effective from
the 2018 bonus, payout for ‘threshold’ and ‘target’ performance will be reduced to 50% (from 67%) and to 75% (from 83%) of the maximum
opportunity, respectively.
As in prior years, the Committee will use its judgement to determine the overall scorecard outcome based on the achievement of the targets and a broad
assessment of Company and individual performance. The Committee reviewed the Company’s malus policy during the year, and agreed to widen the policy
to include a more extensive list of trigger events, including but not limited to material misstatement, material failure of risk management, gross misconduct,
action or omission resulting in serious reputational damage. The revised malus provisions will apply to all incentives, including the annual bonus, effective
from 2018.
The Remuneration Committee will continue to retain discretion as to whether any part of the bonus should be paid in shares and/or deferred for any
period up to three years.
LTIP
Subject to shareholder approval, the Committee will make awards in 2018 within the maximum limits described in the proposed Remuneration Policy.
The performance conditions will be the same as for 2017 awards. The full comparator group is as follows: Acacia Mining, Agnico-Eagle Mines, Alamos Gold,
AngloGold Ashanti, Barrick Gold, Centamin Egypt, Cia des Minas Buenaventura, Coeur Mining, Eldorado Gold, Endeavour Silver, First Majestic Silver,
Fortuna Silver Mines, Fresnillo, Gold Fields, Goldcorp, Hecla Mining, IAMGOLD, Kinross Gold, Newmont Mining, Pan American Silver, Petropavlovsk,
Polymetal, Randgold Resources, Silver Standard Resources, Tahoe Resources, and Volcan Compañía Minera.
As referred to in the Chairman’s Statement and Remuneration Policy, effective from awards made in 2018, the LTIP time horizon will be extended such that
50% of a vested LTIP award will be paid immediately in cash, with remaining 50% invested (on an after tax basis) in the Company’s shares which are
required to be held for a further two years.
Revised malus provisions apply to LTIP awards granted in 2018 and subsequent years on the same basis as that described in the annual bonus section.
Percentage change in CEO remuneration
The table below shows the percentage change in CEO remuneration from the prior year compared with the percentage change in remuneration for all
other employees.
Base salary2
Taxable benefits
Single-year variable
CEO remuneration
US$000
2017
700
26
8753
2016
700
42
8753
% change
0%
-38.1%
0%
Other employees1
% change
7.9%
n/a
10.5%4
‘Other employees’ comprise full-time salaried employees in Peru.
1
2 Base salary only (ie excluding Statutory Supplements – see footnote 1 to table on Single total Figure of Remuneration for Executive Directors on page 78).
3 The CEO’s bonus is calculated with reference to base salary only, i.e. before CTS and tax rebates.
4 Estimated figure due to the unavailability of final actual data as at the date of this report.
Annual Report & Accounts 2017 Hochschild Mining plc 83
Relative importance of spend on pay
The table below shows the percentage change in total employee pay expenditure and shareholder distributions (that is dividends and share buybacks)
from the financial year ended 31 December 2016 to the financial year ended 31 December 2017.
Distribution to shareholders
(US$000)
Employee remuneration
(US$000)
2017
17,0001
2016
14,0001
% change
21.4%
2017
166,994
2016
143,891
% change
16.06%
1 Which, for each year shown, comprises the interim dividend and the final dividend (or in the case of 2017, the proposed final dividend).
The Directors are recommending the payment of a final dividend of US$10m for the year ended 31 December 2017.
Pay for performance
The following graph shows the TSR for the Company compared to the FTSE350 Mining Index and FTSE250 Index, assuming £100 was invested on
31 December 2008. The Board considers that the FTSE350 Mining Index is an appropriate published index as it reflects the sector that Hochschild
operates in, and the FTSE250 Index provides a view of performance against a broad equity market index of which Hochschild has been a constituent
for the majority of the past eight years. The table below details the CEO’s single figure remuneration and actual variable pay outcomes over the
same period.
Historical TSR performance
Growth in the value of a hypothetical £100 holding over the 9 years to 31 December 2017
700
600
500
400
300
200
100
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Hochschild
FTSE350 Mining Index
FTSE250 Index
CEO
CEO single figure
of remuneration
($000)
Annual bonus
outcome
(% of maximum)
LTI vesting outcome
(% of maximum)
2009
20101
20101
2011
2012
2013
2014
2015
2016
2017
Miguel
Aramburú
Miguel
Aramburú
Ignacio
Bustamante
Ignacio
Bustamante
Ignacio
Bustamante
1,228
1,019
1,525
1,120
1,852
Ignacio
Bustamante
999
Ignacio
Bustamante
924
Ignacio
Bustamante
Ignacio
Bustamante
Ignacio
Bustamante
1,328
3,4742
4,621
100%
46%
100%
100%
90%
81%
67%
67%
83%
83%
0%
0% 47% (LTIP)
0% 98% (LTIP)
0%
0%
0% 0% (ELTIP)
90% (LTIP)
86% (ELTIP)
100% (LTIP)
1 Miguel Aramburú resigned on 31 March 2010. Ignacio Bustamante was appointed on 1 April 2010.
2 See footnote 10 to table in section entitled ‘Single total figure of remuneration for Executive Directors’ on page 78.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 84
Directors’ Remuneration Report continued
Directors’ interests (audited)
The interests of the Directors and their families in the ordinary shares of the Company as at 31 December 2017 are detailed in the table below.
The Company has adopted shareholding guidelines whereby all Executive Directors (currently only the CEO) are required to acquire and retain a beneficial
shareholding in the Company equal to at least 200% of base salary. The guideline has been increased to 250% to take effect from the 2018 AGM for
additional shareholder alignment. The CEO is required to invest 20% of a vested LTIP award (on a net basis) and retain 50% of the after-tax vested ELTIP
shares until such time as he has met the shareholding guideline. In respect of awards granted under the proposed LTIP in 2018 and future years, the CEO
will be required to invest 50% of a vested LTIP award (on a net basis) regardless of his achievement of the shareholding guideline.
Vested but
subject to
holding
period
0
Unvested and
subject to
performance
conditions
1,971,066
Unvested and
subject to
deferral only
40,383
Shareholding
requirement
(% of salary)
200%1
Current
shareholding
(% of salary)
331%2
Requirement
met?
Yes
Owned outright
or vested at
31 Dec 2016
(or date of
appointment
if later)
531,751
Shares held
Owned outright
or vested at
31 Dec 2017
(or date of
retirement
if earlier)
650,448
Ignacio Bustamante
Eduardo Hochschild
274,065,373
258,565,373
Dr Graham Birch
Jorge Born Jr
Eileen Kamerick
Michael Rawlinson
Sanjay Sarma
Former Directors
Enrico Bombieri
Roberto Dañino
Nigel Moore
33,750
33,750
–
–
–
–
–
–
–
–
–
–
275,000
68,750
275,000
68,750
1 Shareholding guideline will increase to 250% of base salary from the 2018 AGM.
2 Using the Company’s closing share price and GBP/USD exchange rate as at 29 December 2017 (being the last trading day of the year) of 264p and £1:$1.351 respectively.
Other than the issuance of 298,314 shares to Ignacio Bustamante on 2 January 2018 following the vesting of RSP awards on 30 December 2017, there
have been no changes to Directors’ shareholdings since 31 December 2017.
Annual Report & Accounts 2017 Hochschild Mining plc 85
Directors’ interests in share options, shares and cash awards in Hochschild long-term incentive plans and all
employee plans
Details of Directors’ interests in shares and cash awards under Hochschild’s long-term incentives are set out in the table below.
Date of grant
Share price
at grant1
Exercise price
at grant
Number of shares
awarded1
Face value
at grant2
Performance
period
Vesting
date
Ignacio Bustamante
DBP3
2014 ELTIP
2014 ELTIP
2014 ELTIP
2014 LTIP
2015 LTIP
2016 LTIP
2017 LTIP
RSP4
RSP
RSP
16.03.16
16.03.16
20.03.14
20.03.14
20.03.14
12.03.14
18.03.15
09.03.16
08.03.17
30.12.14
30.12.14
30.12.14
87p
87p
155p
155p
155p
n/a
n/a
n/a
n/a
77p
77p
77p
Nil
Nil
Nil
Nil
Nil
n/a
n/a
n/a
n/a
Nil
Nil
Nil
40,383
40,383
269,030
269,030
538,062
n/a
n/a
n/a
n/a
298,314
298,314
596,630
£35,133
£35,133
£416,996
£416,996
£833,996
$1m
$1m
$1.4m
$1.4m
£229,046
£229,046
£458,094
n/a
n/a
01.01.14 – 31.12.17
01.01.14 – 31.12.18
16.03.17
16.03.18
20.03.18
20.03.19
01.01.14 – 31.12.19
20.03.20
01.01.14 – 31.12.16
01.01.15 – 31.12.17
01.01.16 – 31.12.18
12.03.17
18.03.18
09.03.19
01.01.17 – 31.12.19
08.03.20
n/a
n/a
n/a
30.12.17
30.12.18
30.12.19
1 These figures have been updated for the October 2015 rights issue and, in the case of the share price at grant, the share price has been rounded to the nearest pence.
2
The face values of equity-settled incentives are stated in Pounds Sterling, and cash-settled incentives, namely Long-Term Incentive Plan awards, are stated in US dollars (to be paid in US dollars or its equivalent in
Peruvian Nuevos Soles). These figures have been updated for the October 2015 rights issue.
3 50% of the 2016 DBP award (which relates to the deferred portion of the 2015 annual bonus) vested in March 2017 and the balance will vest in March 2018, subject to continued employment.
4 This second tranche of the 2014 RSP vested on 30 December 2017.
None of the Directors had an interest in the shares of any subsidiary undertaking of the Company or in any significant contracts of the Group.
External appointments
The table below details the fees received and retained by Ignacio Bustamante, as the only Executive Director in office during 2017, in respect of his external
Directorships.
Fee received
US$5,000
US$38,500
US$36,000
Name of company
Caral Edificaciones SAC
Profuturo AFP
Scotiabank Peru SAA
Signed on behalf of the Board
Michael Rawlinson
Chairman of the Remuneration Committee
20 February 2018
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 86
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law the Directors have
prepared the financial statements in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the EU.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and the parent company and of their profit or loss for that period. In preparing those financial statements, the Directors are
required to:
– select suitable accounting policies and then apply them consistently
– make judgements and estimates that are reasonable and prudent;
– state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and
– prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and
disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply
with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities. Under applicable law and regulations the Directors are also responsible for preparing a Strategic
Report, Directors’ Report, Directors’ remuneration report and Corporate governance statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation
in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Annual Report & Accounts 2017 Hochschild Mining plc Independent auditor’s report to the members of Hochschild Mining plc
87
Opinion
In our opinion:
– Hochschild Mining plc’s Group financial statements and parent company financial statements (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 2017 and of the Group’s profit for the year then ended;
– the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union;
– the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in
accordance with the provisions of the Companies Act 2006; and
– 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.
We have audited the financial statements of Hochschild Mining plc which comprise:
Group
Consolidated statement of financial position as at 31 December 2017
Consolidated income statement for the year then ended
Consolidated statement of comprehensive income for the year then ended
Consolidated statement of changes in equity for the year then ended
Consolidated statement of cash flows for the year then ended
Related notes 1 to 37 to the Consolidated financial statements
Parent company
Statement of financial position as at 31 December 2017
Statement of changes in equity for the year then ended
Statement of cash flows for the year then ended
Related notes 1 to 13 to the financial statements
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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent
of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including
the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these
requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Use of our report
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.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to you
whether we have anything material to add or draw attention to:
– the disclosures in the Annual Report set out on page pages 44 to 48 that describe the principal risks and explain how they are being managed or mitigated;
– the Directors’ confirmation set out on page 62 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity,
including those that would threaten its business model, future performance, solvency or liquidity;
– the Directors’ statement set out on page 54 in the financial statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least 12
months from the date of approval of the financial statements;
– whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R (3) is materially
inconsistent with our knowledge obtained in the audit; or
– the Directors’ explanation set out on page 49 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have
done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be
able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Overview of our audit approach
Key audit
matters
Audit scope
– Recoverability of the carrying value of the Group’s mining assets
– Revenue recognition
– Mine rehabilitation provisions
– We performed an audit of the complete financial information of three components, for two components we performed audit procedures
on specific accounts and for the remaining 13 components we performed other audit procedures
– The components where we performed full or specific audit procedures accounted for 97% of Adjusted EBITDA (on absolute basis), 100% of
Revenue and 96% of Total assets
Materiality
– Overall Group materiality of US$6.0m (2016: US$6.3m) which represents approximately 2% of Adjusted EBITDA
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 88
Independent auditor’s report to the members of Hochschild Mining plc
continued
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide
a separate opinion on these matters.
Key observations
communicated to the
Audit Committee
As a result of the audit
procedures performed,
we have concluded
that management’s
impairment indicator
analysis and impairment
assessment for the
Group’s CGUs has been
carried out appropriately
and in accordance with
the requirements of IFRS.
We further concluded
that the significant
assumptions used in the
recoverable value models
prepared by management
were appropriate, and
when applicable, fell within
the range of acceptable
outcomes.
Based on the procedures
performed, we concur
with management’s
conclusion to recognise an
impairment charge and
impairment reversals on
the relevant CGUs.
Furthermore, we concur
with management’s
assessment that the
carrying value of the
Volcan CGU is neither
further impaired nor
requires a reversal
of impairment as at
31 December 2017.
We concluded that
the related disclosures
in the Group financial
statements are
appropriate.
Risk
Recoverability of the carrying value of the Group’s
mining assets
Refer to the Audit Committee Report (page 61); Accounting
policies (page 99); and note 16 (page 120), 17 and 18 of the
Consolidated Financial Statements (page 122)
At 31 December 2017 the carrying value of the Group’s mining
assets were:
– Property, plant and equipment: US$895.7m (2016: US$975.5);
– Evaluation and exploration assets: US$147.4 (US$139.0); and
– Intangible assets: US$24.5m (2016: US$26.4m).
IFRS requires companies to test their non-current assets, by
cash-generating unit (CGU) or relevant group of CGUs, for
impairment whenever an indicator exists.
Additionally, IFRS requires testing the CGUs for impairment
reversal at the end of each reporting period by assessing whether
there is any indicator that an impairment loss recognised in prior
periods (for an asset other than goodwill) may no longer exist, or
may have decreased.
For the Group, the appropriate level of CGUs are:
– Operating mines: Arcata, Pallancata, Inmaculada and San Jose;
and
– Advanced exploration projects: San Felipe, Volcan, Azuca
and Crespo.
The Volcan CGU includes an intangible asset with an indefinite
useful life and therefore is tested for impairment at least annually
and whenever there is an indication that the asset might be
impaired.
Indicators of impairment were identified in 2017 with respect
to the Arcata CGU and indicators of impairment reversals were
identified with respect to the Pallancata and San Felipe CGUs:
– The Arcata mine unit experienced significant decrease in
production during the year as well as difficulties to replace
production with the conversion of resources into reserves.
– At Pallancata there was an increase in resources and reserves as
well as in production resulting in an increase in tonnage
and grades.
– At San Felipe the significant increase in zinc market prices over
the year resulted in an increase in the value of the project,
together with the proceeds received in connection
to the Group’s option agreement to sell San Felipe.
As consequence of the above indicators, management estimated
the recoverable amount of these assets which resulted in the
recognition of an impairment charge of $43.0m in respect of the
Arcata CGU and impairment reversals of $31.9m and $8.4m in
respect of Pallancata and San Felipe CGUs, respectively.
There is a risk that the carrying values of the Group’s mining assets
might not be recoverable or could require additional reversal of
impairments previously recognised. This risk has increased relative
to the prior year as a result of the impairments and impairment
reversals recognised during the year.
Our response to the risk
Our approach focused on the following procedures:
– Obtained an understanding of management’s process and
key controls over impairment of mining assets, and walked
through the process in order to assess their design
effectiveness in supporting the prevention, detection or
correction of material errors in the financial statements
– Obtained management’s assessment of whether any indicators of
impairment or reversal of impairment were present during 2017,
following the requirements of IAS 36 and IFRS 6
– We corroborated the validity and completeness of the
indicators identified by management. For this purpose, we
considered management’s assessment by reference to our
knowledge of the business and the following procedures:
– We compared and assessed the changes to the spot and
analyst forecasts of future gold and silver prices between
31 December 2016 and 31 December 2017
– We obtained and tested relevant support of management’s
position on market interest rates and other macro-economic
factors
– For all operating mines, we assessed the economic
performance of the CGUs during the year and identified
progress against approved mine plans and budgets, taking
into account updated reserves and resources estimates
– For exploration projects we obtained an understanding
of management’s plans to recover the carrying value in
full from successful development or by sale
– We obtained the recoverable value models from management
for all those CGUs requiring a full impairment assessment and
assessed the appropriateness of the methodology applied in
preparing the model as well as the arithmetical accuracy of
management’s model
– With respect to the recoverable value model for the Arcata and
Pallancata CGUs, we performed the following procedures:
– We challenged the appropriateness of key assumptions
such as price, production volumes, grades, operating cost and
capex by comparing to third party/independent sources or
other evidence and performed sensitivity analyses on
significant inputs
– We agreed the main inputs to approved mine plans or
budgets, and compared them with historical actual figures
where appropriate
– We involved our valuation specialists to assist us in
assessing the appropriateness of the discount rate used
in the calculation
– With respect to the recoverable value model for the
San Felipe and Volcan CGUs, we agreed the main inputs
used to information from third party/independent sources.
– In addition, for the Volcan CGU, we involved our valuation
specialists to assist us in assessing the appropriateness of the
methodology applied to determine the carrying value of the
CGU as well as the key assumption used therein
– We compared the calculated recoverable value to the
associated carrying value, assessing whether any impairment
charges, or reversal of previously recognised impairment
charges, were necessary
– Furthermore, we considered the appropriateness, sufficiency,
and clarity of the impairment-related disclosures provided in
the financial statements and disclosures of sensitivities
We performed audit procedures at the Group level over this
risk area covering 100% of the risk amount.
Annual Report & Accounts 2017 Hochschild Mining plc 89
Key observations
communicated to the
Audit Committee
As a result of the
procedures performed,
we concluded that the
Group has appropriately
accounted for the revenue
transactions in
accordance with IFRS,
including the appropriate
determination of the
provisional pricing
adjustment.
As a result of the
procedures performed
we concluded that the
provisions for mine
rehabilitation activities
have been recognised
appropriately in
accordance with IFRS,
and that all required
disclosures have been
included in the Group
financial statements.
Based on the information
available, we consider the
judgements and
assumptions made by
management and the
external specialists to be
reasonable.
Risk
Revenue recognition
Refer to the Audit Committee Report (page 61); Accounting
policies (page 99); and note 5 of the Consolidated Financial
Statements (page 113)
For the year ended 31 December 2017 the Group recognised
revenue from operations of US$722.6m (2016: US$688.2m).
The significant number of sales transactions and complex terms
under which title, risks and rewards pass to the customer
increases the risk of cut-off errors. We have also identified risks in
relation to the calculation of the adjustment for provisional
pricing, including the estimate of silver and gold in the
concentrate sold. In particular:
– Cut-off: the complexity of terms that define when title, risk and
reward are transferred to the customer, as well
as the high value of the transactions, give rise to the risk that
revenue is not recognised in the correct period.
– Measurement: at each reporting period there are a number
of open invoices that are provisionally priced including the
estimate of silver and gold in the concentrate sold and the
forward pricing of those sales. Estimation is used in the
valuation of the embedded derivative and the income
statement impact of the mark to market movement which is
recorded in revenue. This calculation is based on estimations
and susceptible to potential manipulation
The risk relating to revenue recognition has remained stable
in comparison to the prior year as no significant changes were
noted in sales agreements.
Mine rehabilitation provisions
Refer to the Audit Committee Report (page 61); Accounting
policies (page 99); and note 26 of the Consolidated Financial
Statements (page 128)
At 31 December 2017 management has recorded a mine
rehabilitation provision of US$100.1m (2016: US$102.4m).
Management is required to provide for the costs of
environmental rehabilitation and site restoration in accordance
with IAS 37 ‘Provisions, contingent liabilities and contingent
assets’.
Given the high level of judgement and estimation in assessing the
method, timing and quantum of the cash flows required to
rehabilitate mines, this is an area of audit focus.
The risk relating to mine rehabilitation provisions has remained
stable in comparison to the prior year, however as certain mines
are approaching the end of life, this matter still had a greater
effect on directing the efforts of the engagement team and
therefore we consider it as a key audit matter.
Our response to the risk
Our approach focused on the following procedures:
– Obtained an understanding of the key controls around the
revenue recognition process sufficient to assess its design
effectiveness in supporting the prevention, detection or
correction of material errors in the reported revenue figures
– Tested the operating effectiveness of key controls at one
component (where this was deemed a more efficient approach
than substantive testing, after considering the number of sales
transactions), including those controls over provisional pricing
– Read the terms and conditions of material sales contracts and
ensured they have been accounted for in line with the Group's
revenue recognition policy
– Performed detailed substantive testing procedures over the
revenue transactions. This included: agreeing the main inputs to
supporting evidence (such as provisional and final invoices,
credit/debit notes, bill of ladings, market prices, agreements and
bank statements), recalculating the amounts invoiced and
recorded as revenue, performing cut-off testing to ensure
revenue is recognised in the correct period
– For open sales where provisional pricing applies, we verified with
external sources that inputs used were appropriate and
recalculated the provisional price adjustment to ensure it was
correctly measured
– Investigated and understood the nature of any significant
credits raised post year-end to ensure that transactions
were recorded at the correct value in the relevant period
– Tested reconciliation of year-end inventory by agreeing the
movements of production and sales transactions to the
respective reports
– Read and assessed the financial statements disclosures to
ensure that presentation and all the disclosure requirements in
respect of revenue and the provisional pricing have
been included
We performed audit procedures in two components under
full scope audit, covering 100% of this risk amount.
Our approach consisted of the following procedures:
– Obtained an understanding of management’s process to
estimate the future restoration costs
– Obtained a detailed understanding of the mine closure reports
issued by the external specialists engaged by the Group to
update the mine closure plans, and held discussions directly
with the specialists, to understand their work and assess the
sufficiency of the Group’s restoration provisions
– Assessed the objectiveness and competence of the external and
internal specialists used by management
– Understood the main changes or lack of changes in estimates
and new restoration costs and challenged the rationale behind
these. For this purpose we held discussions with management
and the third party specialist as well as performed comparison
to prior year figures and enquired about significant variances
– Performed an overall recalculation of the mine rehabilitation
provision, including assessing the appropriateness of the
discount rate applied by agreeing the nominal risk free rate
according to the life of each mine unit to independent sources
– Assessed the appropriateness of the accounting for the changes
to these provisions, and ensured that these changes and the
provisions were appropriately reflected and disclosed in the
Group financial statements
We performed audit procedures on two full scope components,
covering 99% of this risk amount.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 90
Independent auditor’s report to the members of Hochschild Mining plc
continued
The key audit matters included in our auditor’s report are consistent with those included in prior year.
As part of our audit, we also addressed the risk of management override of internal controls, including evaluating whether there is evidence of bias by
the Directors that may represent a risk of material misstatement due to fraud. The above is not a complete list of all risks identified by our audit.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determines our audit scope for each entity within
the Group. Taken together, this enables us to form an opinion on the Consolidated financial statements. We take into account size, risk profile, the
organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors such as recent internal Audit
results when assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant
accounts in the financial statements, of the 18 reporting components of the Group, we selected three components covering entities within the UK,
Peru and Argentina, which represent the principal business units within the Group.
We performed an audit of the complete financial information for three components ('full scope components') which were selected based on their size
or risk characteristics. In addition to this, for two components ('specific scope components') we performed audit procedures on specific accounts within
those components that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of
the size of these accounts or their risk profile.
The reporting components where we performed audit procedures accounted for 97% (2016: 97%) of the Group’s Adjusted EBITDA (on an absolute
basis), 100% (2016: 100%) of the Group’s Revenue and 96% (2016: 96%) of the Group’s Total assets. For the current year, the full scope components
contributed 97% (2016: 97%) of the Group’s Adjusted EBITDA, 100% (2016: 100%) of the Group’s Revenue and 89% (2016: 90%) of the Group’s Total
assets. The specific scope components contributed 7% (2016: 6%) of the Group’s Total assets. The audit scope of these components may not have
included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.
Of the remaining 13 components that together represent 3% of the Group’s Adjusted EBITDA, none are individually greater than 2% of the Group’s
Adjusted EBITDA. For these components, we performed other procedures, including analytical reviews, testing of consolidation journals and enquiry
of management about unusual transactions in these components, to respond to any potential risks of material misstatement to the Group financial
statements.
The reporting components where we performed audit procedures represented:
Adjusted EBITDA
Revenue
Total assets
97% Full scope components
3% Other procedures
100% Full scope components
89% Full scope components
7% Specific scope components
4% Other procedures
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as
the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Of the three full
scope components, audit procedures were performed on one of these directly by the primary audit team. For the two specific scope components, the
primary audit team performed the audit procedures.
The Group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visits each of
the primary operating locations where the Group audit scope was focused. During the current year’s audit cycle, visits were undertaken by the primary
audit team, including the Senior Statutory Auditor, to the component team in Peru and by the Senior Statutory Auditor to the component team in
Argentina. These visits involved discussing the audit approach with the component team and any issues arising from their work and meetings with local
management. In addition, the primary team interacted regularly with the component teams where appropriate during various stages of the audit, were
responsible for the scope and direction of the audit process, attended closing meetings either in person or by call and reviewed key audit working papers
on risk and other areas. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the
Group financial statements.
Annual Report & Accounts 2017 Hochschild Mining plc 91
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the
users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be US$6.0 million (2016: US$6.3 million), which is approximately 2% (2016: 2%) of the Group’s Adjusted
EBITDA. We believe that Adjusted EBITDA provides us with an earnings-based measure that is significant to users of the financial statements on which
we could set our materiality. This was deemed to be a critical measure for users of the financial statements, given the focus on this metric by the Group’s
shareholders, investors and external lenders, specifically as an Adjusted EBITDA measure is used to assess the Group’s compliance with key restrictive
covenants on the Group’s borrowings.
We determined materiality for the parent company to be US$21.1 million (2016: US$16.4 million), which is 1% (2016: 1%) of Equity. The parent
company materiality is higher than the Group materiality as it is based on Equity, which we considered to be an appropriate basis for materiality for a
holding company, as the users of the financial statements focus on a capital-based measured.
Starting basis
– Profit from continuing operations before exceptional items, net of finance cost, foreign
exchange loss and income tax
– Add: Depreciation and amortisation in cost of sales and in administrative expenses
– Add: Exploration expenses other than personnel and other exploration related fixed expenses
Adjustments
– Add: Other non-cash expenses
– Adjusted EBITDA – US$300.8m
– Materiality: 2% of Adjusted EBITDA – US$6.0m
Materiality
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance
materiality was 75% (2016: 75%) of our planning materiality, namely US$4.5 million (2016: US$4.7 million). We have set performance materiality at this
percentage due to our understanding of the Group’s control environment and that there have been no significant events that would alter our expectation
that there is a low likelihood of misstatements that would be material individually or in aggregate to the financial statements.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a
percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component
to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality
allocated to components was US$2.2 million to US$3.8 million (2016: US$3.0 million to US$3.8 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$300k (2016: US$315k), which is set
at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative
considerations in forming our opinion.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 92
Independent auditor’s report to the members of Hochschild Mining plc
continued
Other information
The other information comprises the information included in the Annual Report set out on pages 1 to 86, including the Strategic Report and Governance
sections (including Directors’ Report, Corporate Governance Report, Supplementary Information, Directors’ Remuneration Report and Statement of
Directors’ Responsibilities), other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in
the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a
material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to
report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:
– Fair, balanced and understandable set out on page 54 – the statement given by the Directors that they consider the Annual Report and financial
statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s
performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
– Audit Committee reporting set out on pages 59 to 62 – the section describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee; or
– Directors’ statement of compliance with the UK Corporate Governance Code set out on page 55 – the parts of the Directors’ statement
required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for
review by the Auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate
Governance Code.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent
with the financial statements; and
– the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have
not identified material misstatements in:
– the Strategic Report or the Directors’ Report; or
– the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given
in compliance with rules 7.2.5 and 7.2.6 of the FCA Rules.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
– 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
– 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
– certain disclosures of Directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit; or
– a Corporate Governance Statement has not been prepared by the Company.
Responsibilities of Directors
As explained more fully in the Directors’ Responsibilities Statement set out on page 86, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group and parent company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate
the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of these financial statements.
Annual Report & Accounts 2017 Hochschild Mining plc 93
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
The objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the financial statements due to fraud; to
obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing
appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the
prevention and detection of fraud rests with both those charged with governance of the entity and management.
Our approach was as follows:
– We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant which
are directly relevant to specific assertions in the financial statements are those related to the report framework (IFRS, the Companies Act 2006 and UK
Corporate Governance Code) and the relevant tax compliance regulations in UK, Peru and Argentina.
– We understood how Hochschild Mining plc is complying with those legal and regulatory frameworks by making enquiries of management, internal audit,
those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of Board minutes
and papers provided to the Audit Committee.
– We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by meeting with
management from various parts of the business to understand where it is considered there was a susceptibility of fraud. We also considered performance
targets and their propensity to influence on efforts made by management to manage earnings. We considered the programmes and controls that the
Group has established to address risks identified, or that otherwise prevent, deter and detect fraud; and how senior management monitors those
programmes and controls. Where the risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These
procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free of fraud or error.
– Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identified in the paragraphs
above. Our procedures involved: journal entry testing, with a focus on manual consolidation journals and journals indicating large or unusual transactions
based on our understanding of the business; enquiries of legal counsel, Group management, internal audit and all full and specific scope management;
and focused testing, as referred to in the key audit matters section above.
– In addition, we concluded that there are certain significant laws and regulations which may have an effect on the determination of the amounts and
disclosures in the financial statements being the Listing Rules of the UK Listing Authority, and those laws and regulations relating to health and safety and
environmental matters.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.
frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s report.
Other matters we are required to address
– We were appointed by the Company on 16 October 2006 to audit the financial statements of the Company for the period ending 31 December 2006 and
subsequent financial periods. Following a competitive tender process, we were reappointed as Auditor of the Company for the period ending 31
December 2016 and subsequent financial periods.
– The period of total uninterrupted engagement including previous renewals and reappointments is 12 years, covering periods from our initial appointment
in 2006 through to the year ended 31 December 2017.
– The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of
the Group and the parent company in conducting the audit.
– The audit opinion is consistent with the additional report to the Audit Committee.
Mirco Bardella
Senior statutory auditor
for and on behalf of Ernst & Young LLP, Statutory Auditor, London
20 February 2018
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
94
Consolidated income statement
For the year ended 31 December 2017
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Exploration expenses
Selling expenses
Other income
Other expenses
Impairment and write-off of non-current assets, net
Profit/(loss) from continuing operations before net
finance income/(cost), foreign exchange loss and
income tax
Finance income
Finance costs
Foreign exchange loss
Profit/(loss) from continuing
operations before income tax
Income tax (expense)/benefit
Profit/(loss) for the year from continuing operations
Attributable to:
Equity shareholders of the Company
Non-controlling interests
Basic earnings/(loss) per ordinary share from continuing
operations for the year (expressed in US dollars per share)
Diluted earnings/(loss) per ordinary share from continuing
operations for the year (expressed in US dollars per share)
Year ended 31 December 2017
Year ended 31 December 2016
Before
exceptional
items
US$000
Exceptional
items
(note 11)
US$000
Before
exceptional
items
US$000
Exceptional
items
(note 11)
US$000
Total
US$000
Notes
3,5
6
7
8
9
12
12
11
13
13
14
15
15
722,572
(549,049)
173,523
(51,283)
(17,199)
(11,024)
10,192
(11,549)
(405)
92,255
5,927
(26,095)
(5,257)
66,830
(13,475)
53,355
41,035
12,320
53,355
0.08
0.08
–
–
–
–
–
–
–
–
(2,753)
(2,753)
–
–
–
(2,753)
3,279
526
526
–
526
–
–
722,572
(549,049)
173,523
(51,283)
(17,199)
(11,024)
10,192
(11,549)
(3,158)
89,502
5,927
(26,095)
(5,257)
64,077
(10,196)
53,881
41,561
12,320
53,881
0.08
0.08
688,242
(487,702)
200,540
(47,979)
(9,193)
(14,175)
33,131
(13,858)
(278)
148,188
1,100
(30,541)
(1,800)
116,947
(47,641)
69,306
53,154
16,152
69,306
0.11
0.10
–
–
–
–
–
–
2,667
(10,675)
(1,634)
(9,642)
974
–
–
(8,668)
2,224
(6,444)
(7,604)
1,160
(6,444)
(0.02)
(0.01)
Total
US$000
688,242
(487,702)
200,540
(47,979)
(9,193)
(14,175)
35,798
(24,533)
(1,912)
138,546
2,074
(30,541)
(1,800)
108,279
(45,417)
62,862
45,550
17,312
62,862
0.09
0.09
Consolidated statement of comprehensive income
For the year ended 31 December 2017
Profit for the year
Other comprehensive income to be reclassified to profit or loss in subsequent periods:
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
Recycling of the loss on cash flow hedges
Deferred income tax relating to components of other comprehensive income
Other comprehensive loss for the year, net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity shareholders of the Company
Non-controlling interests
Notes
19
14
Year ended
31 December
2017
US$000
53,881
2016
US$000
62,862
139
(323)
(1,354)
–
–
–
(1,538)
52,343
40,023
12,320
52,343
(249)
774
(66)
(39,989)
18,722
5,955
(14,853)
48,009
30,697
17,312
48,009
Annual Report & Accounts 2017 Hochschild Mining plc Consolidated statement of financial position
As at 31 December 2017
ASSETS
Non-current assets
Property, plant and equipment
Evaluation and exploration assets
Intangible assets
Available-for-sale financial assets
Trade and other receivables
Other financial assets
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
Deferred income tax liabilities
Current liabilities
Trade and other payables
Other financial liabilities
Borrowings
Provisions
Deferred income
Income tax payable
Total liabilities
Total equity and liabilities
95
As at
31 December
2017
US$000
As at
31 December
2016
US$000
Notes
16
17
18
19
20
36(e)
28
21
20
36(e)
22
27
27
27
27
24
25
26
23
28
24
36(e)
25
26
23
895,666
147,399
24,544
6,264
7,487
1,333
2,400
1,085,093
56,678
81,066
21,241
1,258
256,988
417,231
1,502,324
224,315
438,041
(140)
(217,061)
286,356
731,511
90,177
821,688
1,081
291,955
104,107
30,409
56,040
483,592
116,779
–
67,863
6,203
400
5,799
197,044
680,636
1,502,324
975,483
138,985
26,379
991
25,717
–
1,027
1,168,582
57,056
68,120
20,988
–
139,979
286,143
1,454,725
224,315
438,041
(426)
(217,288)
258,269
702,911
90,442
793,353
1,266
291,073
106,121
25,000
65,971
489,431
98,484
1,726
36,312
5,406
–
30,013
171,941
661,372
1,454,725
These financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by:
Ignacio Bustamante
Chief Executive Officer
20 February 2018
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 96
Consolidated statement of cash flows
For the year ended 31 December 2017
Cash flows from operating activities
Cash generated from operations
Interest received
Interest paid
Payment of mine closure costs
Income 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
Purchase of intangibles
Purchase of available-for-sale financial assets
Net proceeds from sale of subsidiary
Proceeds from sale of available-for-sale financial assets
Proceeds from sale of other assets
Proceeds from deferred income
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds of borrowings
Repayment of borrowings
Dividends paid to non-controlling interests
Dividends paid
Cash flows generated from/(used in) financing activities
Net increase 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
2017
US$000
2016
US$000
32
26
17
18
19
4
19
23
25
25
29
29
22
287,799
1,445
(23,942)
(4,359)
(27,024)
233,919
(119,630)
(4,878)
(16)
(4,383)
–
1,567
1,570
4,000
716
(121,054)
69,500
(38,000)
(12,585)
(13,996)
4,919
117,784
(775)
139,979
256,988
345,856
860
(27,074)
(3,355)
(214)
316,073
(126,495)
(3,478)
(14)
–
807
149
1,550
–
117
(127,364)
70,000
(177,431)
(17,736)
(6,998)
(132,165)
56,544
(582)
84,017
139,979
Annual Report & Accounts 2017 Hochschild Mining plc Consolidated statement of changes in equity
As at 31 December 2017
97
Other reserves
Equity
share
capital
US$000
Share
premium
US$000
Treasury
shares
US$000
Notes
Unrealised
gain on
available-
for-sale
financial
assets
US$000
Unrealised
gain/
(loss) on
hedges
US$000
Cumulative
translation
adjustment
US$000
Share-
based
payment
reserve
US$000
Merger
reserve
US$000
Total
other
reserves
US$000
Retained
earnings
US$000
Capital and
reserves
attributable
to
shareholders
of the Parent
US$000
Non-
controlling
interests
US$000
Total
equity
US$000
223,805
438,041
(898)
32
15,312
(13,602)
(210,046)
4,655 (203,649)
218,093
675,392
90,113
765,505
Balance at
1 January 2016
Other
comprehensive
income/(expense)
Profit for the year
Total
comprehensive
income/
(expense)
for the year
Exercise of share
options
Dividends
Dividends to
non–controlling
interests
Share-based
payments
Balance at
31 December 2016
Other
comprehensive
income/(expense)
Profit for the year
Total
comprehensive
income/ (expense)
for the year
Exercise of
share options
Dividends
Dividends to
non–controlling
interests
Share-based
payments
–
–
–
27(a)/(b)
510
29
29
27(c)
–
–
–
–
–
–
–
–
–
–
–
–
–
472
–
–
–
–
–
–
–
224,315
438,041
(426)
740
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,677)
–
–
(1,677)
286
–
–
–
–
–
–
–
27(b)
29
29
27(c)
708
(15,312)
(249)
–
–
–
708
(15,312)
(249)
–
–
–
–
–
–
–
–
–
(14,853)
–
(14,853)
–
(14,853)
–
45,550
45,550
17,312
62,862
–
(14,853)
45,550
30,697
17,312
48,009
(2,223)
(2,223)
1,241
–
(6,998)
(6,998)
–
–
–
(6,998)
–
–
–
–
–
–
(16,983)
(16,983)
3,437
3,437
383
3,820
–
3,820
–
–
–
–
(13,851)
(210,046)
5,869 (217,288)
258,269
702,911
90,442
793,353
139
–
139
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,538)
–
(1,538)
–
(1,538)
–
41,561
41,561
12,320
53,881
–
(1,538)
41,561
40,023
12,320
52,343
(48)
(48)
(238)
–
– (13,996)
(13,996)
–
–
–
(13,996)
–
–
–
(12,585)
(12,585)
1,813
1,813
760
2,573
–
2,573
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Balance at
31 December 2017
224,315
438,041
(140)
(937)
(13,712)
(210,046)
7,634 (217,061)
286,356
731,511
90,177
821,688
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 98
Notes to the consolidated financial statements
For the year ended 31 December 2017
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 17 Cavendish Square,
London W1G 0PH, 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 (Arcata, Pallancata and
Inmaculada) located in southern Peru and one operating mine (San Jose) located in Argentina. 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 20 February 2018.
The Group´s subsidiaries are as follows:
Company
Hochschild Mining (Argentina) Corporation S.A. 1
MH Argentina S.A. 2
Minera Santa Cruz S.A. 1, 8
Minera Hochschild Chile S.C.M. 3
Andina Minerals Chile Ltd. 3
Southwest Minerals (Yunnan) Inc. 4
Hochschild Mining Holdings Limited 5
Hochschild Mining Ares (UK) Limited 5
Southwest Mining Inc. 4
Southwest Minerals Inc. 4
Minera Hochschild Mexico, S.A. de C.V 6
Hochschild Mining (Peru) S.A. 4
Compañía Minera Ares S.A.C. 4
Compañía Minera Arcata S.A. 4
Empresa de Transmisión Aymaraes S.A.C. 4
Minera Antay S.A.C. 4
Hochschild Mining (US) Inc. 7
Principal activity
Holding company
Exploration office
Production of gold and silver
Exploration office
Exploration office
Exploration office
Holding company
Administrative office
Exploration office
Exploration office
Exploration office
Holding company
Production of gold and silver
Production of gold and silver
Power transmission
Exploration office
Holding company
Equity interest at
31 December
Country of
incorporation
2017
%
2016
%
Argentina
Argentina
Argentina
Chile
Chile
China
England and Wales
England and Wales
Mauritius
Mauritius
Mexico
Peru
Peru
Peru
Peru
Peru
USA
100
100
51
100
100
100
100
100
100
100
100
100
100
99.1
100
100
100
100
100
51
100
100
100
100
100
100
100
100
100
100
99.1
100
100
100
Registered address: Av. Santa Fe 2755, floor 9, Buenos Aires, Argentina.
1
2 Registered address: Sargento Cabral 124, Comodoro Rivadavia, Provincia de Chubut, Argentina.
3 Registered address: Av. Apoquindo 4775, office 1002, Santiago de Chile, Chile.
4 Registered address: La Colonia 180, Santiago de Surco, Lima, Peru.
5 Registered address: 17 Cavendish Square, London, W1G0PH, United Kingdom.
6 Registered address: Bustamante N 2106, Col Altavista, CP 31200, Chihuahua, Ciudad de Mexico, Mexico.
7 Registered address: 1025 Ridgeview Dr. 300, Reno, Nevada 89519, USA.
8
The Group has a 51% interest in Minera Santa Cruz S.A., while the remaining 49% is held by a non-controlling interest. The significant financial information in respect of this subsidiary before intercompany
eliminations as at and for the years ended 31 December 2017 and 2016 is as follows:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Equity
Revenue
Profit for the year and total comprehensive income
Net cash generated from operating activities
Net cash used in investing activities
Cash flow used in financing activities
As at 31 December
2017
US$000
184,852
103,792
(62,745)
(44,726)
(181,173)
227,094
25,147
58,308
(36,199)
(17,884)
2016
US$000
216,124
107,196
(83,823)
(57,837)
(181,660)
235,961
35,262
102,923
(35,221)
(44,655)
Profit attributable to non-controlling interests in the consolidated income statement, non-controlling interest in the consolidated statement of financial
position, and dividends declared to non-controlling interests in the consolidated statement of changes in equity are solely related to Minera Santa Cruz S.A.
Annual Report & Accounts 2017 Hochschild Mining plc 99
2 Significant accounting policies
(a) Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the
European Union (EU) and the Companies Act 2006.
The basis of preparation and accounting policies used in preparing the consolidated financial statements for the years ended 31 December 2017 and 2016
are set out below. The consolidated financial statements have been prepared on a historical cost basis except for the revaluation of certain financial
instruments that are measured at fair value at the end of each reporting period, as explained below. These accounting policies have been consistently
applied, except for the effects of the adoption of new and amended accounting standard.
The financial statements are presented in US dollars (US$) and all monetary amounts are rounded to the nearest thousand ($000) except when
otherwise indicated.
The financial statements have been prepared on the going concern basis. Details of the factors which have been taken into account in assessing the Group’s
going concern status are set out within the Directors’ Report.
Changes in accounting policy and disclosures
The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those applied in the preparation of the
consolidated financial statement for the year ended 31 December 2016. Amendments to standards and interpretations which came into force during the
year did not have a significant impact on the Group’s financial statements and are as follows:
– IAS 7 Statement of cash flows, applicable for annual periods beginning on or after 1 January 2017
The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising
from cash flows and non-cash changes. The adoption of these amendments would not have an impact on the Group´s financial position or performance.
The Group has provided the information for the current year in note 25.
– IAS 12 Income Taxes, applicable for annual periods beginning on or after 1 January 2017
The amendments clarify the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. Entities are required to
apply the amendments retrospectively. The adoption of these rules did not have a significant impact on the Group´s financial position or performance.
Standards, interpretations and amendments 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 2018 or later periods but which the Group has not previously adopted. Those that are applicable to the Group are as
follows:
– IFRS 15 Revenue from Contracts with Customers, applicable for annual periods beginning on or after 1 January 2018
The IASB has issued a new standard for the recognition of revenue arising from contracts with customers. The new revenue standard will supersede all
current revenue recognition requirements under IFRS.
The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The Group has evaluated
recognition and measurement of revenue based on the five-step model in IFRS 15 and has not identified significant financial impacts, hence no adjustments
will be recorded derived from the adoption of IFRS 15 other than certain reclassifications as explained below.
The Group will adopt the new standard from 1 January 2018 applying the simplified transition method and modified retrospective approach. Certain
disclosures will change as a result of the requirements of IFRS 15.
The key issues identified, and the Group’s views and perspective are set below. These are based on the Group’s current interpretation of IFRS 15 and may be
subject to changes as interpretations evolve more generally. Furthermore, the Group is considering and will continue to monitor any further development.
– Embedded derivatives arising from the sales: As discussed in note 2(p), some of the Group’s sales of gold and silver contain provisional pricing features
which are currently considered to be embedded derivatives recorded within sales. Under IAS 18, revenue is recognised at the estimated fair value of the
total consideration received or receivable when the gold and silver is delivered, which is usually when title has passed to the customer. The fair value is
based on the most recent determined estimate of metal content and the estimated forward price that the entity expects to receive at the end of the
quotational period stipulated in the contract. The revaluation of provisionally priced contracts is recorded as an adjustment to revenue. IFRS 15 will not
change the assessment of the provisional price adjustment, however as they are not considered within the scope of IFRS 15, the Group will account for
these in accordance with IFRS 9. Therefore, subsequent changes in fair value will be recognised in the statement of profit or loss and other
comprehensive income as part of ‘other income/other expenses’.
– Impact of shipping terms: The Group sells a portion of its production on CIF Incoterms and therefore the Group is responsible for shipping services after
the date at which control of the gold and silver passes to the customer. Under IAS 18, these shipping services are currently not considered to be part of
the revenue transaction and thus the Group has disclosed them as selling expenses. However, under IFRS 15 the Group should reclassify the portion of
those selling expenses relating to transport of gold and silver from the Group’s production plants to the ports and reclassify those costs to cost of sales.
The Group estimates that approximately US$4,800,000 would be reclassified from selling expenses to cost of sales, based on 2017 figures. In addition,
the Group needs to assess the amount of remaining costs related to shipping services which are considered a separate performance obligation under
IFRS 15 and therefore a portion of the revenue currently recognised when the title has passed to the customer will need to be deferred and recognised as
the shipping services are subsequently provided. Based on the analysis performed during 2017, the Group determined that the overall impact on the
timing of revenue recognition related to these shipping services will not be material and consequently such revenue will not be disclosed separately.
– IFRS 9 Financial Instruments, applicable for annual periods beginning on or after 1 January 2018.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 100
Notes to the consolidated financial statements
continued
2 Significant accounting policies continued
IFRS 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules
for hedge accounting and a new impairment model for financial assets.
Based on the assessment performed, the Group expects the new guidance to have the following impacts on the classification and measurement of its
financial instruments:
– Classification and measurement of the embedded derivatives arising from sales: The financial assets and liabilities arising from the revaluation provisional
priced contracts is currently disclosed separately in the balance sheet as part of ‘other financial assets/liabilities’. Under IFRS 9, the embedded derivative
will no longer be separated from the host contract and therefore the revaluation of provisionally priced contracts will be disclosed within the receivable of
the host contract in ‘trade and other receivables’.
– Available-for sale financial assets: The equity instruments that are currently classified as available-for-sale financial assets satisfy the conditions for
classification as at fair value through other comprehensive income (FVOCI) and therefore there is no impact in classification. However, as opposed to
the current IFRSs, under IFRS 9 gains and losses accumulated in other comprehensive income are not recycled to the income statement. Furthermore,
under IFRS 9 there is no exception to carry investments in entities at costs less any recognised impairment and therefore, fair value will need to be
calculated. There are no other significant changes to the accounting treatment of these assets.
– Impairment: The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only
incurred credit losses as is the case under IAS 39. The Group will apply the simplified approach and record lifetime expected losses on all trade
receivables. However, given the short-term nature of the Group’s receivables, these are not expected to have a significant impact in the financial
statements.
– Disclosures: The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature
and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard.
– The Group has also assessed other changes introduced by IFRS 9 that will have no impacts in the financial statements as explained below:
– The Group does not expect any impact on the accounting for financial liabilities, as the new requirements of IFRS 9 only affect the accounting for financial
liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities.
The Group does not currently apply hedge accounting and therefore there are no impacts in the financial statements.
– No impacts are expected in relation to derecognition of financial instruments as the same rules have been transferred from IAS 39 Financial Instruments:
Recognition and Measurement.
– IFRS 16 Leases, applicable for annual periods beginning on or after 1 January 2019.
– IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model,
requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors
continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The
Group is analysing the adoption of this new standard and expected not to have a significant impact on the Group´s financial position or performance.
– IFRS 2 Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2, applicable for annual periods beginning on or
after 1 January 2018.
The amendments are related to the classification and measurement of share-based payment transactions and it does not require to restate prior periods.
The adoption of these amendments would not have a significant impact on the Group´s financial position or performance.
– IFRIC 23 Uncertainty over income tax treatments, applicable for annual periods beginning on or after 1 January 2019.
IFRIC 23 clarifies the accounting for uncertainties in income taxes. This interpretation is to be applied to the determination of taxable profit (tax loss), tax
bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. The Group will adopt. The
Interpretation specifically addresses the following:
– Whether an entity considers uncertain tax treatments separately
– The assumptions an entity makes about the examination of tax treatments by taxation authorities
– How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates
– How an entity considers changes in facts and circumstances
The interpretation is effective for annual reporting periods beginning on or after 1 January 2019, but certain transition reliefs are available. The Group will
apply interpretation from its effective date, however we do not expect significant impacts on the financial statements on the implementation as the
Group’s current treatment is in line with the requirements of the interpretation.
The Group is analysing the effect of the standards and plans to adopt the new standards on the required effective date.
Annual Report & Accounts 2017 Hochschild Mining plc 101
(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 is contained in the accounting policies and/or the notes to the
financial statements.
Significant areas of estimation uncertainty and critical judgements made by management in preparing the consolidated financial statements include:
Significant estimates:
– Useful lives of assets for depreciation and amortisation purposes – note 2(e).
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 and resources 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 and resources 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
and resources. Changes are accounted for prospectively.
– Ore reserves and resources – note 2(g).
There are numerous uncertainties inherent in estimating ore reserves and resources. 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 resources and may, ultimately, result in the reserves and resources being restated.
– Recoverable values of mining assets – notes 2(i), 16, 17 and 18.
The value of the Group’s mining assets are sensitive to a range of characteristics unique to each mine unit. Key sources of estimation for all assets include
uncertainty around ore reserve estimates and cash flow projections. In performing impairment reviews, the Group assesses the recoverable amount of its
operating assets principally with reference to fair value less costs of disposal, assessed using discounted cash flow models. There is judgement involved in
determining the assumptions that are considered to be reasonable and consistent with those that would be applied by market participants. Key
judgements include the estimation of future gold and silver prices, future capital requirements, exploration potential, operating performance and the
application of discount rates which reflect the macro-economic risk in Peru and Argentina as applicable. Changes in these assumptions will affect the
recoverable amount of the property, plant and equipment, evaluation and exploration assets, and intangibles.
– Mine closure costs – notes 2(m) and 26(1).
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.
– Liability for cash-settled share-based payments – notes 26(2).
The Group initially measures the cost of cash-settled transactions with employees using the Monte Carlo model to determine the fair value of the liability
incurred. The liability needs to be remeasured at the end of each reporting period up to the date of settlement, with any changes in fair value recognised
in the profit or loss. This requires a reassessment of the estimates used at the end of each reporting period, including the anticipated potential changes
to the Total Shareholder Return (‘TSR’) performance, the number of participants in the plan, and levels of interest rates. The assumptions and models
used for estimating fair value are discussed in note 26(2).
– Income tax – notes 2(r), 14, 28 and 34.
Judgement is required in determining whether deferred tax assets are recognised on the statement of financial position. 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.
Judgement is also required when determining the provision for taxes as the tax treatment of some transactions cannot be finally determined until a formal
resolution has been reached with the tax authorities. Provisions are also made for uncertain exposures which can have an impact on both deferred and
current tax. Tax benefits are not recognised unless it is probable that the benefit will be obtained and tax provisions are made if it is probable that a liability
will arise (refer to note 34(a)). The final resolution of these transactions may give rise to material adjustments to the income statement and/or cash flow
in future periods. The Group reviews each significant tax liability or benefit each period to assess the appropriate accounting treatment.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 102
Notes to the consolidated financial statements
continued
2 Significant accounting policies continued
Critical judgements:
– Determination of functional currencies – note 2(d).
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.
– Recognition of evaluation and exploration assets and transfer to development costs – notes 2(f), 16 and 17.
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. This includes the assessment of whether there is sufficient evidence of the probability of the existence of
economically recoverable minerals to justify the commencement of capitalisation of costs; the timing of the end of the exploration phase, the start of the
development phase; and the commencement of the production phase. For this purpose, the future economic benefit of the project can reasonably be
regarded as assured when 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 are based on supporting geological information.
– Significant judgement and assumptions for assets classified as held for sale – note 23.
To determine whether an asset should be classified as an asset held for sale in accordance with IFRS 5, consideration should be given as to whether the
sale is ‘highly probable’. The three main criteria are: There is a plan in place to sell the asset, the sale is due to complete within 12 months of the year end;
and that it is unlikely that significant changes to the plan will be made or the sale withdrawn. As disclosed in note 23, despite the final payment date for
the sale of San Felipe property being within 12 months, all the three criteria to be considered ‘highly probable’ (as defined by IFRS 5) have not been met
and therefore the property has not been classified as an asset held for sale.
(c) Basis of consolidation
The consolidated financial statements set out the Group’s financial position, performance and cash flows as at 31 December 2017 and 31 December 2016
and for the years then ended, respectively.
Subsidiaries are those entities controlled by the Group regardless of the amount of shares owned by the Group. Control is achieved when the Group is
exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the
investee. Non-controlling interests’ rights to safeguard their interest are fully considered in assessing whether the Group controls a subsidiary. Specifically,
the Group controls an investee if, and only if, the Group has:
– power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);
– exposure, or rights, to variable returns from its involvement with the investee; and
– the ability to use its power over the investee to affect its returns.
Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of
the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
– the contractual arrangement with the other vote holders of the investee;
– rights arising from other contractual arrangements; and
– the Group’s voting rights and potential voting rights.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three
elements of control.
Basis of consolidation
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.
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction, affecting retained earnings. 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; and (vii)
reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate.
An NCI represents the equity in a subsidiary not attributable, directly and indirectly, to the parent company and is presented separately within equity in the
consolidated statement of financial position, 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.
Business combinations
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.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for the NCI, and any
previously interest held, over the net identifiable assets acquired and the liabilities assumed. 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 the 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.
Annual Report & Accounts 2017 Hochschild Mining plc 103
(d) Currency translation
The functional currency for each entity in the Group is determined by the currency of the primary economic environment in which it operates. For the
holding companies and operating entities 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 transaction date exchange rate for income statement items. The resulting difference on consolidation is
included as cumulative translation adjustment in equity.
(e) Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment losses. Cost comprises its purchase price
and 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 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 net 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. 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. In addition, the revenue generated for the sale of the inventory produced during the
pre-operating stage is recognised as a deduction of the costs capitalised for this project.
Construction in progress and capital advances
Assets in the course of construction are capitalised as a separate component of property, plant and equipment. Once the asset moves into the production
phase, 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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 104
Notes to the consolidated financial statements
continued
2 Significant accounting policies continued
(f) 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.
(g) Determination of ore reserves and resources
The Group estimates its ore reserves and mineral resources based on information compiled by internal competent persons. Reports to support these
estimates are prepared each year and are stated in conformity with the 2012 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.
(h) Intangible assets
Right to use energy of transmission line
Transmission line costs represent 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.
Water permits
Water permits represent the cost that allow the holder to withdraw a specified amount of water from the ground for reasonable, beneficial uses. This is an
asset with an indefinite useful life.
Legal rights
Legal rights correspond to expenditures required to give the Group the right to use a property for the surface exploration work, development and
production. 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.
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.
(i) Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment.
The carrying amounts of property, plant and equipment 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
and evaluation and exploration assets.
If the carrying amount of an asset or its cash-generating unit (CGU) exceeds the recoverable amount, an impairment 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 (VIU) and fair value less costs of disposal (FVLCD) to sell. FVLCD is based on an
estimate of the amount that the Group may obtain in a sale transaction on an arm’s length basis. VIU is based on estimated future cash flows discounted to
their present value using a 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 CGU to which the
asset belongs.
The recoverable values of the CGU are determined using a FVLCD methodology. FVLCD was determined using a combination of Level 2 and Level 3 inputs
to construct a discounted cash flow model to estimate the amount that would be paid by a willing third party in an arm’s length transaction.
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.
Annual Report & Accounts 2017 Hochschild Mining plc 105
(j) 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:
– costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore;
– depreciation of property, plant and equipment used in the extraction and processing of ore; and
– related production overheads (based on normal operating capacity).
Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
(k) Trade and other receivables
Current trade receivables are carried at the original invoice amount less provision made for impairment of these receivables. Non current receivables are
stated at amortised cost. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of the receivable which on average, do not exceed 30 days. The amount of the provision is the
difference between the carrying amount and the recoverable amount and this difference is recognised in the income statement.
(l) Share capital
Ordinary shares are classified as equity. Any excess above the par value of shares received upon issuance of those shares is classified as share premium.
In the case the excess above par value is available for distribution, it is classified as merger reserve and then transferred to retained earnings.
(m) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of
resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of
money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of
the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the
passage of time is recognised as a finance cost.
Mine closure cost
Provisions for mine closure costs are made in respect of the estimated future costs of closure and restoration and for environmental rehabilitation costs
(which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the accounting
period when the related environmental disturbance occurs. The provision is discounted and the unwinding of the discount is included in finance costs. At
the time of establishing the provision, a corresponding asset is capitalised and is depreciated over future production from the mine to which it relates. The
provision is reviewed on an annual basis for changes in cost estimates, discount rates and operating lives.
Changes to estimated future costs are recognised in the statement of financial position by adjusting the mine closure cost liability and the related asset
originally recognised. If, for mature mines, the related mine assets net of mine closure cost provisions exceed the recoverable value, that portion of the
increase is charged directly to the income statement. Similarly, for reductions to the estimated costs exceeding the carrying value of the mine asset, that
portion of the decrease is credited directly to the income statement. For closed sites, changes to estimated costs are recognised immediately in the
income statement.
Workers’ profit sharing and other employee benefits
In accordance with Peruvian legislation, companies in Peru must provide for workers’ profit sharing equivalent to 8% of taxable income of each year. 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.
(n) 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 reporting
dates are recognised as personnel expenses. 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 TSR performance. Fair values are subsequently remeasured at each reporting date to reflect the number of awards expected
to vest based on the current and anticipated TSR performance.
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).
(o) Contingencies
Contingent liabilities are not recognised in the financial statements and are disclosed in notes to the financial statements 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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 106
Notes to the consolidated financial statements
continued
2 Significant accounting policies continued
(p) Revenue recognition
The Group is involved in the production and sale of gold and silver from doré and concentrate containing both gold and silver. Doré bars are either sold
directly to customers or are sent to a third party for further refining into gold and silver before they are sold. Concentrate is sold directly to customers.
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 gold and silver from doré and concentrate is recognised in the income statement when all significant risks and rewards
of ownership are transferred to the customer, usually when title has passed to the customer. Revenue excludes any applicable sales taxes.
The revenue is subject to adjustment based on inspection of the product by the customer. Revenue is initially recognised on a provisional basis using the
Group’s best estimate of contained gold and silver. Any subsequent adjustments to the initial estimate of metal content are recorded in revenue once they
have been determined.
In addition, certain sales are ‘provisionally priced’ where the selling price is subject to final adjustment at the end of a period, normally ranging from 15 to
90 days after the start of the delivery process to the customer, based on the market price at the relevant quotation point stipulated in the contract.
Revenue is initially recognised when the conditions set out above have been met, using market prices at that date. The price exposure is considered to be
an embedded derivative and hence separated from the sales contract at each reporting date. The provisionally priced metal is revalued based on the
forward selling price for the quotational period stipulated in the contract until the quotational period ends. The selling price of gold and silver can be
measured reliably as these metals are actively traded on international exchanges. The revaluation of provisionally priced contracts is recorded as an
adjustment to revenue.
Income from services provided to related parties (note 30) is recognised in revenue when services are provided.
Deferred revenue results when cash is received in advance of revenue being earned. Deferred revenue is recorded as a liability until it is earned. Once
earned, the liability is reduced and revenue is recorded. The Group analyses when revenue is earned or deferred.
(q) Finance income and costs
Finance income and costs comprise interest expense on borrowings, the accumulation of interest on provisions, interest income on funds invested, unwind
of discount, 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.
(r) 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:
– 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; and
– 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.
(s) Uncertain tax positions
An estimates tax liability is recognised when the Group has a present obligation as a result of a past event, it is probable that the Group will be required to
settle that obligation and a reliable estimate can be made of the amount of the obligation. The provision is the best estimate of the consideration required
to settle the present obligation at the balance sheet date, taking into account risks and uncertainties surrounding the obligation. Separate provisions for
interest and penalties are also recorded if appropriate.
Movements in interest and penalty amounts in respect of tax provisions are not included in the tax charge, but are disclosed in the income statement. Tax
provisions are based on management’s interpretation of country specific tax law and the likelihood of settlement. This involves a significant amount of
judgement as tax legislation can be complex and open to different interpretation. Management uses in-house tax experts, professional firms and previous
experience when assessing tax risks. Where actual tax liabilities differ from the provisions, adjustments are made which can have a material impact on the
Group’s profits for the year. Refer to note 34(a) for specific tax contingencies.
Annual Report & Accounts 2017 Hochschild Mining plc 107
(t) Leases
Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased item, are capitalised at the inception
of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between
finance charges and the reduction of the lease liability so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance
charges are reflected in the income statement. The depreciation policy for leased assets is consistent with that for similar assets owned.
A lease is classified as an operating lease if it does not transfer substantially all of the risks and rewards incidental to ownership. Operating lease payments
are recognised as an expense in the income statement on a straight-line basis over the lease term.
(u) Financial instruments
Financial assets and liabilities are recognised when the Group becomes party to the contracts that give rise to them and are classified as loans or borrowings,
receivables, payables, financial instruments fair valued through profit and loss, available-for-sale financial assets or as derivatives designated as hedging
instruments in an effective hedge (refer to note 2(y)), 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.
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.
Available-for-sale financial assets
For available-for-sale (AFS) 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 more than 12 months.
In addition, the Group analyses any case taking into account the portfolio of projects of the investee, the key technical personnel and the viability of the
investee 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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 108
Notes to the consolidated financial statements
continued
2 Significant accounting policies continued
Derecognition of financial instruments
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:
– the rights to receive cash flows from the asset have expired; or
– the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without
material delay to a third party under a ‘pass-through’ arrangement; and either: (a) the Group has transferred substantially all the risks and rewards of the
asset; or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred
nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the extent of the Group’s
continuing involvement in the asset.
Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset
and the maximum amount of consideration that the Group could be required to repay.
A financial liability is generally derecognised when the contract that gives rise to it is discharged or cancelled or expires. Where an existing financial liability is
replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange
or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying
amounts together with any costs or fees incurred are recognised in profit or loss.
(v) Dividend distribution
Dividends on the Company’s ordinary shares are recognised when they have been appropriately authorised and are no longer at the Company’s discretion.
Accordingly, interim dividends are recognised when they are paid and final dividends are recognised when they are declared following approval by
shareholders at the Company’s Annual General Meeting.
(w) 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 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.
(x) Exceptional items
Exceptional items are those significant items which, due to their nature or the expected infrequency of the events giving rise to them, need to be disclosed
separately on the face of the income statement to enable a better understanding of the financial performance of the Group and facilitate comparison with
prior years. Exceptional items mainly include:
– impairments or write-offs of assets, assets held for sale, property, plant and equipment and evaluation and exploration assets;
– gains or losses arising on the disposal of subsidiaries, investments or property, plant and equipment;
– any gain or loss resulting from restructuring within the Group;
– taxes and interests owed by the Group following a change in circumstances surrounding tax disputes, resulting in the exposure being assessed as probable;
– the impact of infrequent labour action related to work stoppages in mine units;
– the penalties generated by the early termination of agreements with providers of the Group;
– the reversal of an accumulation of prior year’s tax expenses that resulted from an agreement with the government; and
– the related tax impact of the above items.
(y) Hedging
The Group used commodity swaps and zero cost collar contracts to hedge certain of its cash flows from product sales against price risk. These derivative
financial instruments were initially recognised at fair value on the date on which the derivative contract was entered into and were subsequently
remeasured at fair value. The fair value of these forward contracts was determined by reference to market values for similar instruments.
These forward contracts were classified as cash flow hedges as they were hedging the Group’s exposure to variability in cash flows that was attributable to
a particular risk associated with a highly probable forecast sales transaction.
At the inception of a hedging relationship, the Group formally designated and documented the hedge relationship to which the Group wished to apply
hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation included identification of the hedging
instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity would 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 were expected to be highly
effective in offsetting changes in fair value or cash flows and were assessed on an ongoing basis to determine their effectiveness in the financial reporting
periods for which they were designated.
Where the commodity forward contracts meet the strict criteria for hedge accounting, the effective portion of the gain or loss on the hedging instrument
was recognised directly in equity, while any ineffective portion was recognised immediately in the income statement. In the case of zero cost collar
contracts, the time value had to be accounted for at fair value through profit or loss, in consequence the change in the time value would be recognised in
the income statement.
Annual Report & Accounts 2017 Hochschild Mining plc 109
Amounts taken to equity were transferred to the income statement when the hedged transaction affected profit or loss, such as when the forecast
transaction occurred.
If the forecast sales transaction was no longer expected to occur, amounts previously recognised in equity were transferred to the income statement. If the
hedging instrument expired or was sold, terminated or exercised without replacement or rollover, or if its designation as a hedge was revoked, amounts
previously recognised in equity remain in equity until the forecast sales transaction occurred.
(z) Fair value measurement
The Group measures financial instruments such as derivatives and non-financial assets at fair value at each statement of financial position date. Also, fair
values of financial instruments are measured at amortised cost.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
– in the principal market for the asset or liability; or
– in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming
that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, as described
in note 36(e).
For assets and liabilities that are recognised in the financial statements on a recurring basis at fair value, the Group determines whether transfers have
occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a
whole) at the end of each reporting period.
The Group determines the policies and procedures for both recurring fair value measurement and unquoted AFS financial assets, and for non-recurring
measurement.
At each reporting date, the Group analyses the movements in the values of assets and liabilities which are required to be remeasured or reassessed as per
the Group’s accounting policies. For this analysis, the Group verifies the major inputs applied in the latest valuation by agreeing the information in the
valuation computation to contracts and other relevant documents.
The Group, in conjunction with its external valuers, where applicable, also compares each of the changes in the fair value of each asset and liability with
relevant external sources to determine whether the change is reasonable.
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of
the asset or liability and the level of the fair value hierarchy as explained above.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 110
Notes to the consolidated financial statements
continued
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 similar 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 at market prices. 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:
– Operating units – Arcata and San Jose, which generate revenue from the sale of gold, silver, doré and concentrate
– Operating unit – Pallancata, which generates revenue from the sale of concentrate
– Operating unit – Inmaculada, which generates revenue from the sale of gold, silver and doré
– 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 costs charged to the profit and loss and capitalised as assets
– Other – includes the profit or loss generated by Empresa de Transmisión Aymaraes S.A.C. (a power transmission company that absorbed Empresa de
Transmisión Callalli S.A.C. on 1 June 2016)
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 items that could be allocated directly to the segment.
(a) Reportable segment information
Year ended 31 December 2017
Revenue from external customers
Inter-segment revenue
Total revenue
Segment profit/(loss)
Others2
Profit from continuing operations before income
tax
Other segment information
Depreciation3
Amortisation
Impairment and write-off of assets, net
Assets
Capital expenditure
Current assets
Other non-current assets
Total segment assets
Not reportable assets4
Total assets
Arcata
US$000
Pallancata
US$000
San Jose
US$000
Inmaculada
US$000
Exploration
US$000
Other1
US$000
Adjustment
and
eliminations
US$000
Total
US$000
77,940
–
77,940
120,529
–
120,529
227,094
–
227,094
296,594
–
296,594
–
–
–
415
5,712
6,127
–
(5,712)
(5,712)
722,572
–
722,572
(4,212)
48,926
43,162
73,737
(17,393)
10,832
(9,752)
(17,447)
–
(43,135)
(19,479)
–
31,872
(49,019)
(1,247)
(205)
(107,489)
–
(31)
(413)
(462)
8,364
(5,228)
(142)
(23)
17,557
18,906
36,288
52,903
2,026
868
5,483
5,859
11,342
–
11,342
21,699
91,065
112,764
–
112,764
47,398
182,138
229,536
–
229,536
22,707
535,840
558,547
–
558,547
30
194,777
194,807
–
194,807
2,570
57,930
60,500
334,828
395,328
–
–
–
–
–
–
–
–
–
145,300
(81,223)
64,077
(199,075)
(1,851)
(3,158)
128,548
99,887
1,067,609
1,167,496
334,828
1,502,324
1 ‘Other’ revenue relates to revenues earned by Empresa de Transmisión Aymaraes S.A.C.
2
Comprised of administrative expenses of US$51,283,000, other income of US$10,192,000, other expenses of US$11,549,000, impairment and write-off of assets (net) of US$3,158,000, finance income of
US$5,927,000, finance expense of US$26,095,000, and foreign exchange loss of US$5,257,000.
3 Includes depreciation capitalised in the Crespo project (US$831,000), and San Jose unit (US$2,290,000).
4
Not reportable assets are comprised of available-for-sale financial assets of US$6,264,000, other receivables of US$45,344,000, other financial assets of US$2,591,000, income tax receivable of US$21,241,000,
deferred income tax asset of US$2,400,000 and cash and cash equivalents of US$256,988,000.
Annual Report & Accounts 2017 Hochschild Mining plc 111
Year ended 31 December 2016
Revenue from external customers
Inter-segment revenue
Total revenue
Segment profit/(loss)
Others2
Profit from continuing operations before income
tax
Other segment information
Depreciation3
Amortisation
Impairment and write-off of assets
Assets
Capital expenditure
Current assets
Other non-current assets
Total segment assets
Not reportable assets4
Total assets
Arcata
US$000
Pallancata
US$000
San Jose
US$000
Inmaculada
US$000
Exploration
US$000
Other1
US$000
Adjustment
and
eliminations
US$000
Total
US$000
117,358
–
117,358
54,456
–
54,456
235,961
–
235,961
280,108
–
280,108
–
–
–
359
2,062
2,421
–
(2,062)
(2,062)
688,242
–
688,242
22,924
11,284
57,259
97,595
(9,155)
(2,273)
(462)
(22,196)
–
(87)
(10,606)
–
(885)
(53,012)
(1,060)
(278)
(98,243)
–
(414)
(1,834)
(462)
(2)
(4,877)
(138)
(246)
20,819
16,105
35,311
54,199
4,910
301
6,721
48,843
55,564
–
55,564
7,017
55,380
62,397
–
62,397
53,299
196,056
249,355
–
249,355
22,899
589,666
612,565
–
612,565
30
185,825
185,855
–
185,855
3,911
65,077
68,988
220,001
288,989
–
–
–
–
–
–
–
–
–
177,172
(68,893)
108,279
(190,768)
(1,660)
(1,912)
131,645
93,877
1,140,847
1,234,724
220,001
1,454,725
1 ‘Other’ revenue relates to revenues earned by Empresa de Transmisión Callalli S.A.C. and Empresa de Transmisión Aymaraes S.A.C.
2
Comprised of administrative expenses of US$47,979,000, other income of US$35,798,000, other expenses of US$24,533,000, impairment and write-off of assets of US$1,912,000, finance income of
US$2,074,000, finance expense of US$30,541,000, and foreign exchange loss of US$1,800,000.
3 Includes depreciation capitalised in the Crespo project (US$2,215,000), San Jose unit (US$2,640,000), Arcata unit (US$117,000) and the Pallancata unit (US$3,000).
4
Not reportable assets are comprised of available-for-sale financial assets of US$991,000, other receivables of US$57,016,000, income tax receivable of US$20,988,000, deferred income tax asset of
US$1,027,000 and cash and cash equivalents of US$139,979,000.
(b) Geographical information
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 1
Korea
Bulgaria
Japan
Total
Inter-segment
Peru
Total
Year ended
31 December
2017
US$000
2016
US$000
370,035
45,274
60,991
34,777
73,186
–
102,596
27,211
8,502
722,572
225,073
78,248
181,569
4,506
89,838
(1,689)
92,769
16,334
1,594
688,242
5,712
728,284
2,062
690,304
1 Corresponds to the realised loss on the silver zero cost collar contract with JP Morgan Chase Bank, National Association, London Branch, settled on 30 December 2016 (refer to note 5).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
112
Notes to the consolidated financial statements
continued
3 Segment reporting continued
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 2017
Year ended 31 December 2016
US$000 % Revenue
Segment
US$000 % Revenue
Segment
Asahi Refining USA
Republic Metals Corporation
LS Nikko
Asahi Refining Canada Ltd.
Auramet Trading Llc.
130,024
116,274
102,596
17,492
53,585
18%
16%
14%
2%
7%
Inmaculada
Inmaculada and San Jose
Pallancata and San Jose
Inmaculada
Inmaculada
30,304
103,405
92,769
160,312
97,616
4%
15%
14%
23%
14%
Arcata
Arcata, Inmaculada and San Jose
Pallancata and San Jose
Arcata and Inmaculada
Arcata and Inmaculada
Non-current assets, excluding financial instruments and deferred income tax assets, were allocated to the geographical areas in which the assets are
located as follows:
Peru
Argentina
Mexico
Chile
Total non-current segment assets
Available-for-sale financial assets
Trade and other receivables
Other financial assets
Deferred income tax assets
Total non-current assets
4 Disposals of subsidiaries
As at 31 December
2017
US$000
2016
US$000
782,659
182,139
38,841
63,970
1,067,609
6,264
7,487
1,333
2,400
1,085,093
850,605
196,056
30,990
63,196
1,140,847
991
25,717
–
1,027
1,168,582
HMX S.A. de C.V.
On 22 February 2016 the Group sold its Mexican subsidiary HMX S.A. de C.V. to Sergio Salinas and Servicios de Integración Fiscal S.A. de C.V., for nil
consideration. The carrying value of the net assets disposed was US$60,000 and the transaction resulted in a loss of US$60,000.
Asociación Sumac Tarpuy
On 17 May 2016 the Group transferred all its rights over its non-for-profit subsidiary Asociación Sumac Tarpuy to Inversiones ASPI S.A. (‘ASPI’),
recognising a gain on disposal of US$811,000. The gain on disposal was determined as follows:
Cash consideration
Assets and liabilities disposed:
Cash and cash equivalents
Other payables
Net assets disposed
Gain on disposal
Net cash inflow arising on disposal
Consideration received in cash and cash equivalents
Less: cash and cash equivalents disposed of:
US$000
1,100
293
(4)
289
811
US$000
1,100
(293)
807
Annual Report & Accounts 2017 Hochschild Mining plc 5 Revenue
Gold (from doré bars)
Silver (from doré bars)
Gold (from concentrate)
Silver (from concentrate)
Services
Total
113
Year ended
31 December
2017
US$000
266,214
144,762
106,101
205,080
415
722,572
2016
US$000
263,010
177,450
91,348
156,075
359
688,242
Included within revenue is a gain of US$2,578,000 relating to provisional pricing adjustments representing the change in the fair value of embedded
derivatives (2016: loss of US$6,667,000) arising on sales of concentrates and doré (refer to note 2(p) and footnote 1 of note 36(e)).
In 2016, revenue includes realised loss on gold and silver swaps and zero cost collar contracts of US$18,722,000 (gold: US$10,030,000,
silver: US$8,692,000).
Other sources of revenue are disclosed in note 13.
6 Cost of sales
Included in cost of sales are:
Depreciation and amortisation in cost of sales1
Personnel expenses (note 10)
Mining royalty (note 30)
Change in products in process and finished goods
Other items2
Year ended
31 December
2017
US$000
196,150
124,507
6,677
4,131
3,241
2016
US$000
180,317
103,130
7,506
6,487
1,750
1 The depreciation and amortisation in production cost is US$196,241,000 (2016: US$185,655,000).
2 Other items includes costs related to the stoppage at Pallancata and San Jose mine units (2016: Personnel related provisions in Arcata, Pallancata, Inmaculada and San Jose mining units).
7 Administrative expenses
Personnel expenses (note 10)
Professional fees
Social and community welfare expenses1
Lease rentals
Travel expenses
Communications
Indirect taxes
Depreciation and amortisation
Technology and systems
Security
Supplies
Other 2
Total
Year ended
31 December
2017
US$000
2016
US$000
34,775
3,233
586
1,474
1,020
415
2,173
1,564
686
773
123
4,461
51,283
33,028
3,075
384
1,455
598
438
2,057
1,798
678
656
109
3,703
47,979
1 Represents amounts expended by the Group on social and community welfare activities surrounding its mining units.
2
Predominantly related to third-party services of US$1,273,000 (2016: US$972,000), technical services of US$553,000 (2016: US$533,000), repair and maintenance of US$388,000 (2016: US$492,000) and
impairment of receivables of US$79,000 (2016: US$312,000).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 114
Notes to the consolidated financial statements
continued
8 Exploration expenses
Mine site exploration1
Arcata
Ares
Inmaculada
Pallancata
San Jose
Prospects2
Peru
Argentina
Chile
Generative3
Peru
USA
Personnel (note 10)
Others
Total
Year ended
31 December
2017
US$000
2016
US$000
3,029
69
1,127
1,279
3,407
8,911
336
30
267
633
1,862
398
2,260
4,646
749
17,199
1,305
297
1
733
1,691
4,027
316
11
26
353
866
–
866
3,476
471
9,193
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.
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: mapping, sampling, geophysics, identification of local targets and reconnaissance drilling.
Generative expenditure is 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.
3
The Group determines the cash flows which relate to the exploration activities of the companies engaged only in exploration. Exploration activities incurred
by Group operating companies are not included since it is not practicable to separate the liabilities related to the exploration activities of these companies
from their operating liabilities.
Cash outflows on exploration activities were US$2,600,000 in 2017 (2016: US$1,168,000).
9 Selling expenses
Transportation of doré, concentrate and maritime freight
Personnel expenses (note 10)
Warehouse services
Taxes1
Other
Total
1 The export tax on concentrates in Argentina was reduced to zero percent on 12 February 2016.
Year ended
31 December
2017
US$000
2016
US$000
6,477
296
1,742
16
2,493
11,024
8,250
254
1,861
1,495
2,315
14,175
Annual Report & Accounts 2017 Hochschild Mining plc 10 Personnel expenses1
Salaries and wages
Other legal contributions
Statutory holiday payments
Long-Term Incentive Plan
Restricted Share Plan
Termination benefits
Other
Total
115
Year ended
31 December
2017
US$000
2016
US$000
116,597
26,937
7,124
9,348
2,090
2,228
2,670
166,994
98,741
20,552
6,361
10,528
3,181
2,577
1,951
143,891
1
Personnel expenses are distributed in cost of sales, administrative expenses, exploration expenses, selling expenses, other expenses and capitalised as property, plant and equipment amounting to
US$124,507,000 (2016: US$103,130,000), US$34,775,000 (2016: US$33,028,000), US$4,646,000 (2016: US$3,476,000), US$296,000 (2016: US$254,000), US$1,621,000 (2016: US$2,406,000) and
US$1,149,000 (2016: US$1,597,000) respectively.
Average number of employees for 2017 and 2016 were as follows:
Peru
Argentina
Chile
United Kingdom
Total
Year ended
31 December
2017
2,920
1,175
3
10
4,108
2016
2,825
1,125
3
11
3,964
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 116
Notes to the consolidated financial statements
continued
11 Pre-tax 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. Unless stated, exceptional items do not correspond to a reporting segment of the Group.
Other income
Reversal of reserves tax 3
Total
Other expenses
Work stoppage at Pallancata mine unit 4
Penalty for termination of agreement 5
Damage of tailing dump in Ares mine unit 6
Provision for impairment of other receivables 7
Total
(Impairment)/impairment reversal and write-off of non-financial assets, net
Impairment of assets 1
Reversal of impairment of assets 1
Write-off of non-current assets8
Total
Finance income
Reversal of interests on reserves tax 3
Total
Income tax benefit 2, 9
Total
Year ended
31 December
2017
US$000
Year ended
31 December
2016
US$000
–
–
–
–
–
–
–
(43,009)
40,256
–
(2,753)
–
–
3,279
3,279
2,667
2,667
(2,474)
(4,254)
(2,150)
(1,797)
(10,675)
–
–
(1,634)
(1,634)
974
974
2,224
2,224
The exceptional items for the year ended 31 December 2017 are as follows:
1
2 Corresponds to the deferred tax credit generated by the impairment of the Arcata mine unit, net by the reversal on impairment of the Pallancata mine unit.
Corresponds to the impairment of the Arcata mine unit of US$43,009,000 and the reversals of impairment related to the Pallancata mine unit of US$31,892,000 and the San Felipe project of US$8,364,000.
The exceptional items for the year ended 31 December 2016 are as follows:
3
Corresponds to the reversal of the reserves tax liability recorded in previous periods and their associated interests as a result of the settlement agreed between Minera Santa Cruz S.A.C. and the Fiscal Authority
in Argentina.
From 16 November 2016 until the end of the year, due to actions by the communities surrounding the Pallancata mine unit, the extracting and treatment operations were temporarily suspended. At
31 December 2016 the fixed indirect costs related to abnormal decrease in production from the work stoppage amounted to US$2,474,000, corresponding to the Pallancata reporting segment.
4
5 Penalty for early termination of the energy supply contract between Compañia Minera Ares S.A.C. and SDF Energia.
6
A section of the Ares tailings dam lateral walls showed unusual decay. A comprehensive study was conducted to determine long-term stability and the conclusion was that certain areas needed to be repaired.
This failure was not anticipated and required works aimed at repairing and reinforcing the walls and ensure the long-term sustainability of the dam had to be conducted. The expenditure incurred was not part
of our mine closure provision and reflects an unexpected, one-off event.
7 Provision for impairment of the account receivable with a third party due to the uncertainty surrounding the outcome of the legal dispute and hence its recoverability.
8
As at 31 December 2016 corresponds to the write-off of non-current assets of Compañia Minera Ares S.A.C. of US$1,634,000 arising from events falling outside the entity’s ordinary activities. The charge was
generated by the change of the exploitation method in the Pallancata mine unit, from mechanised to conventional.
Mainly corresponds to the current tax credit arising from the costs of the work stoppage at Pallancata mine unit, the penalty for early termination of agreement in Compañia Minera Ares S.A.C., the costs
incurred due to the damage of the tailing dam in Ares mine unit and the reversal of reserves tax in Argentina (US$1,212,000) and the deferred tax credit arising from the write-off of non-current assets and the
account receivable (US$1,012,000).
9
Annual Report & Accounts 2017 Hochschild Mining plc 12 Other income and other expenses before exceptional items
Other income
Decrease in provision for mine closure (note 26(3))
Export credits 1
Lease rentals
Gain on sale of other assets2
Gain on sale of subsidiaries (note 4)
Logistic services
Other
Total
Other expenses
Provision of obsolescence of supplies
Contingencies
Donations (note 30)
Write-off of value added tax
Corporate social responsibility contribution in Argentina 3
Other 4
Total
117
Year ended
31 December
2017
Year ended
31 December
2016
Before
exceptional
items
US$000
Before
exceptional
items
US$000
1,428
1,613
253
1,495
–
3,552
1,851
10,192
(542)
(347)
(754)
(221)
(3,063)
(6,622)
(11,549)
6,346
19,029
391
1,550
751
4,288
776
33,131
(2,162)
(570)
(1,000)
(1,208)
(3,146)
(5,772)
(13,858)
1 Corresponds to the benefit of silver refund in Argentina. In 2016 the amount includes income recognised with respect to the Patagonian port rebate of US$16,900,000. This benefit was eliminated in December 2016.
2 Corresponds to the gain generated by the sale of mining rights of the Ricky project (2016: Corresponds to a gain generated by the sale of a royalty purchase agreement signed with Minera Bateas S.A.C. to Lemuria
Royalties Corp).
3 Relates to a new contribution in Argentina to the Santa Cruz province, effective since January 2016 and calculated as a proportion of sales.
4 Mainly corresponds to the expenses in Ares mine unit of US$4,369,000 (2016: US$1,910,000), concessions of US$491,000 (2016: US$1,210,000) and rentals of US$205,000 (2016: US$440,000).
13 Finance income and finance costs before exceptional items
Finance income
Interest on deposits and liquidity funds
Interest income
Gain from changes in the fair value of financial instruments
Gain on exchange of available-for-sale financial assets
Gain on discount of other receivables
Other
Total
Finance costs
Interest on secured bank loans (note 25)
Other interest
Interest on bond (note 25)
Interest expense
Unwind of discount on mine rehabilitation (note 26)
Loss on discount of other receivables
Loss on sale of available-for-sale financial assets
Other
Total
Year ended
31 December
2017
Year ended
31 December
2016
Before
exceptional
items
US$000
Before
exceptional
items
US$000
1,696
1,696
647
1,386
1,946
252
5,927
(185)
(813)
(24,088)
(25,086)
(280)
–
(32)
(697)
(26,095)
1,011
1,011
–
–
–
89
1,100
(2,602)
(1,106)
(23,925)
(27,633)
(46)
(2,257)
–
(605)
(30,541)
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information
118
Notes to the consolidated financial statements
continued
14 Income tax expense
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)
Effect of change in tax rate 1
Total taxation charge/(credit) in the income statement
Year ended 31 December 2017
Year ended 31 December 2016
Before
exceptional
items
US$000
Exceptional
items
US$000
Before
exceptional
items
US$000
Exceptional
items
US$000
Total
US$000
Total
US$000
15,070
4,201
2,229
–
21,500
–
–
–
–
–
15,070
4,201
2,229
–
21,500
2,755
(10,780)
(8,025)
13,475
(3,279)
–
(3,279)
(3,279)
(524)
(10,780)
(11,304)
10,196
31,701
3,882
3,869
552
40,004
6,364
1,273
7,637
47,641
(1,212)
–
–
–
(1,212)
(961)
(51)
(1,012)
(2,224)
30,489
3,882
3,869
552
38,792
5,403
1,222
6,625
45,417
1
On 29 December 2017, the Argentinian government enacted the tax reform. The main change is the decrease of the statutory income tax rate, from its current level of 35% to 30% with effect from 1 January
2018 and to 25% with effect from 1 January 2020 (2016: In December 2016, the Peruvian government approved an increase of the statutory income tax rate, from its current level of 28% to 29.5% with effect
from 1 January 2017).
The weighted average statutory income tax rate was 29.0% for 2017 and 30.1% for 2016. 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 losses on cash flow hedges
Total tax credit in the statement of other comprehensive income
As at 31 December
2017
US$000
2016
US$000
–
–
(5,955)
(5,955)
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 29.0% (2016: 30.1%)
Expenses not deductible for tax purposes
Deferred tax recognised on special investment regime
Movement in unrecognised deferred tax1
Change in statutory income tax rate2
Withholding tax
Special mining tax and mining royalty3
Derecognition of deferred tax asset
Foreign exchange rate effect4
Utilisation of losses not previously recognised
Other
At average effective income tax rate of 15.9% (2016: 41.9%)
Taxation charge attributable to continuing operations
Total taxation charge in the income statement
As at 31 December
2017
US$000
64,077
18,562
776
(1,819)
(1,324)
(10,780)
–
6,430
–
(1,043)
(1,618)
1,012
10,196
10,196
10,196
2016
US$000
108,279
32,570
1,051
(1,715)
2,705
1,222
552
7,751
316
2,383
–
(1,418)
45,417
45,417
45,417
1
2
Includes the income tax credit on mine closure provision of US$3,010,000 (2016: US$1,925,000).
The Argentinian government approved a decrease of the statutory income tax rate, from its current level of 35% to 30% with effect from 1 January 2018 and 25% with effect from 1 January 2020 (2016:
Peruvian government approved an increase of the statutory income tax rate, from its current level of 28% to 29.5% with effect from 1 January 2017).
3 Corresponds to the impact of a mining royalty and special mining tax in Peru (note 35).
4 Mainly corresponds to the foreign exchange effect of converting tax bases and monetary items from local currency to the functional currency.
Annual Report & Accounts 2017 Hochschild Mining plc 119
The effective tax rate for corporate income tax for the period ended 31 December 2017 is 15.9% (2016: 41.9%), compared to the weighted average
statutory tax rate of 29.0% (2016: 30.1%), and 39.0% (2016: 37.3%) taking into account the mining royalty and the special mining tax which are income
taxes under IAS 12. The main factor that reduced the effective tax rate for corporate income tax is the deferred tax impact of the reduction of the
Argentina tax rate and the reversal of San Felipe impairment, which does not attract a deferred tax liability, on the basis that no deferred tax asset arose
when the impairment was originally recognised.
15 Basic and diluted earnings per share
Earnings per share (‘EPS’) is calculated by dividing profit for the year attributable to equity shareholders of the Company by the weighted average number
of ordinary shares issued during the year.
The Company has dilutive potential ordinary shares.
As at 31 December 2017 and 2016, EPS has been calculated as follows:
Basic earnings/(loss) per share from continuing operations
Before exceptional items (US$)
Exceptional items (US$)
Total for the year and from continuing operations (US$)
Diluted earnings/(loss) 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
2017
2016
0.08
–
0.08
0.08
–
0.08
0.11
(0.02)
0.09
0.10
(0.01)
0.09
Profit/(loss) from continuing operations before exceptional items and attributable to equity holders of the parent is derived as follows:
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)
Profit from continuing operations before exceptional items attributable to equity holders of the parent for the purpose
of diluted earnings per share (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)
Effect of dilutive potential ordinary shares related to contingently issuable shares (thousands)
Weighted average number of ordinary shares in issue for the purpose of diluted earnings per share (thousands)
As at 31 December
2017
41,561
(526)
41,035
2016
45,550
7,604
53,154
41,035
53,154
As at 31 December
2017
507,204
7,768
514,972
2016
505,521
9,435
514,956
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 120
Notes to the consolidated financial statements
continued
16 Property, plant and equipment
Mining
properties and
development
costs1
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
Year ended 31 December 2017
Cost
At 1 January 2017
Additions
Change in discount rate
Change in mine closure estimate
Disposals
Write-offs
Transfers and other movements 2
At 31 December 2017
Accumulated depreciation
and impairment
At 1 January 2017
Depreciation for the year
Disposals
Write-offs
Impairment/(reversal of impairment), net
Transfers and other movements2
At 31 December 2017
Net book amount at 31 December 2017
1,180,904
79,054
–
–
–
–
(56)
1,259,902
791,641
109,642
–
–
(2,369)
467
899,381
360,521
488,486
187
–
–
–
(127)
8,378
496,924
218,123
44,431
–
(98)
3,613
–
266,069
230,855
536,929
16,339
–
–
(2,927)
(3,492)
10,633
557,482
277,692
40,356
(2,564)
(3,152)
8,631
(2,146)
318,817
238,665
6,210
29
–
–
(3)
(172)
547
6,611
4,554
325
(3)
(155)
24
–
4,745
1,866
95,390
–
575
2,572
–
–
–
98,537
64,480
4,321
–
–
(1,646)
–
67,155
31,382
24,943
28,045
–
–
–
(19)
(19,560)
33,409
889
–
–
–
143
–
1,032
32,377
Total
US$000
2,332,862
123,654
575
2,572
(2,930)
(3,810)
(58)
2,452,865
1,357,379
199,075
(2,567)
(3,405)
8,396
(1,679)
1,557,199
895,666
There were borrowing costs capitalised in property, plant and equipment amounting to US$601,000 (2016: US$825,000). The capitalisation rate used was
8.27% (2016: 7.23%).
1 Mining properties and development costs related to Crespo project (US$26,016,000) are not currently being depreciated.
2 Net of transfers and other movements of US$1,607,000 were transferred from evaluation and exploration assets (note 17).
Management determined there were triggers of impairment in the Arcata mine unit as it has experienced difficulties to replace production with incremental
resources and to convert resources into reserves, and there was a significant decrease in production during the year. An impairment test was carried
out resulting in an impairment charge of US$43,009,000 (US$39,905,000 in property, plant and equipment and US$3,104,000 and evaluation and
exploration assets).
In the case of the Pallancata mine unit, there was an increase in terms of tonnage, grades, and resources and reserves due to the Pablo vein. The Group
is currently operating the vein, converting inferred resources into reserves, and the process is showing better results than expected in terms of tonnage
and grades. An impairment test was carried out resulting in an impairment reversal of US$31,892,000 (US$31,509,000 in property, plant and equipment
and US$383,000 and evaluation and exploration assets).
In addition, management evaluated the carrying value of the San Felipe Project, recognising an impairment reversal of US$8,364,000 (all in evaluation
and exploration assets) due to the proceeds received in the year (refer to note 23) and the significant increase in zinc market prices over the year resulting
in an increase of the in-situ value (refer to notes 11 and 17).
No indicators of impairment or reversal of impairment were identified in the other CGUs, which includes other exploration projects.
The recoverable values of the Arcata and Pallancata CGUs were determined using a fair value less costs of disposal (FVLCD) methodology with the
exception of San Felipe, where the recoverable value was determined using a value in use (VIU). FVLCD was determined using a combination of Level 2 and
Level 3 inputs to construct a discounted cash flow model to estimate the amount that would be paid by a willing third party in an arm’s length transaction.
In assessing the recoverable value of the San Felipe CGU, given the early stage of the project, the Group applied a value-in-situ methodology which applies
a realisable ‘enterprise value’ to unprocessed mineral resources. The enterprise value used is based on observable external market information. Together
with the US$29,396,000 recognised as a deferred income (refer to note 23) that will be realised once the option is exercised or terminated; the total
recoverable value of the project under a value in use approach amounts to US$37,081,000.
Annual Report & Accounts 2017 Hochschild Mining plc 121
The key assumptions on which management has based its determination of FVLCD and the associated recoverable values calculated are gold and silver
prices, production costs, the discount rate and the value per in-situ regarding the San Felipe project. Gold and silver prices used, discount rate applied and
value per in-situ per zinc equivalent tonne are presented below.
US$ per oz
Gold
Silver
2018
1,298
18
2019
1,300
18
2020
1,303
19
Long-term
1,300
19
Discount rate (post tax)
Value per in-situ per zinc equivalent tonne (US$)
1 The Pallancata CGU was assessed for impairment reversal at 30 June 2017 and therefore the above reflects the relevant assumption at that date.
Current carrying value of CGU, net of deferred tax (US$000)
31 December 2017
Arcata
Pallancata1
San Felipe
4.3%
n/a
5.4%
n/a
n/a
29.53
Arcata
5,859
Pallancata
San Felipe
91,065
37,081
Sensitivity analysis
Other than as disclosed below, management believes that no reasonably possible change in any of the key assumptions above would cause the carrying
value of any of its CGUs to exceed its recoverable amount.
The estimated recoverable amounts of the following of the Group’s CGUs are equal to, or not materially greater than, their carrying values.
As the Arcata CGU was fully impaired at 31 December 2017, a negative change in any of the key assumptions would not have an impact on the impairment
charge recognised. However, a positive change in the following key assumptions would, in isolation, decrease the impairment charge recorded by:
Prices (increase by 10%)
Post tax discount rate (decrease by 3%)
Production costs (decrease by 10%)
US$000
11,696
30
9,535
As the impairment charge previously recognised at the Pallancata CGU was fully reversed at 30 June 2017, a positive change in any of the key assumptions
would not have an impact on the impairment reversal recognised. Similarly, an adverse change in the key assumptions (10% decrease in price, 3% increase
in post tax discount rate and 10% increase in production costs), in isolation, would still result in a full reversal of the impairment previously recognised.
With respect to the impairment assessment performed at the San Felipe CGU, a decrease of 10% in the value-in-situ per tonne would result in a reversal
of impairment of US$7,595,000, whilst an increase of 10% would result in a reversal of previously recognised impairment of US$9,132,000.
Mining
properties and
development
costs1
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
Year ended 31 December 2016
Cost
At 1 January 2016
Additions
Change in discount rate
Change in mine closure estimate
Disposals
Write-offs
Transfer to intangibles
Transfers and other movements 2
At 31 December 2016
Accumulated depreciation
and impairment
At 1 January 2016
Depreciation for the year
Disposals
Write-offs
Transfers and other movements 2
At 31 December 2016
Net book amount at 31 December 2016
1,097,107
80,565
–
–
–
–
–
3,232
1,180,904
678,547
112,526
–
–
568
791,641
389,263
472,093
6,695
–
–
–
–
–
9,698
488,486
179,036
39,243
–
–
(156)
218,123
270,363
480,747
15,379
–
–
(3,420)
(8,500)
–
52,723
536,929
253,388
33,921
(3,361)
(6,591)
335
277,692
259,237
6,151
–
–
–
(298)
(85)
–
442
6,210
4,447
462
(283)
(82)
10
4,554
1,656
103,386
–
(2,367)
(5,629)
–
–
–
–
95,390
59,790
4,616
–
–
74
64,480
30,910
62,392
25,514
–
–
(56)
–
(44)
(62,863)
24,943
1,152
–
–
–
(263)
889
24,054
1 Mining properties and development costs related to Crespo project (US$27,321,000) are not currently being depreciated.
2 Net of transfers and other movements of US$2,664,000 were transferred from evaluation and exploration assets (note 17).
Total
US$000
2,221,876
128,153
(2,367)
(5,629)
(3,774)
(8,585)
(44)
3,232
2,332,862
1,176,360
190,768
(3,644)
(6,673)
568
1,357,379
975,483
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 122
Notes to the consolidated financial statements
continued
17 Evaluation and exploration assets
Cost
Balance at 1 January 2016
Additions
Transfers to property, plant and equipment
Balance at 31 December 2016
Additions
Disposals
Transfers to property, plant and equipment
Balance at 31 December 2017
Accumulated impairment
Balance at 1 January 2016
Transfers to property, plant and equipment
Balance at 31 December 2016
Transfers to property, plant and equipment
Impairment/(reversal of impairment) 1
Balance at 31 December 2017
Net book value as at 31 December 2016
Net book value as at 31 December 2017
Azuca
US$000
Crespo
US$000
San Felipe
US$000
Volcan
US$000
Others
US$000
Total
US$000
80,165
1,237
–
81,402
197
–
–
81,599
45,876
–
45,876
–
–
45,876
35,526
35,723
25,780
251
–
26,031
208
–
–
26,239
9,878
–
9,878
–
–
9,878
16,153
16,361
55,950
–
–
55,950
–
(500)
–
55,450
25,834
–
25,834
–
(8,364)
17,470
30,116
37,980
92,993
691
–
93,684
768
–
–
94,452
44,381
–
44,381
–
–
44,381
49,303
50,071
12,970
1,299
(3,232)
11,037
3,705
–
(2,074)
12,668
3,718
(568)
3,150
(467)
2,721
5,404
7,887
7,264
267,858
3,478
(3,232)
268,104
4,878
(500)
(2,074)
270,408
129,687
(568)
129,119
(467)
(5,643)
123,009
138,985
147,399
There were no borrowing costs capitalised in evaluation and exploration assets.
1 At 31 December 2017, the Group has recorded an impairment charge with respect to evaluation and exploration assets of the Arcata mine unit of US$3,104,000, and reversals of impairment with respect to the
Pallancata mine unit of US$383,000 and the San Felipe project of US$8,364,000. The calculation of the recoverable values is detailed in note 16.
18 Intangible assets
Cost
Balance at 1 January 2016
Additions
Transfer
Balance at 31 December 2016
Additions
Balance at 31 December 2017
Accumulated amortisation and impairment
Balance at 1 January 2016
Amortisation for the year 4
Balance at 31 December 2016
Amortisation for the year 4
Balance at 31 December 2017
Net book value as at 31 December 2016
Net book value as at 31 December 2017
Transmission
line1
US$000
Water
permits2
US$000
Software
licences
US$000
Legal
rights3
US$000
Total
US$000
22,157
–
–
22,157
–
22,157
12,070
1,004
13,074
1,089
14,163
9,083
7,994
26,583
–
–
26,583
–
26,583
12,686
–
12,686
–
12,686
13,897
13,897
1,798
14
44
1,856
16
1,872
1,315
56
1,371
158
1,529
485
343
6,686
–
–
6,686
–
6,686
3,172
600
3,772
604
4,376
2,914
2,310
57,224
14
44
57,282
16
57,298
29,243
1,660
30,903
1,851
32,754
26,379
24,544
1 The transmission line is amortised using the units-of-production method. At 31 December 2017 the remaining amortisation period is approximately 8 years (2016: 9 years).
2
Corresponds to the acquisition of water permits of Andina Minerals Group (‘Andina’). They have an indefinite life according to Chilean law. To determine the fair value less costs of disposal of the Volcan cash-
generating unit, which includes the water permits held by the Group, the Group used the value-in-situ methodology. This methodology applies a realisable ‘enterprise value’ to unprocessed mineral resources
which was US$7.10 per gold equivalent ounce of resources at 31 December 2017 (2016: US$6.90). The risk adjusted enterprise value figure has been determined using a combination of Level 2 and Level 3
inputs to estimate the amount that would be paid by a willing third party in an arm’s length transaction, taking into account the water restrictions imposed by the Chile government.
Legal rights correspond to expenditures required to give the Group the right to use a property for the surface exploration work, development and production. At 31 December 2017 the remaining amortisation
period is from 10 to 20 years (2016: 8 to 20 years).
3
4 The amortisation for the period is included in cost of sales and administrative expenses in the income statement.
The carrying amount of the Volcan CGU, which includes the water permits, is reviewed annually to determine whether it is in excess of its recoverable amount.
Annual Report & Accounts 2017 Hochschild Mining plc Key assumptions
Risk adjusted value per in-situ (gold equivalent ounce) US$
US$000
Current carrying value Volcan CGU
123
2017
7.10
2017
63,968
2016
6.90
2016
63,187
Sensitivity analysis
Other than as disclosed below, management believes that no reasonably possible change in any of the key assumptions above would cause the carrying
value, to exceed its recoverable amount.
The estimated recoverable amount is not materially greater than its carrying value. A change in the value-in-situ assumption could cause an impairment loss
or reversal of impairment to be recognised as follows:
Approximate (impairment)/reversal of impairment resulting from the following changes (US$000)
Value per in-situ ounce (10% decrease)
Risk factor (increase by 5%)
Risk factor (decrease by 5%)
19 Available-for-sale financial assets
Beginning balance
Acquisitions 1
Fair value change recorded in equity
Disposals 2
Exchange of shares 2
Ending balance
2017
(2,667)
(1,095)
9,384
2016
(3,896)
(2,376)
7,760
Year ended
31 December
2017
US$000
2016
US$000
991
7,163
(323)
(1,160)
(407)
6,264
366
–
774
(149)
–
991
1
2
Corresponds to the purchase of 4,886,538 shares of Cobalt Power Group (Cobalt) (US$500,000), 14,545,454 shares of Red Eagle Mining Corporation (Red Eagle) (US$3,314,000), and 153,616 shares of
Goldspot Discoveries Inc. (US$569,000). In addition, 13,415,000 shares of Santa Cruz Silver Mining were received in payment (US$2,780,000) of the option for the San Felipe project (refer note 23) and thus
no cash consideration was received. With the acquisition of the shares, the Group also acquired 14,545,454 warrants of Red Eagle and 2,443,269 warrants of Cobalt respectively. The warrants were recognised
at fair value on acquisition and presented as other financial assets.
As at 31 December 2016 the Group held an investment in Mariana Resources Ltd which was acquired by Sandstorm Gold on 12 July 2017. In consideration for the exchange of shares the Group received cash
proceeds of $407,000 and shares of Sandstorm Gold generating a gain of US$1,386,000. On 17 July 2017 the Group disposed its investment in Sandstorm Gold realising a loss on sale of available-for-sale-
financial assets of US$32,000.
The fair value of the listed shares is determined by reference to published price quotations in an active market.
Investments held in Pembrook Mining Corp. (US$11,745,000), ECI Exploration and Mining Inc.(US$2,639,000) and Goldspot Discoveries Inc.
(US$581,000) are unlisted and recognised at cost less any recognised impairment loss as there is no active market for these investments. The investments
in Pembrook Mining Corp and ECI Exploration and Mining Inc. are fully impaired as at 31 December 2016 and 2017.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 124
Notes to the consolidated financial statements
continued
20 Trade and other receivables
Trade receivables (note 36(c))
Advances to suppliers
Duties recoverable from exports of Minera Santa Cruz 1
Receivables from related parties (note 30(a))
Loans to employees
Interest receivable
Receivable from Kaupthing, Singer and Friedlander Bank
Other 2
Provision for impairment 3
Assets classified as receivables
Prepaid expenses
Value Added Tax (VAT) 4
Total
As at 31 December
Non-
current
US$000
2017
Current
US$000
Non-
current
US$000
–
–
1,570
–
877
–
–
1,810
–
4,257
91
3,139
7,487
43,209
4,482
2,681
160
353
402
208
9,397
(4,594)
56,298
3,720
21,048
81,066
–
–
19,065
–
856
–
–
2,188
–
22,109
44
3,564
25,717
2016
Current
US$000
36,821
2,458
–
71
230
151
198
10,205
(6,342)
43,792
2,590
21,738
68,120
The fair values of trade and other receivables approximate their book value.
1
Relates to export benefits through Port Patagonico and silver refunds in Minera Santa Cruz, discounted over 19 months (2016: 24 months) at a rate of 5.40% (2016: 6.39%) for dollars denominated amounts
and 29.60% (2016: 23.31%) for Argentinian Pesos. The gain on the unwinding of the discount is recognised within finance income (2016: loss on discount is recognised within finance costs).
2 Mainly corresponds to account receivables from contractors for the sale of supplies of US$4,773,000 (2016: US$3,968,000), and other tax claims of US$3,903,000 (2016: US$5,333,000).
3
Includes the provision for impairment of trade receivable from a customer in Peru of US$1,080,000 (2016: US$1,043,000), the impairment of deposits in Kaupthing, Singer and Friedlander of US$208,000
(2016: US$198,000), the impairment of the account receivable from a third party of US$2,501,000 (2016: US$1,797,000) and other receivables of US$805,000 (2016: US$3,304,000 that mainly relates to an
exploration project that would be recovered through an ownership interest if it succeeds).
Primarily relates to US$12,829,000 (2016: US$16,030,000) of VAT receivable related to the San Jose project that will be recovered through future sales of gold and silver and also through the sale of these
credits to third parties by Minera Santa Cruz S.A. It also includes the VAT of Compañía Minera Ares S.A.C. of US$6,519,000 (2016: US$4,776,000) and Empresa de Transmisión Aymaraes S.A.C. of
US$4,034,000 (2016: US$3,665,000). The VAT is valued at its recoverable amount.
4
Movements in the provision for impairment of receivables:
At 1 January 2016
Provided for during the year
Released during the year 1
At 31 December 2016
Provided for during the year
Released during the year 1
At 31 December 2017
1 Corresponds to the reversal of the provision of US$9,000 (2016: US$1,046,000) and write-off of US$2,804,000 (2016: US$nil).
As at 31 December 2017 and 2016, none of the financial assets classified as receivables (net of impairment) were past due.
Individually
impaired
US$000
5,327
2,061
(1,046)
6,342
1,065
(2,813)
4,594
Annual Report & Accounts 2017 Hochschild Mining plc 21 Inventories
Finished goods valued at cost
Products in process valued at cost
Raw materials
Supplies and spare parts
Provision for obsolescence of supplies
Total
125
As at 31 December
2017
US$000
2016
US$000
3,011
17,099
–
41,572
61,682
(5,004)
56,678
3,515
20,727
33
40,241
64,516
(7,460)
57,056
Finished goods include ounces of gold and silver, doré and concentrate.
Products in process include stockpile and precipitates.
The Group either sells doré bars as a finished product or if it is commercially advantageous to do so, delivers the bars for refining into gold and silver
ounces which are then sold. In the latter scenario, the doré bars are classified as products in process. At 31 December 2017 and 2016 the Group had no
doré on hand included in products in process.
Concentrate is sold to smelters, but in addition could be used as a product in process to produce doré.
As part of the Group’s short-term financing policies, it acquires pre-shipment loans which are guaranteed by the sales contracts.
The amount of expense recognised in profit and loss related to the consumption of inventory of supplies, spare parts and raw materials is US$104,689,000
(2016: US$86,754,000).
Movements in the provision for obsolescence comprise an increase in the provision of US$542,000 (2016: US$2,162,000) and the reversal of
US$2,997,000 relating to the sale of supplies and spare parts, that had been provided for (2016: US$nil).
22 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
2017
US$000
335
2,869
61,612
192,172
256,988
2016
US$000
353
203
68,643
70,780
139,979
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 of 29 days as at 31 December 2017 (2016: average of 16 days).
2 Relates to bank accounts which are freely available and bear interest.
3 These deposits have an average maturity of 32 days (2016: Average of 3 days) (refer to note 36(c)).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 126
Notes to the consolidated financial statements
continued
23 Deferred income
San Felipe contract 1
El Mosquito contract 2
Current balance
Non-current
As at 31 December
2017
US$000
2016
US$000
29,396
1,413
30,809
(400)
30,409
25,000
–
25,000
–
25,000
1
2
On 3 August 2011, the Group entered into an agreement with Impulsora Minera Santa Cruz (‘IMSC’) whereby IMSC acquired the right to explore the San Felipe properties and an option to purchase the related
concessions. Under the terms of this agreement the Group has received US$29,396,000 as non-refundable payments at 31 December 2017 (2016: US$25,000,000).
These payments will reduce the total consideration that IMSC will be required to pay upon exercise of the option and constitute an advance of the final purchase price, rather than an option premium and, as
such, they were recorded as deferred income.
On 30 November 2016, IMSC renegotiated terms of the agreement, extending the validity of the agreement to 1 December 2017. As a result of this extension, on 9 March 2017 the Group received in payment
13,415,000 ordinary shares of Santa Cruz Silver Mining (‘SCSM’) quoted in the Toronto Stock Exchange, at the unit price of CAD 0.28 amounting to CAD 3,756,000 equivalent to US$2,780,000. The amount
received included valued added taxes of US$384,000 and part consideration of US$2,396,000 recognised as deferred income.
On 28 February 2017, the Group signed a new option agreement with IMSC for the San Felipe properties for a total consideration of US$10,000,000. An initial payment of US$2,000,000 was received in cash on
7 March 2017.
In March 2017, IMSC entered into an agreement with Americas Silver Corporation (‘ASC’) to assign 100% of its interest in the San Felipe Project.
On 1 December 2017, the option to sell the San Felipe property to IMSC was extended to 31 December 2018 based on an amendment to the payment terms, and additional US$8,000,000 is payable by IMSC at
31 December 2017.
On 25 April 2017 the Group signed a five-year option agreement with Minas Argentinas S.A. (‘MASA’) giving MASA the right to explore and the option to purchase the Mosquito property, located in Argentina.
The Group has received in cash US$2,000,000, recognising US$1,813,000 as deferred income at 31 December 2017.
24 Trade and other payables
Trade payables 1
Salaries and wages payable 2
Dividends payable
Taxes and contributions
Guarantee deposits
Mining royalty (note 35)
Accounts payable to related parties (note 30(a))
Other
Total
2017
Non-
current
US$000
–
–
–
32
–
–
–
1,049
1,081
Current
US$000
63,038
36,143
107
6,425
6,946
684
149
3,287
116,779
As at 31 December
2016
Non-
current
US$000
–
–
–
43
–
–
–
1,223
1,266
Current
US$000
55,381
28,500
75
4,962
5,073
679
94
3,720
98,484
The fair value of trade and other payables approximate their book values.
1 Trade payables relate mainly to the acquisition of materials, supplies and contractors’ services. These payables do not accrue interest and no guarantees have been granted.
2
Salaries and wages payable relates to remuneration payable. There were Board members' remuneration payable of US$nil (2016: US$2,000) and long-term incentive plan payable of US$7,520,000 (2016:
US$6,279,000) at 31 December 2017.
25 Borrowings
Bond payable (a)
Secured bank loans (b)
Pre-shipment loans in Minera Santa Cruz (note 21)
Short-term bank loans
Total
As at 31 December
Effective
interest
rate
2017
Non-
current
US$000
Current
US$000
8.56%
291,955
8,779
1.80% to
2.85%
1.75%
–
–
291,955
9,043
50,041
67,863
Effective
interest
rate
8.56%
2.70% to
3.00%
0.65%
2016
Non-
current
US$000
291,073
Current
US$000
8,778
–
–
291,073
2,524
25,010
36,312
Annual Report & Accounts 2017 Hochschild Mining plc
127
(a) Bond payable
On 23 January 2014 the Group issued US$350,000,000 7.75% Senior Unsecured Notes of Compañía Minera Ares S.A.C. guaranteed by Hochschild Mining
plc and Hochschild Mining (Argentina) Corporation S.A. The interest is paid semi-annually, until maturity in 23 January 2021. During November and
December 2015, the Group repurchased bonds amounting to US$55,225,000 for US$54,369,000, giving rise to a gain on repurchase of US$856,000. The
balance at 31 December 2017 comprises the carrying value, including accrued interest payable, of US$300,734,000 (2016: US$299,851,000) determined
in accordance with the effective interest method.
The following options could be taken before the maturity:
– Optional Redemption without Make-Whole Premium: The issuer may redeem all or part of the notes on or after 23 January 2018 at the redemption
prices specified plus accrued and unpaid interest and additional amounts, if any, to the redemption date. The Make-Whole Premium requires repayment
of 103.875%, 101.938% or 100% of the outstanding principal balance if exercised in 2018, 2019 or 2020 respectively.
– Optional Redemption Upon Tax Event: 100% of the outstanding principal amount plus accrued and unpaid interest and additional amounts, if any.
– Change of Control Offer: 101% of principal amount plus accrued and unpaid interest.
(b) Secured bank loans
Short-term bank loans:
One credit agreement signed by Compañía Minera Ares S.A.C. with BBVA Continental (2016: two credit agreements signed by Compañía Minera Ares
S.A.C. with BBVA Continental). The loan has an interest rate of 1.75% (2016: 0.65%). The carrying value including accrued interest payable at 31
December 2017 is US$50,041,000 (2016: US$25,010,000). The due date is 15 December 2018 (2016: Repaid on due date 7 February 2017).
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
2017
US$000
–
291,955
–
291,955
2016
US$000
–
291,073
–
291,073
The carrying amount of current borrowings differs their fair value only with respect to differences arising under the effective interest rate calculations
described above. The carrying amount and fair value of the non-current borrowings are as follows:
Secured bank loans
Bond payable
Total
Carrying amount as at
31 December
Fair value as at
31 December
2017
US$000
–
291,955
291,955
2016
US$000
–
291,073
291,073
2017
US$000
–
306,566
306,566
2016
US$000
–
318,062
318,062
In the case of the bond payable, the fair value was determined with reference to the quoted price of these bonds in an active market, it is Level 1 input.
Current
Bank loans
Bond payable
Non-current
Bond payable
Accrued interest
Before accrued interest
As at
1 January
2017
US$000
27,534
8,778
36,312
291,073
291,073
(8,812)
318,573
Additions
US$000
Repayments
US$000
Reclassifications
US$000
As at
31 December
2017
US$000
69,686
24,688
94,374
–
–
(24,874)
69,500
(38,136)
(23,805)
(61,941)
–
–
23,941
(38,000)
–
(882)
(882)
882
882
–
–
59,084
8,779
67,863
291,955
291,955
(9,745)
350,073
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 128
Notes to the consolidated financial statements
continued
26 Provisions
At 1 January 2016
Additions
Accretion
Change in discount rate 4
Change in estimates 4
Foreign exchange effect
Transfer to trade and other payables
Payments
At 31 December 2016
Less: current portion
Non-current portion
At 1 January 2017
Additions
Accretion
Change in discount rate 4
Change in estimates 4
Foreign exchange effect
Transfer to trade and other payables
Payments
At 31 December 2017
Less: current portion
Non-current portion
Provision for
mine
closure1
US$000
Long-Term
Incentive
Plan2
US$000
120,080
–
46
(2,367)
(11,975) 3
–
–
(3,355)
102,429
3,580
98,849
102,429
–
280
863
8563
–
–
(4,359)
100,069
4,562
95,507
963
9,965
–
–
–
–
(6,279)
–
4,649
–
4,649
4,649
8,702
–
–
–
–
(7,520)
–
5,831
–
5,831
Other
US$000
6,474
570
–
–
–
(547)
(2,048)
–
4,449
1,826
2,623
4,449
347
–
–
–
(352)
–
(34)
4,410
1,641
2,769
Total
US$000
127,517
10,535
46
(2,367)
(11,975)
(547)
(8,327)
(3,355)
111,527
5,406
106,121
111,527
9,049
280
863
856
(352)
(7,520)
(4,393)
110,310
6,203
104,107
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 adjusted for the impact of quantitative easing as at 31 December 2017 and 2016 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. The discount rate used was 0.14% (2016: 0.25%). Expected cash flows will be over a period from one to 16 years.
2 Corresponds to the provision related to awards granted under the Long-Term Incentive Plan (‘LTIP’) to designated personnel of the Group. Includes the following benefits: (i) 2017 awards, granted in March
2017, payable in March 2020 (ii) 2016 awards, granted in March 2016, payable in March 2019. 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 percentage of the award granted is determined 70% by the Company’s TSR ranking relative to a tailored peer group of mining
companies, and 30% by the Company’s TSR ranking relative to a peer group of FTSE350 companies. The liability for the LTIP is measured, initially and at the end of each reporting period until settled, at the fair
value of the awards, by applying the Monte Carlo pricing model, taking into account the terms and conditions on which the awards were granted, and the extent to which the employees have rendered services
to date. Changes to the provision of US$8,702,000 (2016: US$9,965,000) have been recorded as administrative expenses US$8,215,000 (2016: US$9,298,000) and exploration expenses US$487,000 (2016:
US$667,000).
Based on the 2017 internal and external review of mine rehabilitation estimates, the provision for mine closure increased by US$856,000 (2016: US$11,975,000 decrease). The net increase (2016: net decrease)
mainly corresponds to the Pallancata mine unit of US$1,385,000 (2016: US$447,000 decrease), the Inmaculada mine unit of US$1,191,000 (2016: US$1,651,000 increase), the Crespo project of US$43,000
(2016: US$37,000 decrease), the Ares mine unit of US$22,000 (2016: US$1,622,000 decrease) and the Azuca project of US$7,000 (2016: US$8,000 decrease), net of the decrease in Arcata mine unit of
US$1,131,000 (2016: US$6,648,000 decrease), the Selene mine unit of US$607,000 (2016: US$698,000 decrease) and San José mine unit of US$54,000 (US$4,166,000 decrease).
US$1,428,000 (2016: US$6,346,000) related to changes in estimate and discount rates for mines already closed and the Arcata mine unit which reduction of the estimated costs exceeded the carrying value of
the mine asset, therefore the effect has been recognised directly in the income statement.
4
3
The following tables list the inputs to the Monte Carlo model used for the LTIPs for the years ended 31 December 2016 and 2017, respectively:
For the period ended
Dividend yield (%)
Expected volatility (%)
Risk–free interest rate (%)
Expected life (years)
Weighted average share price (pence)
LTIP 2015
LTIP 2016
LTIP 2017
31 December
2017
US$000
31 December
2016
US$000
31 December
2017
US$000
31 December
2016
US$000
31 December
2017
US$000
31 December
2016
US$000
–
–
–
–
–
0.49
3.89
0.12
1
100.68
0.81
4.02
0.25
1
63.07
0.49
3.89
0.12
2
63.49
0.81
4.02
0.25
2
239.22
–
–
–
–
–
The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the awards and is indicative of future trends,
which may not necessarily be the actual outcome.
Annual Report & Accounts 2017 Hochschild Mining plc 27 Equity
(a) Share capital and share premium
Issued share capital
The issued share capital of the Company as at 31 December 2017 is as follows:
Class of shares
Ordinary shares
The issued share capital of the Company as at 31 December 2016 is as follows:
Class of shares
Ordinary shares
129
Issued
Number
Amount
507,232,310
£126,808,078
Issued
Number
Amount
507,232,310
£126,808,078
At 31 December 2017 and 2017, all issued shares with a par value of 25 pence each were fully paid (2017: weighted average of US$0.442 per share, 2016:
weighted average of US$0.442 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.
On 30 December 2016 the Group issued 1,660,805 ordinary shares under the Restricted Share Plan, to certain employees of the Group.
The changes in share capital are as follows:
Shares issued as at 1 January 2016
Shares issued according the Restricted Share Plan benefit on 30 December 2016
Shares issued as at 31 December 2016 and 2017
Number of
shares
Share capital
US$000
505,571,505
1,660,805
507,232,310
223,805
510
224,315
Share
premium
US$000
438,041
–
438,041
(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(n)). During
2011, the Group purchased 126,769 shares for the purposes of the plan, for a total consideration of £561,478 (equivalent to US$898,000). No shares
were purchased by the Group during 2016 and 2017.
On 20 March 2016, 66,727 Treasury shares with a value of US$472,000 (being the cost incurred to acquire the shares) were transferred to the CEO of the
Group with respect to the Deferred Bonus Plan benefit. On 20 March 2017, 40,383 Treasury shares with a value of US$286,000 (being the cost incurred to
acquire the shares) were transferred to the CEO of the Group with respect to the Deferred Bonus Plan benefit. Treasury shares at 31 December 2017
comprise 67,197 (2016: 107,580) ordinary shares with a value of US$140,000 (2016: US$426,000).
(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 which 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 instruments (refer to note 2(y)).
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.
Share-based payment reserve
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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 130
Notes to the consolidated financial statements
continued
27 Equity continued
(i) Restricted Share Plan (‘RSP’)
At the beginning of 2015, the Group introduced the RSP, which is a new one-off share-based long-term incentive plan for some executives and key
employees who play a fundamental role in the performance of the business.
Under the RSP of the Group, on 30 December 2014 and 16 February 2015, 1,319,392 and 6,026,089 share options with a fair value of 86.8p (US$1.35)
and 92.3p (US$1.42) per share were granted to the CEO and certain key employees. Following the rights issue in October 2015, the number of share
options were adjusted to 1,491,572 and 6,812,485 with a fair value of 76.7p (US$1.19) and 81.6p (US$1.25) per share, respectively.
The vesting of the options is subject to the satisfaction of certain performance as well as service conditions classified as non-market conditions. The
options vest over a five-year period in tranches of 20% of the shares after each of 2, 3 and 4 years and the balance after 5 years.
If the service conditions are not met, the options lapse. As the performance conditions are non-market-based they are not reflected in the fair value of the
award at grant date, and therefore the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative
charge as required at each financial year-end.
The fair value of the option was determined with respect to the market price of the shares on the grant date. The awards do not entitle the recipients to
dividends or payment in lieu of dividends during the vesting period.
The RSP does not have an exercise price.
On 30 December 2016 the Group issued 1,660,805 ordinary shares under the Restricted Share Plan, to certain employees of the Group, including the CEO.
The carrying amount of the share-based payment reserve relating to the RSP at 31 December 2017 is US$6,048,000 (2016: US$3,958,000) with the
amount recognised in the consolidated income statement of US$2,090,000 (2016: US$3,181,000).
On 30 December 2017 20% of the options vested, resulting in 1,660,805 ordinary shares that were issued on 2 January 2018. The balance of shares
pending to vest at 31 December 2017 is 4,982,447 ordinary shares.
(ii) Deferred Bonus Plan (‘DBP’)
At the beginning of 2014, the Group introduced the DBP, as a mechanism to pay the annual bonuses to the employees. Before the approval of DBP the
annual bonuses were paid entirely in cash. Under the DBP rules a part of the annual bonuses could be deferred into shares for one or two years. A Deferred
Bonus award granted under the Plan, and the terms of that Deferred Bonus award, must be approved in advance by the Directors.
The fair value of the awards was determined with respect to the market price of the shares on the grant date. The awards do not entitle the recipients to
dividends or payment in lieu of dividends during the vesting period. The carrying amount of the share-based payment reserve relating to the DBP at 31
December 2017 is US$43,000 (2016: US$57,000) with the amount recognised in the consolidated income statement of US$34,000 (2016: US$76,000).
On 20 March 2016 and 20 March 2017, 66,727 and 40,383 Treasury shares were transferred respectively to the CEO of the Group with respect to the DBP.
(iii) Enhanced Long-term Incentive Plan (‘ELTIP’)
In April 2011 and March 2014, the CEO was granted awards under the ELTIP (397,645 and 1,076,122 shares respectively). Awards were made over
conditional shares with a value, on the date of grant, equivalent to six times salary and which vest in tranches over an extended performance period of four,
five and six years. Further details on the design of the ELTIP award and numbers of awards granted are included in the Directors' Remuneration Report.
The fair value of the option was determined using the Monte Carlo model. The carrying amount of the share-based payment reserve relating to the ELTIP
at 31 December 2017 is US$1,543,000 (2016: US$1,854,000). The amount recognised in the consolidated income statement amounts to US$449,000
(2016: US$563,000). In addition, US$$760,000 (2016: US$383,000) relating to options that lapsed during the year (204,731 ordinary shares lapsed in
2017 and 102,365 ordinary shares lapsed in 2016) were transferred from the share-based payment reserve to retain earnings.
As at 31 December 2017, 1,076,122 ordinary shares are pending to vest (31 December 2016: 1,280,853 ordinary shares). No shares lapsed during the
year (2016: 204,731 shares).
Annual Report & Accounts 2017 Hochschild Mining plc 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) (note 14)
Deferred income tax arising on net unrealised gains on cash flow hedges recognised in equity (note 14)
End of the year
131
As at 31 December
2017
US$000
(64,944)
11,304
–
(53,640)
2016
US$000
(64,274)
(6,625)
5,955
(64,944)
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 2016
Income statement (credit)/charge
Deferred income tax arising on net unrealised gains on cash flow hedges
recognised in equity
Transfer
At 31 December 2016
Transfer
At 31 December 2017
Differences in
cost of PP&E
US$000
Mine
development
US$000
Financial
instruments
US$000
Others
US$000
Total
US$000
47,967
(6,319)
–
–
41,648
2,474
44,122
60,107
8,235
–
–
68,342
991
69,333
8,064
–
(5,955)
(2,109)
–
201
201
4,762
(1,938)
–
–
2,824
(1,197)
1,627
120,900
(22)
(5,955)
(2,109)
112,814
2,469
115,283
Deferred income tax assets
At 1 January 2016
Income statement credit/(charge)
Transfer
At 31 December 2016
Income statement credit/(charge)
At 31 December 2017
Differences in
cost of PP&E
US$000
Provision for
mine closure
US$000
Tax losses
US$000
Mine
development
US$000
Financial
instruments
US$000
Others
US$000
Total
US$000
7,862
8,463
–
16,325
14,347
30,672
22,853
(3,319)
–
19,534
(51)
19,483
16,814
(15,868)
–
946
893
1,839
954
(42)
–
912
(110)
802
2,253
160
(2,109)
304
(304)
–
5,890
3,959
–
9,849
(1,002)
8,847
56,626
(6,647)
(2,109)
47,870
13,773
61,643
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
As at 31 December
2017
US$000
2,400
(56,040)
2016
US$000
1,027
(65,971)
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 132
Notes to the consolidated financial statements
continued
28 Deferred income tax continued
Tax losses expire in the following years:
Unrecognised
Expire in one year
Expire in two years
Expire in three years
Expire in four years
Expire after four years
Other unrecognised deferred income tax assets comprise (gross amounts):
Provision for mine closure1
Impairments of assets2
As at 31 December
2017
US$000
2016
US$000
3,517
493
42
4,320
119,461
127,833
2,268
3,231
4,594
2,295
111,630
124,018
As at 31 December
2017
US$000
7,287
2,509
2016
US$000
9,971
14,692
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 Related to the reversal of impairment of San Felipe project (2016: Related to the impairment of San Felipe and Volcan project) (note 17).
Unrecognised deferred tax liability on retained earnings
At 31 December 2015, there was no recognised deferred tax liability (2014: nil) for taxes that would be payable on the unremitted earnings of certain of
the Group’s subsidiaries as the intention is that these amounts are permanently reinvested.
29 Dividends
Dividends paid and proposed during the year
Equity dividends on ordinary shares:
Final dividend for 2016: 1.38 US cents per share (2015: nil US cents per share)
Interim dividend for 2017: 1.38 US cents per share (2016: 1.38 US cents per share)
Total dividends paid on ordinary shares
Proposed dividends on ordinary shares:
Final dividend for 2017: 1.965 US cents per share (2016: 1.38 US cents per share)
Dividends paid to non-controlling interests
Dividends paid to non-controlling interest related to 2014 and previous periods
Total dividends paid to non-controlling interests
2017
US$000
2016
US$000
6,997
6,999
13,996
–
6,998
6,998
9,967
6,997
12,585
–
12,585
16,983
753
17,736
Dividends per share
The interim dividend paid in September 2017 was US$6,999,000 (1.38 US cents per share). A proposed dividend in respect of the year ending
31 December 2017 of 1.965 US cents per share, amounting to a total dividend of US$9,967,000, is subject to approval at the Annual General Meeting
on 25 May 2018 and is not recognised as a liability as at 31 December 2017.
Annual Report & Accounts 2017 Hochschild Mining plc 133
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 2017 and 2016. The related parties are
companies owned or controlled by the main shareholder of the parent company or associates.
Current related party balances
Cementos Pacasmayo S.A.A.1
Total
Accounts receivable
as at 31 December
Accounts payable
as at 31 December
2017
US$000
2016
US$000
2017
US$000
2016
US$000
160
160
71
71
149
149
94
94
1 The account receivable relates to reimbursement of expenses paid by the Group on behalf of Cementos Pacasmayo S.A.A. The account payable relates to the payment of rentals.
As at 31 December 2017 and 2016, all 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 Asociación Sumac Tarpuy to Inversiones ASPI S.A.
Expenses
Donation to the Universidad de Ingenieria y Tecnologia ‘UTEC’
Expense recognised for the rental paid to Cementos Pacasmayo S.A.A.
Transactions between the Group and these companies are on an arm’s length basis.
(b) Compensation of key management personnel of the Group
Compensation of key management personnel (including Directors)
Short-term employee benefits
Long-Term Incentive Plan, Deferred Bonus Plan and Restricted Share Plan
Total compensation paid to key management personnel
Year ended
2017
US$000
2016
US$000
–
811
–
(200)
(1,000)
(200)
As at 31 December
2017
US$000
2016
US$000
6,086
5,446
11,532
5,459
6,622
12,081
This amount includes the remuneration paid to the Directors of the parent company of the Group of US$5,438,873 (2016: US$5,487,769).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 134
Notes to the consolidated financial statements
continued
31 Auditor’s remuneration
The Auditor’s remuneration for services provided to the Group during the years ended 31 December 2017 and 2016 is as follows:
Audit fees pursuant to legislation 1
Audit-related assurance services
Taxation compliance services
Taxation advisory services
Other non-audit services 2
Total
1 The total audit fee in respect of local statutory audits of subsidiaries is US$350,000 (2016: US$358,000).
2 Related to the benchmark on derivatives and IFRS 15 and 9 implementation.
In 2017 and 2016, all fees are included in administrative expenses.
32 Notes to the statement of cash flows
Reconciliation of loss for the year to net cash generated from operating activities
Profit for the year
Adjustments to reconcile Group loss to net cash inflows from operating activities
Depreciation (note 3(a))
Amortisation of intangibles (note 18)
Write-off of assets
Impairment of assets (note 11)
Gain on sale of available-for-sale financial assets, net
Loss/(gain) on sale of property, plant and equipment
Provision for obsolescence of supplies
Gain on sale of subsidiary
Decrease of 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
Amounts paid to
Ernst & Young in the year
ended 31 December
2017
US$000
2016
US$000
597
53
14
29
18
711
597
53
–
63
–
713
As at 31 December
2017
US$000
2016
US$000
53,881
62,862
195,954
1,851
405
2,753
(1,354)
145
542
–
(1,428)
(4,541)
26,063
10,196
5,464
(22,109)
–
(3,671)
(165)
22,670
1,143
287,799
185,793
1,660
1,912
–
(66)
(48)
2,162
(751)
(6,346)
(2,008)
30,541
45,417
5,483
27,949
(423)
585
11,068
(21,595)
1,661
345,856
Annual Report & Accounts 2017 Hochschild Mining plc
135
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. These agreements are not under non-cancellable/irrevocable clauses.
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
(b) Operating lease commitments
The Group has a number of operating lease agreements, as a lessee.
As at 31 December
2017
US$000
3,300
41,200
2016
US$000
350
4,500
The lease expenditure charged to the income statement during the years 2017 and 2016 are included in production costs (2017: US$12,565,000, 2016:
US$12,265,000), administrative expenses (2017: US$1,474,000, 2016: US$1,455,000), exploration expenses (2017: US$519,000, 2016: US$321,000) and
selling expenses (2017: US$2,000, 2016: US$3,000).
The Group entered into leases for vehicles for the mine units. These leases have a life of three years with renewal terms 15 days before the expiration and
no purchase option. The rent is payable based on fares depending on the type of the vehicle.
As at 31 December 2017 and 2016, 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
Argentina
34 Contingencies
For the year ended
31 December
2017
US$000
2016
US$000
2,462
764
3,802
1,931
For the year ended
31 December
2017
US$000
2016
US$000
15,925
5,739
21,664
14,296
3,682
17,978
As at 31 December 2017 the Group is subject to various claims which arise in the ordinary course of business. No provision has been made in the financial
statements and none of these claims are currently expected to result in any material loss to the Group.
(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 2017, the Group had exposures totalling
US$46,664,000 (2016: US$43,931,000) which are assessed as ‘possible’, rather than ‘probable’. No amounts have been provided in respect of these items.
This predominantly relates to potential tax penalties and related interest on intercompany loans.
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) Guarantees
The Group is required to provide guarantees in Peru in respect of environmental restoration and decommissioning obligations. The Group has provided for
the estimated cost of these activities (see note 26).
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 136
Notes to the consolidated financial statements
continued
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 sold, 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 additional tax is calculated
by applying a progressive scale of rates ranging from 2% to 8.4%, of the quarterly operating profit.
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 ‘Income Taxes’.
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.
d)
In the case of the Arcata mine unit, the Company left the tax stability agreement, but has maintained the agreement for the mining royalties, such that
the Arcata unit is liable for the new SMT but the mining royalties remain payable at the same rate as they were, before the modification in 2011.
As at 31 December 2017, the amount payable as under the former mining royalty (for the Arcata mining unit), the new mining royalty (for the Ares,
Pallancata and Inmaculada mining units), and the SMT amounted to US$108,000 (2016: US$170,000), US$1,133,000 (2016: US$769,000), and
US$492,000 (2016: US$737,000) 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$885,000 (2016: US$1,759,000)
representing the former mining royalty, classified as cost of sales, US$4,201,000 (2016: US$3,882,000) of new mining royalty and US$2,229,000 (2016:
US$3,869,000) of SMT, both classified as income tax.
Argentina
In accordance with Argentinian legislation, Provinces (being the legal owners of the mineral resources) are entitled to collect royalties from mine
operators. For San Jose, the mining royalty applicable to doré and concentrate is 3% of the pit-head value. As at 31 December 2017, the amount payable as
mining royalties amounted to US$576,000 (2016: US$509,000). The amount recorded in the income statement as cost of sales was US$5,792,000 (2016:
US$5,747,000).
36 Financial risk management
The Group is exposed to a variety of risks and uncertainties which may have a financial impact on the Group and which also impact the achievement of
social, economic and environmental objectives. These risks include strategic, commercial, operational and financial risks and are further categorised into
risk areas to facilitate consolidated risk reporting across the Group.
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; therefore, the Group’s profitability is ensured
through the control of its cost base and the efficiency of its operations.
The Group´s policy is generally 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.
Annual Report & Accounts 2017 Hochschild Mining plc 137
During 2017 the Group had no hedging instruments. For the year ended 2016 the loss recognised in the income statement for the commodity swaps
contracts signed was as follows:
Year
2016
Oz Ag
Oz Au
8,999,997
115,000
Average
Price per oz
Ag US$
Average
Price per oz
Au US$
Effect on
Income
statement
US$000
From 14
to 17.60
1,181
(18,722)
The fair value of unsettled commodity forward contracts as at 31 December 2017 and 2016 is US$nil.
At 31 December 2017 and 2016 the Group is not exposed to commodity price risk on commodity forward contracts.
The Group has embedded derivatives arising from the sale of concentrate and doré which were provisionally priced at the time the sale was recorded
(refer to notes 5 and 36(e)). 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
2017
2016
Increase/
decrease in
price of
ounces of:
Effect on
profit
before tax
US$000
Gold +/-10%
Silver+/-10%
Gold +/-10%
Silver+/-10%
+/-335
+/-542
+/-647
+/-495
(b) Foreign currency risk
The Group produces silver and gold which are typically priced in US dollars. A proportion of the Group’s costs are incurred in pounds sterling, Peruvian
nuevos soles, Canadian dollars, Argentinian pesos and Mexican pesos. Accordingly, the Group’s financial results may be affected by exchange rate
fluctuations between the US dollar and the local currency. The long-term relationship between commodity prices and currencies in the countries in which
the Group operates provides a certain degree of natural protection. The Group does not use derivative instruments to manage its foreign currency risks.
The following table demonstrates the sensitivity of financial assets and liabilities, at the reporting date, denominated in their respective currencies, to a
reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before tax and the Group’s equity.
Year
2017
Pounds sterling
Argentinian pesos
Mexican pesos
Peruvian nuevos soles
Canadian dollars
Chilean pesos
2016
Pounds sterling
Argentinian pesos
Mexican pesos
Peruvian nuevos soles
Canadian dollars
Chilean pesos
Increase/
decrease in
US$/other
currencies’
rate
Effect on
profit
before tax
US$000
Effect on
equity
US$000
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-10%
+/-58
+/4,124
-/+1,945
+/-864
+/-141
+/13
+/-45
-/+263
-/+1,857
+/-834
+/-9
-/+55
–
–
–
–
+/-567
–
+/-95
–
–
–
+/-3
–
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 138
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 2017 and 31 December 2016:
Summary commercial partners
Trade receivables
Cash and cash equivalents – Credit rating1
A+
A
A-
BBB+
BBB
BBB-
NA
Total
As at
31 December
2017
US$000
% collected
as at
19 February
2018
As at
31 December
2016
US$000
% collected
as at
7 March
2017
43,209
41%
36,821
76%
As at
31 December
2017
US$000
As at
31 December
2016
US$000
6,651
20,700
29,798
199,166
61
6
606
256,988
–
64,017
8,877
65,023
1,549
–
513
139,979
1 The long-term credit rating as at 6 February 2018 (2016: 31 January 2017).
To manage the credit risk associated with commercial activities, the Group took the following steps:
– Active use of prepayment/advance clauses in sales contracts
– Delaying delivery of title and/or requiring advance payments to reduce exposure timeframe (potential delay in sales recognition)
– Obtaining parent guarantees or contracting directly with parent company to shore up the credit profile of the customer (where possible)
– Maintaining as diversified a portfolio of clients as possible
To manage credit risk associated with cash balances deposited in banks, the Group took the following steps:
– Increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit and to diversify credit risk
– Limiting exposure to financial counterparties according to Board approved limits
– Investing cash in short-term, highly liquid and low risk instruments (money market accounts, term deposits, US Treasuries)
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 notes 20, 22 and 36(e).
(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.
At 31 December 2017 the sensitivity to reasonable movements in the share price of available-for-sale financial assets of +/- 25% with all other variables held
constant is +/-US$1,421,000 recognised in equity. The amount held of investments at 31 December 2016 (note 19) is not significant and the sensitivity to
reasonable movements in the share price of available-for-sale financial assets is immaterial.
Annual Report & Accounts 2017 Hochschild Mining plc 139
(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 2017 and 2016, the Group held the following financial instruments measured at fair value:
Assets measured at fair value
Equity shares (note 19)
Warrants (note 19)
Embedded derivatives 1
Assets measured at fair value
Equity shares (note 19)
Liabilities measured at fair value
Embedded derivatives 1
31 December
2017
US$000
5,383
1,333
1,258
31 December
2016
US$000
991
Level 1
US$000
Level 2
US$000
Level 3
US$000
5,683
1,333
–
Level 1
US$000
991
–
–
–
–
–
1,258
Level 2
US$000
Level 3
US$000
–
–
–
(1,726)
(1,726)
–
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 doré into gold and silver), with the Group either paying or receiving the difference between the provisional price and the
final price. This price exposure is considered to be an embedded derivative in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’. The gain or loss that arises on the fair value of the
embedded derivative is recorded in ‘Revenue’ (note 5).
During the period ending 31 December 2017 and 2016, there were no transfers between these levels.
The reconciliation of the financial instruments categorised as level 3 is as follows:
Balance at 1 January 2016
Changes in fair value1
Realised embedded derivatives during the period 1
Balance at 31 December 2016
Changes in fair value1
Realised embedded derivatives during the period 1
Balance at 31 December 2017
1 The movement of the period has been recognised in ‘Revenue’ (note 5).
Embedded
derivatives
liabilities
US$000
(1,141)
(10,328)
9,743
(1,726)
2,160
824
1,258
(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.
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 2017
Trade and other payables
Borrowings
Total
At 31 December 2016
Trade and other payables
Embedded derivative liability
Borrowings
Total
Less than
1 year
US$000
Between
1 and 2
years
US$000
Between
2 and 5
years
US$000
Over
5 years
US$000
104,121
82,832
186,953
90,373
1,726
50,408
142,507
352
22,845
23,197
340
–
22,845
23,185
939
329,043
329,982
1,020
–
351,888
352,908
–
–
–
227
–
–
227
Total
US$000
105,412
434,720
540,132
91,960
1,726
425,141
518,827
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 140
Notes to the consolidated financial statements
continued
36 Financial risk management continued
(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.
Fixed rate
Assets
Liabilities
Floating rate
Assets
Fixed rate
Assets
Liabilities
Floating rate
Assets
As at 31 December 2017
Within
1 year
US$000
Between
1 and 2
years
US$000
Between
2 and 5
years
US$000
Over
5 years
US$000
Total
US$000
192,172
(67,863)
2,869
Within
1 year
US$000
71,133
(36,312)
203
–
–
–
–
(291,955)
–
–
–
–
192,172
(359,818)
2,869
As at 31 December 2016
Between
1 and 2
years
US$000
Between
2 and 5
years
US$000
Over
5 years
US$000
–
–
–
–
(291,073)
–
–
–
–
Total
US$000
71,133
(327,385)
203
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 sensitivity to a reasonable movement in the interest rate, with all other variables held constant, of the financial instruments with a floating rate,
determined as a +/-50bps change in interest rates has a +/-14,000 effect on profit before tax (2016: +/-6,000). The Group is exposed to fluctuations in
market interest rates.
This assumes that the amount remains unchanged from that in place at 31 December 2017 and 2016 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.
(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).
In 2017 the Group collected US$69,500,000 (2016: US$70,000,000) due to proceeds of borrowings while US$38,000,000 (2016: US$177,431,000) of
debt was repaid.
Management also retains the right to fund operations (fully owned and with joint venture partners) with a mix of equity and joint venture partners’ debt.
37 Subsequent events
(a) A restructuring plan has been established for the Arcata mining unit that includes the dismissal of approximately 165 employees. This reduction is
aligned with the exploitation plan 2018, which is lower than budgeted in 2017, and is scheduled to take place between the months of January and
February 2018. The process has been co-ordinated and communicated during January 2018 to the employees and the union. The approximate cost
associated with the indemnities is estimated to be around US$1,388,000.
(b) On 23 January 2018 the Group redeemed in full all of the US$294,775,000 outstanding principal amount of the Senior Unsecured Notes of Compañía
Minera Ares S.A.C. (refer to note 25 (a)). The redemption price was US$317,620,062, that includes the principal amount of US$294,775,000, the
total amount of unpaid interests of US$11,422,531 and a premium of US$11,422,531.
(c) On 10 January 2018 the Group signed a short-term loan with Nova Scotia Bank of US$50,000,000 (3 months LIBOR plus 0.32%) and on 17 January
2018 signed a medium-term loan with Nova Scotia Bank of US$100,000,000 (3 months LIBOR plus 0.70%). The proceeds were employed to redeem
the Senior Unsecured Notes of Compañia Minera Ares S.A.C.
(d) On 2 January 2018 the Group issued 1,660,805 ordinary shares under the Restricted Share Plan, to certain employees of the Group.
Annual Report & Accounts 2017 Hochschild Mining plc Parent company statement of financial position
As at 31 December 2017
ASSETS
Non-current assets
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
Provisions
Current liabilities
Trade and other payables
Total liabilities
Total equity and liabilities
The profit of the Company after tax amounted to US$487,315,000 (2016: US$1,199,842,000).
The financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by:
Ignacio Bustamante
Chief Executive Officer
20 February 2018
141
As at 31 December
2017
US$000
2016
US$000
Notes
5
6
7
8
8
8
9
10
9
2,336,010
2,336,010
1,844,725
1,844,725
10,463
2,182
12,645
2,348,655
8,824
10,402
19,226
1,863,951
224,315
458,267
(140)
7,634
1,423,704
2,113,780
224,315
458,267
(426)
5,869
949,863
1,637,888
3,500
480
3,980
5,194
419
5,613
230,895
230,895
234,875
2,348,655
220,450
220,450
226,063
1,863,951
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 142
Parent company statement of cash flows
For the year ended 31 December 2017
Reconciliation of loss for the year to net cash used in operating activities
Profit for the year
Adjustments to reconcile Company profit to net cash outflows from operating activities
Reversal of impairment on investment in subsidiary
Share-based payments
Finance income
Finance costs
Income tax
(Decrease)/increase 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
Net cash used in operating activities
Cash flows from investing activities
Net cash generated from investing activities
Cash flows from financing activities
Dividends paid
Repayment of borrowings
Loans from subsidiaries
Cash flows used in financing activities
Net decrease in cash and cash equivalents during the year
Exchange difference
Other
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended 31 December
Notes
2017
US$000
2016
US$000
487,315
1,199,842
5
(491,285) (1,202,604)
563
(2,696)
16
1
449
(1,739)
19
–
484
(235)
795
(4,197)
45
(4,152)
476
(541)
337
(4,606)
121
(4,485)
–
–
(13,996)
(72)
10,000
(4,068)
(8,220)
61
(61)
10,402
2,182
(6,998)
–
–
(6,998)
(11,483)
(44)
44
21,885
10,402
7
Annual Report & Accounts 2017 Hochschild Mining plc
Parent company statement of changes in equity
For the year ended 31 December 2017
143
Balance at 1 January 2016
Other comprehensive income
Profit for the year
Total comprehensive profit for the year
Exercise of share options
Dividends
Share-based payments
Balance at 31 December 2016
Other comprehensive income
Profit for the year
Total comprehensive profit for the year
Exercise of share options
Dividends
Share-based payments
Balance at 31 December 2017
Equity share
capital
US$000
Share
premium
US$000
Notes
223,805
–
–
–
510
–
–
224,315
–
–
–
–
–
–
224,315
458,267
–
–
–
–
–
–
458,267
–
–
–
–
–
–
458,267
8
2
2
8
2
2
Other reserves
Treasury
shares
US$000
Share-based
payment
reserve
US$000
Total other
reserves
US$000
(898)
–
–
–
472
–
–
(426)
–
–
–
286
–
–
(140)
4,655
–
–
–
(2,223)
–
3,437
5,869
–
–
–
(48)
–
1,813
7,634
4,655
–
–
–
(2,223)
–
3,437
5,869
–
–
–
(48)
–
1,813
7,634
Retained
earnings
US$000
(244,605)
–
1,199,842
1,199,842
1,241
(6,998)
383
949,863
–
487,315
487,315
(238)
(13,996)
760
1,423,704
Total equity
US$000
441,224
–
1,199,842
1,199,842
–
(6,998)
3,820
1,637,888
–
487,315
487,315
–
(13,996)
2,573
2,113,780
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 144
Notes to the parent company financial statements
For the year ended 31 December 2017
1 Corporate information
Hochschild Mining plc (hereinafter ‘the Company’) is a public limited company incorporated on 11 April 2006 under the Companies Act 1985 as a Limited
Company and registered in England and Wales with registered number 05777693.
The Company’s registered office is located at 17 Cavendish Square, London W1G 0PH, United Kingdom. The Company was incorporated to serve as a
holding company to be listed on the London Stock Exchange. The Company acquired its interest in a group of companies to constitute the Hochschild
Mining Group (‘the Group’) pursuant to a share exchange agreement (‘Share Exchange Agreement’) dated 2 November 2006.
The ultimate controlling party of the Company is Mr Eduardo Hochschild whose beneficial interest in the Company and its subsidiaries (together ‘the
Group’ or ‘Hochschild Mining Group’) is held through Pelham Investment Corporation, a Cayman Islands company.
On 8 November 2006, the Company’s shares were admitted to the Official List of the UKLA (United Kingdom Listing Authority) and to trading on the
London Stock Exchange.
2 Significant accounting policies
(a) Basis of preparation
The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the
European Union and are also consistent with IFRS issued by the IASB, as applied in accordance with the Companies Act 2006.
The financial statements of the Company have been prepared on a historical cost basis. The financial statements are presented in US dollars (US$) and all
monetary amounts are rounded to the nearest thousand ($000) except when otherwise indicated.
(b) Going concern
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 itself a going concern and can provide financial support if necessary, the Directors have prepared the financial statements for the
Company on the going concern basis.
(c) Exemptions
The Company’s financial statements are included in the Hochschild Mining Group consolidated financial statements for the years ended 31 December 2017
and 31 December 2016. As permitted by section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account.
(d) 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.
(e) Changes in accounting policy and disclosures
The accounting policies adopted in the preparation of the financial statements are consistent with those applied in the preparation of the consolidated
financial statement for the year ended 31 December 2017. Amendments to standards and interpretations which came into force during the year did not
have a significant impact on the financial statements. The accounting policies adopted are consistent with those of the previous financial year.
(f) 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.
(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 periods, 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.
Annual Report & Accounts 2017 Hochschild Mining plc 145
(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 in 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 are classified as equity. Any excess above the par value of shares received upon issuance of those shares is classified as share premium. In
the case the excess above par value is available for distribution, it is classified as merger reserve and then transferred to retained earnings.
(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 reporting
dates are recognised as personnel expenses. 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 TSR performance. Fair values are subsequently remeasured at each reporting date to reflect the number of awards expected
to vest based on the current and anticipated TSR performance.
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 Company’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.
(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 with the following exemptions:
– where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination
that at the time of the transaction affects neither accounting nor taxable profit or loss;
– in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of
the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled
based on the tax rates (and tax laws) that have been enacted or substantively enacted at the 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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 146
Notes to the parent company financial statements continued
For the year ended 31 December 2017
2 Significant accounting policies continued
(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.
Financial guarantees
Financial guarantees are guarantees provided by the Company on behalf of one of the Group’s subsidiaries. At inception the fair value of a financial
guarantee is determined and recognised as a liability in the Company’s accounts, while the debit is recognised as a capital contribution to its subsidiary. The
liability is subsequently amortised on a straight-line basis over the life of the guarantee, unless it is considered probable that the guarantee will be called, in
which case it is measured at the value of the guaranteed amount payable, if higher.
The liability is presented within creditors as ‘Financial liability – financial guarantee’.
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.
A detailed description of the Company’s policies in respect of financial instruments is included in the Group’s financial statements (note 2(t)).
(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.
3 Profit and loss account
The Company made a profit attributable to equity shareholders of US$487,315,000 (2016: US$1,199,842,000).
4 Property, plant and equipment
At 31 December 2017 and 2016 the Company has property, plant and equipment with cost of equipment of US$265,000 which is fully depreciated.
There were no additions during 2016 and 2017.
Annual Report & Accounts 2017 Hochschild Mining plc 5 Investments in subsidiaries
Year ended 31 December 2016
Cost
At 1 January 2016
At 31 December 2016
Accumulated impairment
At 1 January 2016
Reversal of impairment
At 31 December 2016
Net book value at 31 December 2016
Year ended 31 December 2017
Cost
At 1 January 2017
At 31 December 2017
Accumulated impairment
At 1 January 2017
Reversal of impairment
At 31 December 2017
Net book value at 31 December 2017
147
Total
US$000
2,336,010
2,336,010
(1,693,889)
1,202,604
(491,285)
1,844,725
2,336,010
2,336,010
(491,285)
491,285
–
2,336,010
The Company tested its investment in subsidiary for impairment in light of increases in the prices of gold and silver, as well as increases in the Company’s
publicly listed share price. As a result of this test, the Company recognised an impairment reversal of the investment in Hochschild Mining Holdings Ltd. of
US$491,285,000 (2016: US$1,202,604,000).
The recoverable value of the investment in Hochschild Mining Holdings Limited was determined using a fair value less costs of disposal. The fair value less
costs of disposal was determined with reference to the market capitalisation of the Group at 31 December 2017 and 2016 translated from Pounds Sterling
into US dollars using the year-end exchange rate (both Level 1 inputs), to which a control premium was added based on recent market transactions (a
Level 2 input), and subsequently adjusted for the net debt held directly by the Company. A Level 1 input refers to quoted prices in active markets, while a
Level 2 input corresponds to other information that can be observed directly or indirectly. Any positive variation in the key assumptions would not have an
impact on the impairment reversal recognised. Therefore, an adverse change of 10% of the market capitalisation would result in a reduction of the reversal
of impairment by US$86,048,000.
The breakdown of the investments in subsidiaries is as follows:
Name
Hochschild Mining Holdings Limited
Total
Country of
incorporation
Equity interest
%
Carrying value
US$000
Country of
incorporation
Equity interest
%
Carrying value
US$000
England & Wales
100%
2,336,010 England & Wales
2,336,010
100%
1,844,725
1,844,725
As at 31 December 2017
As at 31 December 2016
The list of indirectly held subsidiaries of the Group is presented in note 1 (Corporate information) of the notes to the consolidated financial statements.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 148
Notes to the parent company financial statements continued
For the year ended 31 December 2017
6 Other receivables
Amounts receivable from subsidiaries (note 11)
Prepayments
Receivable from Kaupthing, Singer and Friedlander
Interests receivable
Other receivable
Provision for impairment 1
Total
Less current balance
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$208,000 accrued in 2008 (2016: US$198,000).
Movements in the provision for impairment of receivables:
At 1 January 2016
Amounts recovered
At 31 December 2016
Provided for during the year
At 31 December 2017
As at 31 December 2017 and 2016, none of the financial assets classified as receivables (net of impairment) were past due.
7 Cash and cash equivalents
Bank current account1
Time deposits2
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 32 days (2016: 3 days).
8 Equity
(a) Share capital and share premium
Issued share capital
The issued share capital of the Company as at 31 December 2017 is as follows:
Class of shares
Ordinary shares
The issued share capital of the Company as at 31 December 2016 is as follows:
Class of shares
Ordinary shares
Year ended 31 December
2017
US$000
10,436
20
208
–
7
10,671
(208)
10,463
(10,463)
2016
US$000
8,779
11
198
17
17
9,022
(198)
8,824
(8,824)
Total
US$000
252
(54)
198
10
208
Year ended 31 December
2017
US$000
669
1,513
2,182
2016
US$000
440
9,962
10,402
Issued
Number
Amount
507,232,310
£126,808,078
Issued
Number
Amount
507,232,310
£126,808,078
At 31 December 2017 and 2016, all issued shares with a par value of 25 pence each were fully paid (2017: weighted average of US$0.442 per share, 2016:
weighted average of US$0.442 per share).
Annual Report & Accounts 2017 Hochschild Mining plc 149
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.
On 30 December 2016 the Group issued 1,660,805 ordinary shares under the Restricted Share Plan, to certain employees of the Group.
The changes in share capital are as follows:
Shares issued as at 1 January 2016
Shares issued according the Restricted Share Plan benefit on 30 December 2016
Shares issued as at 31 December 2016 and 2017
Number of
shares
Share capital
US$000
505,571,505
1,660,805
507,232,310
223,805
510
224,315
Share
premium
US$000
458,267
–
458,267
(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(n)). During
2011, the Company purchased 126,769 shares for the purposes of the plan, for a total consideration of £561,478 (equivalent to US$898,000). No shares
were purchased by the Company during 2016 and 2017.
On 20 March 2016, 66,727 Treasury shares with a value of US$472,000 (being the cost incurred to acquire the shares) were transferred to the CEO of the
Group with respect to the Deferred Bonus Plan benefit. On 20 March 2017, 40,383 Treasury shares with a value of US$286,000 (being the cost incurred to
acquire the shares) were transferred to the CEO of the Group with respect to the Deferred Bonus Plan benefit. Treasury shares at 31 December 2017
comprise 19,659 (2016: 60,042) ordinary shares with a value of US$140,000 (2016: US$426,000).
(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.
Share-based payment reserve
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.
Refer to note 27(c) to the consolidated financial statements for details of the share-based payment reserve at 31 December 2017 and 2016.
9 Trade and other payables
Trade payables
Payables to subsidiaries (note 11)
Remuneration payable
Taxes and contributions
Financial guarantees 1
Total
As at 31 December
2017
2016
Non-current
US$000
Current
US$000
Non-current
US$000
–
–
–
–
3,500
3,500
485
227,324
943
446
1,697
230,895
–
–
–
–
5,194
5,194
Current
US$000
297
217,235
747
476
1,695
220,450
1
The Company has provided financial guarantees to certain banks over the bond payable entered into by its subsidiary Compañia Minera Ares S.A.C. The financial guarantee was recognised at its fair value at
initial recognition of US$16,361,000. This fair value was determined through the use of certain Level 3 estimates, the most significant of which being the estimated rate of interest Compañia Minera Ares S.A.C.
would have been charged were it not for the guarantee provided by the Company. The liability is subsequently amortised on a straight-line basis over the life of the guarantee.
Trade payables mainly relate to the purchase of third party services. These payables do not accrue interest and no guarantees have been granted in relation
to these payables. The fair value of trade and other payables approximate their book values.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 150
Notes to the parent company financial statements continued
For the year ended 31 December 2017
10 Provisions
Beginning balance
Increase in provision, net
At 31 December
Less: current portion
Non-current portion
As at 31 December
2017
US$000
2016
US$000
419
61
480
–
480
82
337
419
–
419
1
Corresponds to the provision related to cash-settled share-based payment awards granted under the Long-Term Incentive Plan (‘LTIP’) to designated personnel of the Company. Includes the following benefits:
(i) Long-Term Incentive Plan awards, granted in March 2017, payable in March 2020, (ii) Long-Term Incentive Plan awards, granted in March 2016, payable in March 2019. 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. Refer to footnote 2 of note 26 to the
consolidated financial statements for details of the LTIP awards and assumptions used for the valuation as at 31 December 2017 and 2016.
11 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 2017 and 31 December 2016.
Subsidiaries
Compañía Minera Ares S.A.C.1
Hochschild Mining Holdings Ltd. 2
Other subsidiaries
Total
As at
31 December 2017
As at
31 December 2016
Accounts
receivable
US$000
Accounts
payable
US$000
Accounts
receivable
US$000
Accounts
payable
US$000
9,796
–
640
10,436
441
226,860
23
227,324
7,773
487
519
8,779
279
216,932
24
217,235
1
The account receivable mainly relates to the Deferred Bonus Plan and Restricted Share Plan provision that are going to be paid by Hochschild Mining plc in shares on behalf of Compañía Minera Ares S.A.C. The
account payable mainly relates to the services performed by Compañía Minera Ares S.A.C. to Hochschild Mining plc during 2017 of US$857,000 (2016: US$766,000). The Company has also provided certain
financial guarantees on behalf of Compañía Minera Ares S.A.C. (note 9).
2 Relates to loans receivable by and payable to Hochschild Mining Holdings Ltd. The loan payable is repayable on demand and is free of interest.
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$1,364,583 (2016:
US$1,420,504).
Compensation of key management personnel (including Directors)
Short-term employee benefits
Long-Term Incentive Plan
Total compensation
12 Dividends paid and proposed
As at
31 December
2017
US$000
2016
US$000
915
450
1,365
857
563
1,420
Dividends per share
The interim dividends paid in September 2017 were US$6,998,797 (1.38 US cents per share). A proposed dividend in respect of the year ending
31 December 2017 of 1.965 US cents per share, amounting to a total dividend of US$9,967,000, is subject to approval at the Annual General Meeting
on 25 May 2018 and are not recognised as a liability as at 31 December 2017.
13 Financial risk management
The Company is exposed to a variety of risks and uncertainties which may have an impact on the achievement of financial and economic objectives. These
risks include strategic, operational and financial risk and are further categorised into risk areas to facilitate risk assessment.
The Company is not exposed to significant sources of commodity price, equity or interest rate risk.
(a) Foreign currency risk
Due to the operations of the Company, it has cash and cash equivalents and trade payables denominated in Pounds Sterling and Canadian dollars.
Accordingly, the financial results of the Company may be affected by exchange rate fluctuations. The Company does not use derivative instruments to
manage its foreign currency risks. The following table demonstrates the sensitivity of financial assets and liabilities, at the reporting date denominated in
Annual Report & Accounts 2017 Hochschild Mining plc 151
their respective currencies, to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Company’s profit
before tax and the Company’s equity.
Year
2017
Pounds sterling
2016
Pounds sterling
Increase/
decrease in
US$/other
currencies
rate
Effect on
profit
before tax
US$000
Effect on
equity
US$000
+/-10%
+/-48
+/-10%
+/-35
–
–
(b) Credit risk
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 has evaluated and introduced efforts to try to mitigate credit risk exposure.
To manage credit risk associated with cash balances deposited in banks, the Company is:
– increasing banking relationships with large, established and well-capitalised institutions in order to secure access to credit and to diversify credit risk;
– investing cash in short-term, highly liquid and low risk instruments (term deposits); and
– 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 and
cash equivalent held by the Company and Hochschild Mining Holdings Ltd at 31 December 2017 of US$2,182,000 (2016: US$10,402,000) and US$16,137,000
(2016: US$17,218,000) respectively. The Company also serves as principal funding conduit for the Group’s capital raising activities such as equity 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 2017
Trade and other payables
At 31 December 2016
Trade and other payables
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
228,810
218,279
–
–
–
–
–
–
228,810
218,279
The table below analyses the maximum amounts payable under financial guarantees provided to Compañía Minera Ares S.A.C. (note 9), considering that if
the guarantees were to be called, the guaranteed amounts would be due immediately:
At 31 December 2017
Financial guarantees 1
At 31 December 2016
Financial guarantees 1
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
294,775
294,775
–
–
–
–
–
–
294,775
294,775
1 Not including any accumulated interest that may be payable at the call date.
(d) 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 (notes 8 and 9). 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.
Annual Report & Accounts 2017 Hochschild Mining plc Strategic ReportGovernanceFinancial statementsFurther information 152
Profit by operation
(Segment report reconciliation) as at 31 December 2017
Company (US$000)
Revenue
Cost of sales (Pre consolidation)
Consolidation adjustment
Cost of sales (Post consolidation)
Production cost excluding depreciation
Depreciation in production cost
Other items
Change in inventories
Gross profit
Administrative expenses
Exploration expenses
Selling expenses
Other income/expenses
Operating profit before impairment
Impairment and write-off of assets
Finance income
Finance costs
FX loss
Profit/(loss) from continuing operations before
income tax
Income tax
Profit/(loss) for the year from continuing operations
1 On a post exceptional basis.
Arcata
Pallancata
Inmaculada
San Jose
Consolidation
adjustment
and others
Total/HOC
77,940
(80,221)
(159)
(80,062)
(62,340)
(17,446)
–
(276)
(2,281)
–
–
(1,931)
–
(4,212)
–
–
–
–
(4,212)
–
(4,212)
120,529
(70,305)
(175)
(70,130)
(46,874)
(20,256)
(1,461)
(1,539)
50,224
–
–
(1,298)
–
48,926
–
–
–
–
48,926
–
48,926
296,594
(221,739)
(277)
(221,462)
(109,005)
(110,632)
–
(1,825)
74,855
–
–
(1,118)
–
73,737
–
–
–
–
73,737
–
73,737
227,094
(177,255)
140
(177,395)
(127,217)
(47,907)
(1,780)
(491)
49,839
–
–
(6,677)
–
43,162
–
–
–
–
415
471
471
–
–
–
–
–
886
(51,283)
(17,199)
–
(1,357)
(68,953)
(3,158)
5,927
(26,095)
(5,257)
43,162
–
43,162
(97,536)
(10,196)
(107,732)
722,572
(549,049)
–
(549,049)
(345,436)
(196,241)
(3,241)
(4,131)
173,523
(51,283)
(17,199)
(11,024)
(1,357)
92,660
(3,158)
5,927
(26,095)
(5,257)
64,077
(10,196)
53,881
Annual Report & Accounts 2017 Hochschild Mining plc Reserves and resources
153
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 153 to 155 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 aims 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 2017, 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$1,200 per
ounce and Ag Price: US$16.5 per ounce.
Attributable metal reserves as at 31 December 2017
Reserve category
OPERATIONS¹
Arcata
Proved
Probable
Total
Inmaculada
Proved
Probable
Total
Pallancata
Proved
Probable
Total
San Jose
Proved
Probable
Total
Grand total
Proved
Probable
Total
Proved and
probable
(t)
318,092
539,625
857,717
3,124,529
1,564,684
4,689,213
934,208
368,996
1,303,204
495,980
221,327
717,307
4,872,809
2,694,631
7,567,440
Ag
(g/t)
Au
(g/t)
Ag
(moz)
Au
(koz)
Ag Eq
(moz)
395
335
357
147
214
169
360
289
340
490
384
457
239
262
247
1.2
1.1
1.1
4.1
5.0
4.4
1.4
1.2
1.3
7.0
6.7
6.9
3.7
3.8
3.7
4.0
5.8
9.8
14.8
10.8
25.6
10.8
3.4
14.3
7.8
2.7
10.5
37.5
22.7
60.2
11.8
18.4
30.2
412.0
249.5
661.5
41.8
14.4
56.3
111.5
48.0
159.5
577.2
330.3
907.5
4.9
7.2
12.1
45.3
29.2
74.5
13.9
4.5
18.4
16.1
6.3
22.4
80.2
47.2
127.4
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 Operations were audited by P&E Consulting.
Strategic ReportGovernanceFinancial statementsFurther informationAnnual Report & Accounts 2017 Hochschild Mining plc
154
Reserves and resources
continued
Attributable metal resources as at 31 December 20171
Resource category
OPERATIONS
Arcata
Measured
Indicated
Total
Inferred
Inmaculada
Measured
Indicated
Total
Inferred
Pallancata
Measured
Indicated
Total
Inferred
San Jose
Measured
Indicated
Total
Inferred
GROWTH
PROJECTS
Crespo
Measured
Indicated
Total
Inferred
Azuca
Measured
Indicated
Total
Inferred
Volcan
Measured
Indicated
Total
Inferred
OTHER PROJECTS2
Measured
Indicated
Total
Inferred
Grand total
Measured
Indicated
Total
Inferred
Tonnes
(t)
Ag
(g/t)
Au
(g/t)
Zn
(%)
Pb
(%)
Cu
(%)
Ag Eq
(g/t)
Ag
(moz)
Au
(koz)
Ag Eq
(moz)
Zn
(kt)
Pb
(kt)
Cu
(kt)
1,168,941
1,933,181
3,102,122
4,129,459
3,023,358
1,797,660
4,821,018
2,964,567
1,331,079
693,617
2,024,696
3,095,641
805,579
844,078
1,649,657
446,885
5,211,058
17,298,228
22,509,286
775,429
190,602
6,858,594
7,049,196
6,946,341
105,918,000
283,763,000
389,681,000
41,553,000
1,393,716
1,354,261
2,747,977
13,445,001
119,042,333
314,542,619
433,584,952
73,356,323
416
381
394
334
178
253
206
128
426
311
387
327
583
427
503
360
47
38
40
46
244
187
188
170
–
–
–
–
69
82
76
8
21
12
14
58
1.26
1.25
1.25
1.24
4.93
5.55
5.16
3.28
1.73
1.37
1.61
1.31
8.37
6.76
7.55
6.68
0.47
0.40
0.42
0.57
0.77
0.77
0.77
0.89
0.738
0.698
0.709
0.502
0.02
0.06
0.04
0.30
0.89
0.73
0.77
0.73
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7.12
6.14
6.64
0.58
0.08
0.03
0.04
0.10
3.10
2.73
2.92
0.21
0.04
0.01
0.02
0.04
0.39
0.31
0.35
1.22
0.00
0.00
0.00
0.22
509
473
487
426
542
664
588
370
554
412
506
424
1,202
927
1,061
854
82
67
71
88
301
243
245
236
55
52
52
37
315
295
305
160
89
67
73
136
15.6
23.7
39.3
44.3
17.3
14.6
31.9
12.2
18.2
6.9
25.2
32.5
15.1
11.6
26.7
5.2
7.9
21.0
28.8
1.1
1.5
41.2
42.7
37.9
47.3
77.5
124.8
164.7
479.1
321.0
800.2
312.5
74.0
30.6
104.7
130.3
216.7
183.5
400.2
96.0
78.6
222.5
301.0
14.2
4.7
168.8
173.5
199.5
–
2,513.1
– 6,368.0
8,882.7
–
670.7
–
3.1
3.6
6.7
3.4
0.9
2.4
3.3
128.6
19.1
29.4
48.6
56.5
52.7
38.4
91.1
35.3
23.7
9.2
32.9
42.2
31.1
25.2
56.3
12.3
13.7
37.4
51.1
2.2
1.8
53.7
55.5
52.7
186.0
471.2
657.3
49.6
14.1
12.9
27.0
69.0
342.3
78.7 3,414.5
122.6 7,374.3
677.4
201.3 10,790.4 1,019.8
319.8
136.7 1,716.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
99.3
83.2
182.4
77.8
99.3
83.2
182.4
77.8
43.1
37.0
80.1
28.5
43.1
37.0
80.1
28.5
5.5
4.2
9.7
163.6
5.5
4.2
9.7
163.6
1 Prices used for resources calculation: Au: $1,200/oz and Ag: $16.5/oz.
2 Includes the Jasperoide copper project and the San Felipe zinc/silver project. The silver equivalent grade (147 g/t Ag Eq) has being calculated applying the following ratios, Cu/Ag=96.38 and Au/Ag=60.
Annual Report & Accounts 2017 Hochschild Mining plc
Change in attributable reserves and resources
Ag equivalent content (million ounces)
Arcata
Inmaculada
Pallancata
San Jose
Crespo
Azuca
Volcan
Other projects total
Total
Percentage
attributable
December
2017
December
2016
Att.¹
December
2017
Att.¹
Net
difference
100%
100%
100%
51%
100%
100%
100%
100%
104.2
17.7
143.8
89.4
83.6
18.0
73.5
29.4
53.3
–
108.2
–
706.9
–
96.0
–
1,369.5
154.5
105.1
12.1
126.4
74.5
75.1
18.4
68.6
22.4
53.3
–
108.2
–
706.9
–
96.0
–
1,339.6
127.4
0.9
(5.6)
(17.4)
(14.9)
(8.5)
0.4
(4.9)
(7.0)
–
–
–
–
–
–
–
–
(29.9)
(27.1)
Category
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
Resource
Reserve
1 Attributable reserves and resources based on the Group’s percentage ownership of its joint venture projects.
155
%
change
0.9%
(31.6%)
(12.1%)
(16.7%)
(10.2%)
2.2%
(6.7%)
(23.8%)
–
–
–
–
–
–
–
–
(2.2%)
(17.5%)
Strategic ReportGovernanceFinancial statementsFurther informationAnnual Report & Accounts 2017 Hochschild Mining plc
156
Shareholder information
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, and dividends and to report changes in personal details:
By post
Link Asset Services, The Registry, 34 Beckenham Road, Beckenham,
Kent BR3 4TU.
By telephone
If calling from the UK: 0371 664 0300 (calls cost 12p per minute plus your
phone company's access charge. Lines are open 9.00am-5.30pm Mon to Fri
excluding public holidays in England and Wales).
If calling from overseas: +44 371 664 0300 (Calls charged at the applicable
international rate).
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 15 May 2018 in respect
of the 2017 final dividend.
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 in respect of the 2017 final dividend, a dividend mandate form, also
available from the Company’s registrars, should be completed and returned
to the registrars by 15 May 2018. This arrangement is only available in
respect of dividends paid in UK Pounds Sterling. Shareholders who have
already completed one or both of these forms need take no further action.
Financial calendar
Dividend dates
Ex-dividend date
Record date
Deadline for return of currency election forms
Payment date
2018
10 May
11 May
15 May
1 June
17 Cavendish Square
London
W1G 0PH
United Kingdom
Annual Report & Accounts 2017 Hochschild Mining plc Forward looking statements
The constituent parts of this Annual Report, including those that make up the Directors’ Report, contain certain forward-looking statement, 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. 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, 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 announcement. Nothing in this Annual Report should be construed as a profit forecast.
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Hochschild Mining plc
17 Cavendish Square
London W1G 0PH
United Kingdom
+44 (0) 203 709 3260
info@hocplc.com
www.hochschildmining.com
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