Mara Rosa Optimization Will Drive Higher Margins And Long-Term Precious Metals Upside

Catalysts

About Hochschild Mining

Hochschild Mining is a precious metals producer focused on gold and silver assets in the Americas.

What are the underlying business or industry changes driving this perspective?

• Ramp up and optimization at Mara Rosa, including filter repairs, a new tailings thickener and improved mine and plant productivity, are expected to move the asset from breakeven to a high margin open pit operation and support stronger group EBITDA and earnings from 2026 onward.
• Advancing Royropata from permitting towards production using the existing Selene plant, with significantly expanded high grade resources and potential output above 100,000 ounces, should materially lift production volumes and unit margins as the project comes online around 2028 to 2029.
• Sustained brownfield exploration success at Inmaculada, Mara Rosa and San Jose, backed by an annual exploration budget of around $35 million, is extending mine lives and raising mineable ounces, which underpins long term revenue visibility and supports reserve backed valuation multiples.
• Development of Monte do Carmo as a second Brazilian operation, incorporating lessons learned from Mara Rosa and robust engineering, positions the group for around 60% production growth with a modern, low cost asset base. This is expected to drive higher free cash flow and return on capital through the next decade.
• Improving ESG performance, rising local workforce and procurement, and a shift to predominantly renewable power by 2027 are expected to lower operating and energy costs while reducing community and regulatory risk. This should support resilient net margins and a structurally lower cost of capital.

Assumptions

This narrative explores a more optimistic perspective on Hochschild Mining compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Hochschild Mining's revenue will grow by 23.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 13.8% today to 32.5% in 3 years time.
• The bullish analysts expect earnings to reach $665.5 million (and earnings per share of $1.3) by about December 2028, up from $148.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $435.6 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 21.2x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 17.4x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.61%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent cost inflation in Argentina and structurally higher royalties and profit sharing linked to stronger gold and silver prices could entrench elevated all in sustaining costs across the portfolio, limiting operating leverage to higher metal prices and capping long term revenue growth and net margins.
• The operational turnaround at Mara Rosa and the planned ramp up of Monte do Carmo and Royropata depend on resolving complex engineering, geotechnical and tailings challenges in regions exposed to heavy rainy seasons and high altitudes. Any delays, redesigns or further capex overruns could push out production growth and compress future earnings.
• San Jose is an aging asset with declining grades and only a few years of life of mine. If brownfield exploration fails to consistently convert inferred resources into reserves at Inmaculada, San Jose and future projects, group production could plateau or fall, undermining the assumed long term revenue expansion and free cash flow.
• Exposure to politically and economically volatile jurisdictions such as Peru and Argentina, including changes to FX regimes, special mining taxes, export programs and community expectations, raises the risk of adverse fiscal terms or social disruption that could increase tax and royalty burdens, inflate operating costs and reduce net profit.
• The strategy to fund organic growth, repay debt and restore dividends from internally generated cash depends on sustained high metal prices and strong cash generation from a concentrated asset base. A cyclical downturn in gold and silver prices or weaker than expected production could strain the balance sheet, limit reinvestment capacity and suppress long run earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Hochschild Mining is £5.98, which represents up to two standard deviations above the consensus price target of £4.7. This valuation is based on what can be assumed as the expectations of Hochschild Mining's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.98, and the most bearish reporting a price target of just £3.49.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $665.5 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £4.56, the analyst price target of £5.98 is 23.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.