November 08, 2006
Hochschild Gives A South American Boost To Londons Mining Sector


Quite a feather in Londons cap to have Hochschild Mining taking a full listing. At first glance Toronto or New York might have seemed a more logical destination, but the Sabanes-Oxley Act has meant that compliance requirements in North America have reached stratospheric levels and London looked more attractive, though a full listing on the LSE is certainly no walkover. Geographically, also, it has advantages as both JP Morgan Cazenove and Goldman Sachs International, the joint sponsors, joint global co-ordinators and joint bookrunners for the IPO are both based in London, as are Canaccord Adams the co-lead manager and Nomura International, the co-manager. The shares were placed at 350 p each to raise around 270 million from institutional investors in the UK, Europe, the US and Canada. On this basis its market capitalisation is just over 1 billion which takes it straight to 99th position in the FTSE 250 Index and makes it worthy of consideration by all types of investors.

The history of this Peruvian mining company is fascinating as it comprises the mining operations of the Hochschild Group which was founded in Chile in 1911 by Mauricio Hochschild. After World War 1 it expanded into Bolivia where the target was tin and it did not start its Peruvian operations until 1925. Even then it stuck to metal trading and beneficiation until the 1940s and during the 2nd World War the Group was a key supplier of tin and other metals to the allied forces. The next major advance came in the 1960s when the Arcata mine was developed in Peru and it is still in production today. Over the next ten years or so more mines were opened in Brazil, Peru and Chile such as the well known Mantos Blancos copper mine in Chile.

It is here that the history gets a bit complicated as in November 1984 Anglo American bought the South African mining operations of Hochschild Group and immediately sold the Peruvian operations to Luis Hochschild who is clearly a descendant of the founder, though the exact relationship is not clear. Anyway it is his son Eduardo who is now executive chairman of the company, having started as a safety assistant at Arcata in 1987 and working his way up to be boss of the company 12 years later. At the executive level he is supported by Roberto Danino as deputy chairman and Alberto Beeck which is director of strategy and corporate development.

The operations sold back to Luis became the basis of Hochschild Mining which then launched an aggressive expansion campaign in Peru as well as in Mexico, Argentina and Chile. In order to spread the financial risk joint ventures were agreed with other local and overseas mining partners to develop the San Jose, Pallacanta, Mina Moris and San Felipe projects. Hochschild Mining is now the fourth largest silver producer in the world with an output of around 10.5 million ounces plus just under 250,000 ounces of gold in 2005. In that year its cash costs of production amounted to US$2.65/oz for silver and US$169/oz for gold which puts it in the first quartile of the 2005 global cost curve for both metals.

Its specialisation is in epithermal vein deposits and it currently has three underground mines Arcata, Ares and Salene - in production in southern Peru. Next up are two advanced and two early stage development projects in Argentina, Mexico and Peru and then a swathe of prospects at various stages. The overall strategy is to bring a sequence of these projects into production and the aim is to push towards annual production of 50 million silver equivalent ounces, or 830,000 gold equivalent ounces if preferred, by 2011. This is quite an uplift from the 2005 figures, but Hochschild is not the sort of company which would risk undershooting a declared target, so it may err on the conservative side.





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Will it breach the 300p support level tomorrow? We will see.

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293p now. Agree with you 270-280p a fair price but if silver price falls further with reduced demand, 260p very likely.

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I feel this is not tree shaking.

RIO, XTA, KAZ, FRES and LMI will all have a significant downward move.

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Closed at 276p today.

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Extract from Canaccord broker note:
"The announced resignations of the CEO and CFO will rightfully send concerns through the investment community. We understand Ignacio Rosado joined the Group three years ago on the basis that he would be considered for CEO and has been overlooked. Ignacio is very ambitious and capable, and clearly has ambitions elsewhere. We did not expect either of these announcements and need to look further behind the headlines."

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Flippin' heck, the divi is a bit mean at 2 !!!

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