Why Hochschild Plc (HOC), A Gold Mining Company Is Suddenly Hot?

  • Feb 23, 2019 GMT
  • Team Kalkine
Why Hochschild Plc (HOC), A Gold Mining Company Is Suddenly Hot?

Business Overview

Hochschild is a leading precious metal mining company, engaged in extraction, refining and distribution of precious metals; headquartered in London, United Kingdom. Hochschild (HOC) is listed on the London Stock Exchange.

Its areas of operations are categorised into five segments: exploration, Arcata, Pallancata, San Jose and Inmaculada. Hochschild’s 41 per cent of total group revenue comes from Inmaculada, 31.4 per cent from San Jose, 16.68 per cent from Pllancata and 10.8 per cent come from Arcata, as per FY17 annual report. 

Recent Developments

  • On 20th February 2019, Hochschild reported its preliminary FY18 results, during the year group's full-year revenue stood at $704.29 million vs $722.57 million in FY17.
  • On 13th February 2019, Company announced its intention halt temporary its operations at the Arcata precious metal mine, based out in South Peru. Full care maintenance will be in effect by Q2FY19.
  • On 16th January 2019, Group posted its Q4FY18 and 12-months production report ended 31st December 2018. The company delivered an increase in production in FY18, with output grew for the six consecutive years.

Hochschild Plc FY18 Preliminary Financial Performance

(Source: Company filings, LSE)

Financial Performance – Commentary

  • Hochschild’s FY18 revenue stood at $2 million, down by 2.5 per cent against the FY17 total revenue of $722.5 million.
  • Adjusted EBITDA fell by 10.8 per cent in FY18 to $268 million vs $300.7 million reported last year.
  • During the FY18, exploration costs increase to $34.4 million as compared to the $17.2 million in FY17, on account of increased investments in brownfield and greenfield exploration.
  • Pre-exceptional profit from continuing operations fell to $18.2 million in FY18 compared to the $53.5 million in FY17.
  • Profit from continuing operations (post exceptional items) fell to $6.7 million in FY18 from $53.8 million in FY17.
  • The company recognised a forex loss of $8.9 million in FY18 vs $5.3 million in FY17.
  • Pre-exceptional basic EPS stood at $0.05 vs $0.08 in FY17, down by 37.5 per cent on year-on-year basis.

Ratios Highlights

(Source: Thomson Reuters)

Ratios Commentary

  • Hochschild Plc’s gross margin for FY18 stood at 24.5%, significantly below the industry median of 30.5%, but improved a bit compared to the FY17 gross margin.
  • The company's EBITDA margin stood significantly above the industry median of 17.3%, also the company has delivered consistently an EBITDA margin above 30% in the last three consecutive years. However, EBITDA margin of 34.6% fell considerably in FY18 compared with the FY17 EBITDA margin of 40.4%.
  • At operating margin front, Hochschild’s performance in FY18 of 8.0%, places it below the industry median of 10.7% and considerably below the FY17 margin of 12.4%.
  • As per return on equity (ROE) measure, Hochschild ROE of 1.8% stood significantly below the industry median of 13.8.
  • Hochschild’s liquidity position in terms of current ratio was 0.99 in FY18, which was below the industry median of 1.84.
  • Asset/Equity ratio of 1.78x of the company in FY18 indicates Hochschild Plc was comparatively less leveraged compared to its peers in the gold mining industry, the industry median was 2.2x.
  • The company’s debt-equity ratio of 0.22x stood significantly lower than the industry median.
  • Hochschild's asset turnover ratio was more or less in line with the industry median.

Stock Performance Commentary

  • On 22nd February 2019, Hochschild share closed at GBp 204, up by 0.99 per cent against its previous day closing price.
  • During the last one-year shares of Hochschild have reached a 52w high of GBp 228.6 and a 52w low of GBp 146.65. At the closing price, the share was trading 10.76 per cent lower than its 52w High and 39.11 per cent higher than its 52w low.
  • Stocks 5days average volume traded was 28.64% above the 30 days average volume traded on the stock exchange.
  • In last one-year shares of Hochschild has delivered negative returns of 2.86%.
  • Hochschild dividend yield stood at 1.47%, and its outstanding market cap stood at GBP 1.04 billion.
  • Stock's Beta of 2.32 makes it highly volatile against the benchmark, and it indicates if there is 1x up or down movement in the benchmark, there could be 2.3x movement in the shares of Hochschild Plc.

Key Risks to the Company

  • Commodities prices risks (mainly, Gold and Silver)
  • Forex risks (primarily US Dollar and GBP)
  • Brexit Uncertainties

Conclusion

Going forward we anticipate the company's greenfield and brownfield expansion will increase its exploration volume. Increase in commodity prices especially prices of gold and silver will have a positive impact on the top-line of the company.

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