Cooking up the HOC

Calling Time on Hochschild - wait, what?

Dear reader,

A £1.11bn valuation for HOC and 12.6% up on its news. I decided to call time on HOC at a 217.50p share price.

But first of all congratulations to readers who followed my idea since I last wrote in July 2024 “Mano De Oro” and “HOC-Key to 2024” that readers potentially could enjoy $400m adj.EBITDA. A hockey stick profit…. In actual fact they enjoyed $421.4m.

So with knockout results and quadrupling profits why call time?

I simply believe better ideas exist elsewhere and I have some other concerns too. Let’s unpack those but also let’s work through the results.

• Revenue up 37% at $947.7 million (2023: $693.7 million)

• Adjusted EBITDA up 54% at $421.4 million (2023: $274.4 million)

• PBT (pre-exceptional) up 272% at $199.1 million (2023: $53.5 million)

• PBT (post-exceptional) up 507% at $177.2 million (2023: $43.5 million loss)

• Basic earnings per share (pre-exceptional) at $0.23 (2023: $0.02)

• Basic earnings per share (post-exceptional) at $0.19 (2023: loss per share of $0.10)

• Gross Cash $97.0 million as at 31 December 2024 (2023: $89.1 million)

• Net debt of $215.6 million as at 31 December 2024 (2023: $257.9 million)

• Full year attributable production of 347,374 gold equivalent ounces

• All-in sustaining costs (AISC) from operations of $1,638 per gold equivalent ounce (2023: $1,454)

• Exploration 2.8m AuEq Ozs added

• Dividend 1.5p

So a great result in many ways but one buoyed by the stunning gold price. No one sees who’s swimming naked when the tide is in and right now the high tide is here with the current gold price, with potential for even higher prices in 2025.

So the AISC of $1,638 up from $1,454 is barely perceptible and blamed on Argentian inflation and a slower ramp up in Brazil. Of course $1,638/oz excludes corporate costs so the true AISC is $1,755 per ounce. Ouch!

But the outlook for costs is at best $1,587/oz au eq and potentially could run higher in 2025.

This is not what HOC told us they could achieve 12 months ago. Where are the AISC improvements? This was the chart that was promised just 12 months ago.

There is a 31%/69% split of silver to gold revenue so arguably HOC could be a great way to play a bullish silver market yet will silver reach the stratisphere in 2025? Predictions of higher silver prices have abounded yet at $33/oz we see little evidence to this. Silver is strongly correlated with gold so if gold goes to $3,300 silver might go to $36? There appears to be ample levels of thrifting in industry and technologies rendering silver increasingly obsolete in solar panels, while copper is a close substitute albeit slightly inferior conductivity performance. Jewellery meanwhile appears only mildly supportive of silver.

Other precious metals like PGMs appear better bets to me.

Hedges depressed HOC’s 2024 performance so my model which forecast $2,350 was $5 out with an actual $2,345. So stripping out a circa 30% discount to today’s gold price you can see a $300m upside in 2025, which is pretty good. Tempting.

But what if gold and silver doesn’t go to the moon? There’s some breathing space in Mara Rosa is up and running and that’s a positive. But even this is delivering at a $1,408/Oz AISC in 2024. Last year, on February 21, 2024, following the first gold pour, HOC explicitly stated that Mara Rosa was expected to produce 83,000–93,000 ounces of gold in 2024 at an AISC of $1,090–$1,120 per gold ounce over its 10-year mine life. Peel Hunt spoke to $1000 AISC in late 2023.

The reality is different. Meanwhile San Jose at nearly $2,000 an ounce appears to be heading towards care and maintenance.

And yes there is the new mine Monte De Carmo in proximity to Mara Rosa, Brazil and this one might be a doozy. HOC call it “a low-cost, long-life asset located in a mining-friendly jurisdiction of Brazil, within close proximity to the Mara Rosa mine”. The “previously forecast” AISC for Monte do Carmo, before Hochschild’s operational influence, is rooted in Cerrado’s October 2023 Feasibility Study:

• Life-of-Mine AISC: $687 per gold ounce, a figure Hochschild implicitly adopted in its acquisition rationale.

• First Five Years: $373 per ounce, reflecting peak efficiency before grade dilution.

The low AISC stemmed from the project’s straightforward metallurgy (94% gold recovery via CIP), proximity to infrastructure (paved highways, hydropower), and modest capital intensity ($164 million initial capex). Hochschild hasn’t revised these publicly, as Monte do Carmo isn’t yet in production—its first pour is slated in 2027, pending construction (capex now estimated at $181 million by Hochschild). The 2025 group AISC ($1,587–$1,687/oz) reflects current operations (Inmaculada, Mara Rosa), not Monte do Carmo’s future contribution. So there is jam tomorrow which is Marks & Spencer’s not just any jam. I don’t dispute there is potential for improvement a few years out but the potential is baked into the price.

(The other question I ask myself is what sort of company sells a mine like Monte Do Carmo for “just” $60m when it can deliver such stunning profits? What other mines and projects do you have that makes you discard it?! Eagle-eyed readers will know I speak of Cerrado Gold which is an OB25 for 25 holding with MAFL… more on that in a future article too)

There could be optimism too for the Royropata project but we do not know costs here. But based on the prior strategic outlook and Peruvian cost norms, it likely sat at $900–$1,100 per Au Eq life-of-mine, set around 2023-2024 during exploration planning. This has likely reached $1,300-$1,400 today and certainly benefits from not requiring a mill as part of its capex (it will feed the Inmaculada mill). As Royropata advances to a future DFS in the next 12 months we’ll know more.

Conclusion

A 1.5p dividend reward for a 216p share, and an £88.1m net profit for a £1.11bn share alongside a risk of further rising costs and reliance on the gold/silver price staying high to not reveal those is a concern for me. A P/E of 12.6X reflects a fairly full valuation. Yes net profits could double in 2026 and beyond to get to a forward P/E of 6.3X - which would then be a fair multiple.

I’ll be comparing HOC against THX (OB 25 for 25 idea) and possibly others in another “Mano De Oro” article but why pay about 10X more per pound of profit for HOC in Peru vs THX in Nigeria? (and possibly 5X more in a future where HOC’s profit double)? Why buy a share with an AISC over 50% higher, with debt and which has more than double/triple bagged - depending on from which OB article you base HOC’s price today on. Especially when you consider THX isn’t standing still either. And profits are forecast to grow there too.

So for me the really exciting aspect to HOC’s results is the read across to other gold ideas and the growing realisation that those will be releasing knock out results in 2025 at much lower cost levels and without appreciably higher levels of risk.

SELL

Regards

The Oak Bloke.

Disclaimers:

This is not advice - make your own investment decisions.

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"