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News Release

Final Results
March 25, 2009 at 3:05 AM EDT

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RNS Number : 4244P
Hochschild Mining PLC
25 March 2009
 


25 March 2009

Hochschild Mining plc

Preliminary Results for the twelve months ended 31 December 2008

Operational Highlights     

  • 2008 production target achievedattributable production of 26.1 million silver equivalent ounces 

  • Increase in plant capacity of 29% year-on-yearall mine expansions completed on schedule

  • Delivered on M&A strategy with the strategic acquisitions of 40% of Lake Shore Gold, 100% of San Felipe, 50% of Liam JV, 15% of GRC

  • Signed agreement to acquire 100% of Southwestern Resources Corp for $17.5 million2

  • Continued focus on producing profitable ounces: 2009 production target set at 28 million attributable silver equivalent ounces; 7% increase over 2008 production


Financial Highlights 

  • 42% increase in revenue to $433.8 million 

  • Solid financial position with a year end cash balance of $116.1 million 

  • Swiftly acted to address volatile market conditions by reducing costs and conserving cash holdings 

  • Contained unit cost per tonne inflation through increased throughput and operating efficiencies

  • Financial results impacted by $45 million of exceptional items, including an impairment of $34.7 million relating to fixed assets

  • Pre-exceptional EPS down from $0.27 to $0.08 following anticipated lower grades at Ares and Selene and cost inflation

  • Proposed dividend of $0.02 per share, bringing the total dividend to $0.04 per share 


($ millions, unless stated)
12 months to 31 December 2008
12 months to 31 December 2007
% change
Attributable silver production (koz)
16,941
13,588
25%
Attributable gold production (koz)
153
201
(24%)
Revenue
433,779
305,021
42%
Adjusted EBITDA3
142,292
147,606
(4%)
Attributable profit after tax (before exceptionals)
24,643
81,538
(70%)
Attributable profit after tax (after exceptionals)
(19,003)
85,073
(122%)
Earnings per share (before exceptionals)
0.08
0.27
(70%)
Earnings per share (after exceptionals)
(0.06)
0.28
(121%)


10% of Gold Resource Corp ("GRC") was acquired on 26 February 2009

Agreement signed on 23 March 2009 and is subject to the approval of Southwestern's shareholders

3 Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance costs and income tax plus depreciation, amortisation and exploration expenses other than personnel and other expenses.  


Eduardo HochschildExecutive Chairman of Hochschild Mining commented: 


"We have delivered a creditable performance in a volatile trading climate. I am pleased that, despite difficult conditions, we have once again achieved all our operational targets, completing expansions at three of our six mines and increasing capacity by 29%. Our 2009 production target is 28 million silver equivalent ounces, representing a 7% increase on 2008. 


We may face volatile markets but the cost saving measures we swiftly implemented at the end of last year ensure that we are in a sound financial position and well placed to deliver our long term growth strategy. With solid assets, an excellent project pipeline and an enthusiastic and dedicated management team, we are well positioned for the coming year." 


-------------------------------------------------------------------------------------------------------------------------


A conference call will be held at 9.30am (London time) on Wednesday 25 March 2009 for analysts and investors.  


Dial in details as follows:


UK   +44 (0)203 037 9098


A recording of the conference call will be available for one week following its conclusion, accessible from the following telephone numbers:


UK   +44 (0)208 196 1998

Access code: 7521788#      


_____________________________________________________________________


Enquiries:




Hochschild Mining plc


Isabel Lütgendorf

  +44 (0)20 7907 2934

Head of Investor Relations




Ignacio Rosado

  +511 437 6007

Chief Financial Officer




Finsbury


Robin Walker

  +44 (0)20 7251 3801

Public Relations


__________________________________________________________________


About Hochschild Mining plc:


Hochschild Mining plc is a leading precious metals company listed on the London Stock Exchange (HOCM.L for Reuters / HOC LN for Bloomberg) with a primary focus on the exploration, mining, processing and sale of silver and gold. Hochschild has over forty years experience in the mining of precious metal epithermal vein deposits and currently operates five underground epithermal vein mines, four located in southern Peru, one in southern Argentina and one open pit mine in northern Mexico. Hochschild also has numerous long-term prospects throughout the Americas




Chairman's Statement 


2008 was a challenging year. The global economy was heavily impacted by the financial crisis in 2008 and many companies struggled to survive. Whilst the economic turmoil was certainly negative for Hochschild in the short term, it also gave us the opportunity to focus on what has always been our priority - to produce profitable ounces.


Precious metals prices, particularly silver, fell sharply during the second half of the year. While other mining companies were waiting for prices to adjust, we were aggressively making plans to prepare the business for future challenges. In November, we announced a number of measures to ensure that we continued to mine profitable ounces, including: 150 redundancies, a freeze on non-essential capex, cuts in our exploration budget and the delay of San Felipe, our zinc project in northern MexicoAt the end of 2008 and in the first three months of 2009, we sold forward 10.7 million ounces of our 2009 silver equivalent production (comprised of 8.9 million ounces of silver and 30 thousand ounces of gold) to ensure a more stable cash flow which will fund operating capex and future M&A initiatives. 


In our forty years as underground miners, this is not the first time that we have needed to react to volatile precious metals prices. The speed at which we implemented these changes shows that we are well prepared to address price volatility. In 2009, prices have readjusted and we are now a leaner, fitter company, benefiting from an improving price environment. 


Revenue for the year increased by 42% to $433.8 million whilst operating profit decreased by 17% to $86.3 millionmostly due to lower realisable silver prices, the anticipated decline in average grades at Ares and Selene, cost inflation and higher treatment charges. As a consequence, pre-exceptional EPS has decreased from $0.27 to $0.08. Our results were also significantly impacted by $45 million of exceptional items, including an impairment of $34.7 million relating to fixed assets (Selene, Moris and San Felipe)


We continue to enjoy a healthy balance sheet with a year end cash balance of $116.1 million. This, in conjunction with cash generated from our operations and more stable inflows guaranteed by our short term forward sales, will allow us to pursue our growth strategy: maximising profit through organic growth, exploration and carefully selected acquisitions. 


Organic growth 

I am very proud to say that we have delivered on all our production targets since our IPO in 2006. We produced 26.1 million silver equivalent ounces in 2008 and we are now the world's third largest primary silver producer.


Our 2008 production target was set at a challenging level and meeting it has not been an easy feat in a year when we were also expanding three of our six operations - Arcata (+46%), Selene (+50%) and San José (+100%). All our plant expansions were successfully completed on time and since the IPO, overall production capacity has more than doubled. Including Moris, our only open pit mine, production capacity has increased by 264%


As industry costs increased, we had to be particularly vigilant with regard to unit cost per tonne inflation, which was contained at an increase of 14.3%. Including Moris, unit cost per tonne was flat year on year. This has been achieved through a mix of strong operational management, sound planning and efficient procurement.  


Exploration growth 

In addition to the exploration success achieved at our existing operations, we are also confident about a number of projects in our pipeline which are delivering positive results. Since January 2008, our exploration efforts have been led by Raymond Jannas, the new Vice President of Exploration & Geology who has over 30 years experience in this field mainly working in the Americas. Raymond is responsible for driving forward the exploration effort for the Group and developing our pipeline for future growth.


Azuca 


Azuca is a 100% owned project located in southern Peru, in close proximity to our existing operations. In 2008 we identified two laterally extensive mineralized vein systems which have resulted in the development of a significant inferred resource totalling 1.8 million metric tonnes at 327 g/t Ag and 1.34 g/t Au, containing 23.3 million silver equivalent ounces. Drilling extensions at the Azuca and Canela veins look very promising and we believe that there is a high probability that an additional resource will be defined in 2009.


Encrucijada 


Encrucijada, which is located in Chile, is a joint venture project with Andina Minerals Inc, in which we can earn a 60% interest. In 2008 we achieved some particularly encouraging results as a result of a first-pass core drilling program. The most promising vein intercepts include; 1.4mt at 3.87 g/t Au, 344 g/t Ag (538 g/t Ag equivalent); 1.6mt at 2.47 g/t Au, 85 g/t Ag (209 g/t Ag equivalent), 0.2mt at 0.9 g/t gold and 2,378 g/t silver (2,422 g/t silver-equivalent) in separate drill holes. In 2009, we plan to expand our drilling program to evaluate two new targets. 


M&A growth 

In 2008, we continued to execute our cluster consolidation strategy by securing bolt-on acquisitions, joint ventures and strategic investments in a number of key mining districts, investing a total of $254 million during the year. Our 40% investment in Lake Shore Gold is an example of this strategy, providing us with a phased, low-risk exposure to high-grade gold deposits in a mineral rich region of Canada and adding a new cluster to our portfolio. 


In June 2008, the Group acquired 100% of the San Felipe project, our advanced development project in northern Mexico, for $51.5 million. As a result of declining zinc prices in the second half of the year and our commitment to reduce capex, in November we decided to delay the development of this project. However, we remain confident about the long term potential of San Felipe and will continue to review the timing of the project.


In Peru, we purchased 50% of Liam, a joint venture (JV) with Southwestern Resources Corp. ("Southwestern"). Southwestern is Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern PeruThe Liam JV comprises a 282,000 hectare land package in very close proximity to our four existing operations. In 2009, we entered into a binding agreement to acquire the remaining 50% of the Liam JV through the purchase of 100% of Southwestern, for a total cash consideration of $17.5 million. The acquisition, which is subject to the approval of Southwestern's shareholders, consolidates our position in one of our key operational clusters and enables us to leverage our existing infrastructure and knowledge of the regional geology.


In Mexico, we entered into a strategic alliance with Gold Resource Corporation ("GRC") and after the year end, we increased our ownership interest in GRC from 5% to 15%. GRC is a precious metals mining company with a number of high grade development and exploration projects in southern Mexico, including El Aguila which is scheduled to begin production in 2009.  


We also made an offer to acquire Minera Andes or its stake in the San José project, in order to ensure that the project would be fully financed. Although our offer was not accepted, Minera Andes was able to meet its obligations at San José by other means. We look forward to working with Minera Andes to continue to develop the operation and realise its full potential.


With a solid balance sheet, we are well positioned to benefit from current market opportunities and looking forward, we expect to continue growing through carefully selected M&A. 


Responsible mining 

Efficient operations can only be achieved through good community support and we are dedicated to maintaining the highest standards of corporate and social responsibility. We are committed to the safety of all our employees and have made significant progress over the past year. In 2008, we reduced our accident frequency rate by 24% compared to 2007. Nonetheless, it is with deep regret that I report one mine fatality in 2008. We are addressing the underlying safety deficiencies that led to the occurrence of this tragic event. 


The impact of market conditions on our full year results means that the 8% profit sharing that our Peruvian employees are entitled to under Peruvian law will be lower and this is creating a challenge for us. As announced on 23 March 2009, mining industry workers in Peru in general are expecting profit sharing to remain at similar levels to previous years and, as a result, there has been industrial action at our four Peruvian operations. The stoppage is not currently impacting our full year production target and we remain confident that a negotiated solution can be reached.


Board changes  

During the year, we announced the appointments of Miguel Aramburú, CEO and Ignacio Rosado, CFO to the board of directors. I would like to thank them and all our employees for the hard work that has enabled Hochschild Mining to progress on its strategic goals.


I would also like to take this opportunity to thank Alberto Beeck, who stepped down from the Board of Directors in September 2008, for his significant contribution to the Group. 


Dividend

Despite the cashflow generated by the Company, the board has agreed that in the current climate, it is sensible to conserve cash and ensure that the business is well funded to further its growth strategy. It has therefore concluded that a reduced dividend of $0.02 per ordinary share is proposed for the six months to 31 December 2008, resulting in a total dividend for the year of $0.04 per ordinary share. We will keep dividend policy under review to ensure that we manage the business in a way that maximises long term shareholder return. 


Outlook 

Going into 2009, Hochschild is a leaner, fitter company that is well positioned to face the challenges ahead, with a firm focus on producing profitable ounces


Our attributable production target for 2009 is 28 million silver equivalent ounces (at the Company's current conversion ratio of 60:1), comprising approximately 19.1 million ounces of silver and 148.2 thousand ounces of goldrepresenting a year-on-year increase of 7%. In addition, Lake Shore Gold is targeting 30,000 ounces of gold in 2009 which would equate to 0.72 million attributable silver equivalent ouncesWe remain extremely optimistic about Lake Shore Gold's growth profile


We expect unit cost per tonne to decrease due to expansions and lower projected input pricesWe will continue to responsibly manage our operations and will not hesitate to close or put into care and maintenance mines that are considered uneconomic. 


The financial crisis continues to have an impact on the sector and we believe that this creates interesting opportunities for a company with Hochschild's financial strength and established record as a partner of choice in the AmericasWe will continue to take a disciplined approach to M&A, focusing on mid sized, underground precious metals projects in the Americas, preferably located around existing clusters.


In order to ensure more stable cashflow to fund operating capex and future M&A, we sold forward 10.7 million ounces of our 2009 silver equivalent production during late 2008 and early 2009. The fundamentals for silver and gold are strong and wtherefore remain extremely positive about the long term prospects for precious metals and have not sold forward any of our 2010 production. At this time we do not plan to undertake any further forward sales contracts for 2009 production


The measures we swiftly implemented at the end of last year ensure that we are in a sound financial position and well placed to deliver our long term growth strategy. Our focus will continue to be on producing profitable ounces and expanding the business through appropriate investment and acquisition. With our solid assets, excellent project pipeline and professional and dedicated management team, we are well positioned for the coming year. 


Eduardo Hochschild

Executive Chairman 




OPERATIONAL REVIEW 


Production 


In line with guidance for the year, the Company achieved total attributable silver production of 26.1 million ounces, comprising 16.9 million ounces of silver and 152.9 thousand ounces of gold. 


Attributable silver production increased 25% year-on-year representing strong silver production at Arcata, Pallancata and San José. Attributable gold production decreased by 24% due to anticipated lower grades at Ares and Selene, but this was partially offset by an increase in production at our other operations. 


For further information on production, see tables on pages 47 to 49


As a result of the expansions completed in 2008, the Group's plant capacity has increased by 29%, with full benefits to accrue in 2009. Capacity at San José doubled to 530 ktpa while Arcata's capacity has been expanded by over 46% from 424 to 618 ktpa. Throughput at the Selene plant, which also processes ore from Pallancata, has increased by 50% from 706 to 1,059 ktpa. Hochschild has more than doubled plant capacity since its IPO in November 2006 demonstrating once again its ability to deliver projects on schedule. Including Moris, our only open pit mine, production capacity increased by 263%.


Hochschild's attributable production target for 2009 is 28 million attributable silver equivalent ounces (at the Company's current conversion ratio of 60:1), comprising approximately 19.1 million ounces of silver and 148.2 thousand ounces of gold. This represents a year-on-year increase of 7%. The 2009 production target of 28 million silver equivalent ounces only forecasts Selene's production through to June. See page 8 for further detail on Selene 


In addition to the Group's production of 28 million attributable silver equivalent ounces, Lake Shore Gold, in which we have a 40% investment, is expected to produce up to 30,000 ounces of gold in 2009 (which would equate to 0.72 million attributable silver equivalent ounces). We remain optimistic about Lake Shore Gold's growth profile.


To ensure that we are mining profitable ounces, we have increased cut-off grades in our underground mines by an average of 18%. This has impacted our reserve base as marginally economic ore is excluded from reserves. The combined effect of the change in cut-off grades and the increase in capacity implemented last year, resulted in a decrease in average mine life from 4.6 to 3.2 years* based on reserves as at 31 December 2008. However, we remain committed to replenishing and expanding our resource base and we have an extremely successful record of converting resources to reserves. 


*Reserve life of mine relates to our underground operations. Moris, our only open pit mine, has a different operational profile and is therefore not included


Peru 


Arcata


Production and sales 



Year ended 31 December 2008

Year ended 31 December 2007

% change 

Ore production (tonnes)

557,870

415,400

34%

Average head grade silver (g/t)

571.37

560.04

2%

Average head grade gold (g/t)

1.53

1.43

7%

Concentrate produced (tonnes)

20,639

16,665

24%

Silver grade in concentrate (kg/t)

13.94

12.12

15%

Gold grade in concentrate (kg/t)

0.04

0.03

33%

Silver produced (koz)

9,032

6,553

38%

Gold produced (koz) 

24.04

16.48

46%

Silver sold (koz)

8,564

6,544

31%

Gold sold (koz)

22.36

15.50

44%


Arcata enjoyed another successful year with silver production up 38% and gold production up 46% year on year. These increases were a result of the plant expansion completed during the year as well as consistent grades and recoveries. 


In 2008, we sold Arcata's concentrate production to Peñoles, Traxys, Cormin, Louis Dreyfus and a small fraction to Doe Run. 


Exploration


Stated on an attributable basis

As at
31 December 2008
*

As at
31 December 2007

% change

Resources

3.94 mt @ 583 g/t Ag & 1.75 g/t Au

3.58 mt @ 526 g/t Ag & 1.41 g/t Au


Resource (moz Ag eq) 

87.2

70.3

24%

Reserves

1.61 mt @ 541 g/t Ag & 1.62 g/t Au

 1.84 mt @ 476 g/t Ag & 1.19 g/t Au


Reserve (moz Ag eq)

33.1

32.4

2%

*2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades


During 2008, we incorporated 1,112,254 metric tonnes with 1.4 g/t Au and 525 g/t Ag (21.7 million ounces of silver equivalent) into indicated resources and 1,032,896 metric tonnes with 1.4 g/t Au and 517 g/t Ag (19.8 million ounces of silver equivalent) into reserves. We continue to increase reserves and resources in the Mariana, Julia, Michelle, Soledad, Ramal Marion, Nicole and Soledad Norte veins. We are also exploring two new veins, Rosita and Luz and secondary structures mainly between Marion and Macarena (35,251 metres drilled in 132 holes; 4,478 metres of underground workings). Exploration potential is open at depth and along strike for these veins.


The 2009 exploration programme focuses on adding new reserves and resources primarily in the Rosita, Luz, Mariana and Nicole veins, as well as exploring new targets north of the Mariana structure through underground workings and drilling.


Ares


Production and sales 


 
Year ended 31 December 2008
Year ended 31 December 2007
% change
Oreproduction (tonnes)
347,910
333,800
4%
Average head grade silver (g/t)
156.95
279.25
(44%)
Average head grade gold (g/t)
6.06
14.57
(58%)
Doré total (koz)
1,608
2,593
(38%)
Silver produced (koz)
1,538
2,701
(43%)
Gold produced (koz)
64.16
149.98
(57%)
Silver sold (koz)
2,398
2,880
(17%)
Gold sold (koz)
77.44
157.77
(51%)


As anticipated and previously disclosed, the average reserve grade at Ares is declining due to the ageing and geological nature of the deposit. As a consequence, gold and silver production decreased 57% and 43% respectively. Ares produces 100% doré, all of which was sold to Johnson Matthey in 2008


Exploration


Stated on an attributable basis

As at
31 December 2008
*

As at
31 December 2007

% change

Resources

1.02 mt @ 183 g/t Ag & 5.89 g/t Au

0.96 mt @ 191 g/t Ag & 5.89 g/t Au


Resource (moz Ag eq) 

17.5

16.8

4%

Reserves

0.65 mt @ 120 g/t Ag & 4.86 g/t Au

0.84 mt @ 183 g/t Ag & 5.94 g/t Au


Reserve (moz Ag eq)

8.6

14.6

(41%)

*2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades


During 2008 we drilled 5,690 metres and developed 1,062 metres of underground workings that resulted in 178,954 metric tonnes with 5.1 g/t Au and 96 g/t Ag (2.3 million ounces of silver equivalent). We are continuing to replace the ore in splays and tensional structures in the Victoria vein system.  


We tested a new geological model with 19 drill holes (6,226 metres) exploring the Apolo, Maria, Teresa and Tania vein targets, sub-parallel to the major success at the main Victoria system. In 2009, our exploration efforts will focus on developing resources and reserves at the Isabel, Tania and Maruja veins, located north of Victoria.


Selene 


Production and sales 



Year ended 31 December 2008

Year ended 31 December 2007

% change 

Ore production (tonnes)

269,150

413,622

(35%)

Average head grade silver (g/t)

209.52

295.79

(29%)

Average head grade gold (g/t)

1.21

2.01

(40%)

Concentrate produced (tonnes)

3,201

4,010

(20%)

Silver grade in concentrate (kg/t)

15.04

26.83

(44%)

Gold grade in concentrate (kg/t)

0.08

0.17

(53%)

Silver produced (koz)

1,579

3,414

(54%)

Gold produced (koz) 

8.50

21.62

(61%)

Silver sold (koz)

1,929

3,644

(47%)

Gold sold (koz)

9.93

22.03

(55%)


As anticipated and previously disclosed, the average reserve grade at Selene is declining due to the ageing and geological nature of the deposit. As a consequence, gold and silver production decreased 61% and 54% respectively. 


Selene produced an average of 22,000 tonnes of ore per month in 2008; however, this number is expected to decrease to approximately 15,000 tonnes per month in 2009. Although Selene has 1.2 million tonnes of total resources, a high level of capital expenditure would be required to extract these ounces. As announced in our Q408 Production Report in January 2009, the Company's focus for 2009 is to deliver profitable production and we will therefore reduce production, close, or put into care and maintenance any mines that are considered uneconomic. As a consequence, Selene is under consideration for closure. Selene's plant, which was upgraded during the year, will continue to process ore from Pallancata. The 2009 production target of 28 million silver equivalent ounces only forecasts Selene's production through to June with a significant decline in tonnage over this 6 month period. 


In 2008, more than 60% of Selene's production was converted into doré at the Ares plant and sold to Johnson Matthey. The remaining concentrate was sold on spot basis primarily to Teck Cominco, Norddeutsche Affinerie AG and in blends with Arcata to Cormin. 


Exploration


Stated on an attributable basis

As at
31 December 2008
*

As at
31 December 2007

% change

Resources

1.20 mt @ 248 g/t Ag & 1.35 g/t Au

1.79 mt @ 241 g/t Ag & 1.34 g/t Au


Resource (moz Ag eq) 

12.7

18.5

(31%)

Reserves

0.13 mt @ 268 g/t Ag & 2.00 g/t Au

0.81 mt @ 269 g/t Ag & 1.68 g/t Au


Reserve (moz Ag eq)

1.6

9.6

(83%)

*2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades 


During 2008, we executed 11,335 metres of diamond drilling at the Martha-Eva, Tumiri, Timida, Explorador and Pucanta veins. We achieved a minor development of resources, converting 290,716 metric tonnes at 1.5 g/t Au and 189 g/t Ag (2.6 million ounces silver equivalent) into reserves. However, grades are lower than those historically found at Selene due to the ageing nature of the mine. As the exploration results have deteriorated over time, in 2009 we will focus on compiling all geological information and re-interpreting the data to define possible new drill targets.


Pallancata 


Production and sales 



Year ended 31 December 2008

Year ended 31 December 2007

% change 

Ore production (tonnes)

468,125

78,335

498%

Average head grade silver (g/t)

312.18

310.02

1%

Average head grade gold (g/t)

1.49

1.49

0%

Concentrate produced (tonnes)

4,265

638

568%

Silver grade in concentrate (kg/t)

30.54

34.28

(11%)

Gold grade in concentrate (kg/t)

0.12

0.13

(8%)

Silver produced (koz)

4,188

704

495%

Gold produced (koz) 

16.16

2.76

486%

Silver sold (koz)

3,852

550

600%

Gold sold (koz)

14.81

2.03

630%


Pallancata, which commenced production in the third quarter of 2007, is a venture with International Minerals Corporation ("IMC") in which we control 60% and act as the mine operator. Pallancata exemplifies our cluster consolidation strategy. Its close proximity to Selene enables us to leverage existing infrastructure as ore from the operation is transported 22 kilometres to the plant at Selene for processing. Selene's plant was expanded in 2008 from 2,000 to 3,000 tpd to accommodate the anticipated growth in production at Pallancata. 

 

Pallancata recorded strong production results in its first full year of operation, with silver and gold production increasing 495% and 486% year on year to 4,188 koz and 16.16 koz respectively. 


In 2008 the silver/gold concentrate from Pallancata was sold to Teck Cominco


Exploration 


Stated on an attributable basis

As at
31 December 2008
*

As at
31 December 2007

% change

Resources

3.32 mt @ 411 g/t Ag & 1.68 g/t Au

3.22 mt @ 397 g/t Ag & 1.42 g/t Au


Resource (moz Ag eq) 

54.6

49.9

9%

Reserves

2.58 mt @ 366 g/t Ag & 1.51 g/t Au

2.13 mt @ 289 g/t Ag & 1.24 g/t Au


Reserve (moz Ag eq)

37.8

24.9

52%

*2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades 


Underground workings at the Pallancata Central, Ramal Central, Cimoide 1, María and Sofía veins resulted in a major conversion of resources into reserves of 3,080,459 metric tonnes at 1.3 g/t Au and 396 g/t Ag (47.5 million ounces of silver equivalent). 


In addition, we drilled 5,332 metres in 67 drill holes at the Pallancata-Oeste, Pallancata-Central veins and associated secondary structures, developing an inferred resource of 699,102 metric tonnes at 1.4 g/t Au and 368 g/t Ag (10.1 million ounces of silver equivalent). 


The 2009 exploration program will focus on 15,220 metres of drilling at the Virgen del Carmen, San Javier and Mariana that have high grade silver potential.


Argentina 


San José


Production and sales 


 
Year ended 31 December 2008
Year ended 31 December 2007
% change
Oreproduction (tonnes)
295,963
92,974
218%
Average head grade silver (g/t)
559.11
538.38
4%
Average head grade gold (g/t)
6.69
7.08
(6%)
Silver produced (koz)
4,381
958
357%
Gold produced (koz)
54.26
14.96
263%
Silver sold (koz)
4,588
92
4,887%
Gold sold (koz)
57.70
1.49
3,772%


San José, the Group's operation in Argentina, commenced production in the second quarter of 2007. San José is a venture with Minera Andes in which we control 51% and act as the mine operator. We remain very positive about the potential at San José, reflected by the plant expansion undertaken in 2008 which doubled capacity from 750 to 1,500 tonnes per day. 


Inventories were higher than expected in the fourth quarter primarily due to a temporary furnace malfunction which has now been resolved. In addition, sales were impacted by the early closure of a customer's refinery for the Christmas holiday period. 


After the year end, we made an offer to acquire Minera Andes or its stake in the San José project, in order to ensure that the project would be fully financed. Although our offer was not accepted, Minera Andes was able to meet its obligations at San José by other means.


In 2008, we sold the doré produced at San José to Argor Heraeus S.A., a licensed trader, smelter and assayer based in Switzerland. The concentrate produced at the operation was sold to Norddeutsche Affinerie AG. 


Exploration 


Stated on an attributable basis

As at
31 December 200
8*

As at
31 December 2007

% change

Resources

1.68 mt @ 467 g/t Ag & 7.30 g/t Au

1.59 mt @ 473 g/t Ag & 7.09 g/t Au


Resource (moz Ag eq) 

49.0

45.9

7%

Reserves

0.83 mt @ 522 g/t Ag & 7.90 g/t Au

1.37 mt @ 403 g/t Ag & 6.01 g/t Au


Reserve (moz Ag eq)

26.7

33.7

(21%)

*2008 reserve and resource figures are not comparable to 2007 due to the increase in cut-off grades and methodology


In 2008 we drilled 14,453 metres in 60 drill holes along the Odin, Ayellen and Ramal Frea veins. Another 4,24 metres in 20 holes were drilled at extensions of the Huevos Verdes, Frea and Kospi veins increasing the mineralization potential of these structures.  


Mexico 


Moris 


Production and sales 


 
Year ended 31 December 2008
Year ended 31 December 2007
% change
Oreproduction (tonnes)
876,148
338,304
159%
Average head grade silver (g/t)
5.71
4.69
22%
Average head grade gold (g/t)
1.57
1.65
(5%)
Silver produced (koz)
65.07
12.63
415%
Gold produced (koz)
26.85
5.58
381%
Silver sold (koz)
68.27
6.44
960%
Gold sold (koz)
28.01
3.26
759%

Moris, which commenced production in August 2007, is a venture with EXMIN in which we control 70% and act as the mine operator. Moris is the Group's only open pit mine but provided a key stepping stone into Mexicowhich is of key strategic importance to the Group. 

Production at the operation more than doubled to 876 thousand tonnes in 2008. Gold recoveries at Moris are expected to increase in 2009 as a result of a more stable plant process. In 2008, we sold all of the gold/silver doré produced at Moris to Johnson Matthey. 


Exploration

Stated on an attributable basis

As at
31 December 2008

As at
31 December 2007

% change

Resources

2.10 mt @ 5 g/t Ag & 1.26 g/t Au

2.44 mt @ 5 g/t Ag & 1.33 g/t Au


Resource (moz Ag eq.) 

5.4

6.6

(18%)

Reserves

1.24 mt @ 5 g/t Ag & 1.44 g/t Au

1.77 mt @ 5 g/t Ag & 1.50 g/t Au


Reserve (moz Ag eq.)

3.6

5.4

(33%)


Acquisitions and investments


Expansion through investment and acquisition is a key element of our strategy. We have maintained our disciplined approach in 2008, focusing on mid-sized, underground precious metals projects in the Americas, particularly in our existing clusters, which we believe will create long term shareholder value. During 2008 and in early 2009we secured a number of strategic investments in key mining districts with a total spend of $284.5 million, of which $254 million was invested during 2008


In the first half of 2008 we acquired 40% of Lake Shore Gold for a total of $164 million, providing us with exposure to reasonably priced, high-grade gold deposits in the Timmins mining district of Northern Ontario, CanadaThe company has a strong pipeline of projects, from grass roots through to advanced exploration as well as a proprietary database of exploration targets and is expected to produce up to 30,000 ounces of gold in 2009 (which would equate to 0.72 million attributable silver equivalent ounces). We view this as an important strategic investment and have three positions on the board. 


In 2009 we participated in Lake Shore Gold's equity financing and maintained our ownership at 40% by investing a further $18.5 million. Proceeds from the financing will be used for underground rehabilitation and development work at the company's 100% owned Bell Creek mine and Vogel properties in support of an advanced underground exploration program, exploration expenditures at the Timmins, Thunder Creek, Casa Berardi and other exploration properties, and for general corporate purposes. 


In June 2008 we acquired 100% of the San Felipe project, our advanced development project in northern Mexico. As a result of declining zinc prices in the second half of the year and our commitment to reduce capex, in November we decided to delay the development of this project. However, we remain confident about the long term potential of San Felipe and will continue to review the timing of the project. 


In line with our cluster strategy, we further consolidated our position in southern Peru via the acquisition of a 50% interest in the Liam JV with Southwestern for a total consideration of US$33.3 million. The 282,000 hectare property has significant strategic importance for Hochschild as it is in close proximity to our four existing operations; Arcata, Ares, Selene and Pallancata. The acquisition was completed in August 2008. 


In 2009, we entered into a binding agreement, subject to the approval of Southwestern's shareholders, to acquire the remaining 50% of the Liam JV through the purchase of 100% of Southwestern, for a total cash consideration of $17.5 millionSouthwestern is Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern PeruThe acquisition consolidates our position in one of our key operational clusters and enables us to leverage our existing infrastructure and knowledge of the regional geology.


In November 2008, we made a $5 million investment in Gold Resource Corp, an underground precious metals mining company with a number of high grade development and exploration projects in southern Mexico. We have subsequently exercised our option to invest a further $13 million in GRC and as a result we now hold 15% of the company and are extremely confident about the potential of the business.


Exploration 


We remain committed to our long term goal of achieving a resource and reserve life of 4.0 years at each of our operations and in 2008 spent $23.8 million on exploration. 


We remain extremely positive about our project pipeline which currently has numerous opportunities in PeruArgentinaMexicoChile and Canada at various stages of development. We are constantly evaluating opportunities, with a clear focus on mid-sized, high grade, underground precious metals deposits in key mining districts: 


Peru 


Azuca 


Azuca is a 100% owned project located in southern Peru, in close proximity to our existing operations. Successful exploration at Azuca during 2008 has identified two laterally extensive mineralised vein systems; Azuca and Canela. Additional mineralised vein systems have been identified at the property and their continuity and metal content will be confirmed in 2009.


Core drilling of approximately 15,000 metres in 53 holes at this exciting new discovery resulted in the development of a significant resource in the inferred category along two ore shoots in the Azuca vein, totalling 1,776,034 metric tonnes at 327 g/t Ag and 1.34g/t Au (408 g/t Ag-equivalent) containing 23.3 million ounces of silver-equivalent.


Drilling to the east of Azuca and along the Canela vein looks very promising, indicating that there is potential for additional resource to be defined in 2009. Metallurgical recoveries are slightly above 90% for both gold and silver. 


Liam JV


To date, 38 prospects have been identified and partially evaluated. 


The most important is the Crespo project where previous exploration led to the drilling of approximately 6,400 metres in 41 holes. Drilling results have allowed the internal calculation of a mineralised potential at Crespo of 12.5 million metric tonnes at 0.77 g/t Au and 39.4 g/t Ag, containing 0.4 moz Au and 15.8 moz Ag. Initial core drilling focused on defining distinct zones containing structures with higher grade mineralization (above 300g/t Ag equivalent). A total of 352 metres was completed in 6 holes. Results include 14.5 metres at 328 g/t Ag equivalent and 11 metres at 327 g/t Ag equivalent. 


Data review, core re-logging and preliminary exploration work were also carried out at the Huacullo, Astana-Farallón and Ibel prospects. These areas will be a significant part of the 2009 generative program in Peru.


Inmaculada 


The Inmaculada project is part of a JV agreement with Ventura Gold, in which Hochschild has a 49% ownership interest. Ventura Gold recently reported the first independent inferred mineral resource estimate at the Inmaculada project as per National Instrument 43-101 by Micon of 3.7 million tonnes at an average grade of 4.0 g/t Au and 139 g/t Ag containing 483,000 ounces Au and 16.6 million ounces Ag (as at 5 January 2009).


Chile 


Encrucijada 


Encrucijada is part of a JV agreement with Andina Minerals Inc, signed in February 2008, in which Hochschild can earn a 60% interest in the property. Detailed surface exploration has defined four areas of interest (Millaray, Central, Curicala and Norte). A first pass core drilling program was completed in the Millaray area totalling 1,561 million tonnes in 10 holes. The Quillay and Millaray veins have been recognised at above 400 metres along strike and to 130 million tonnes depth. In 2009, detailed exploration will be performed at the Central, Curicala and Norte areas to define drillable targets for follow-up.


Vaquillas project 


A joint venture letter of intent with Iron Creek Capital Corp. to explore the precious metal properties within their Vaquillas project was signed in September 2008. Under the terms of the agreement Hochschild can earn-in a 60% interest in the Vaquillas project by contributing $6.75 million over a 5 year period. Field work started during the first week in October on the Inti claims followed by a 2,100 metre reverse circulation drill program (9 holes) that was completed in December. Sample results from the drilling program show no significant mineralization, with the exception of drill hole 3 which intersected 1m of 326 g/t Ag. The remaining targets will be explored during 2009.



FINANCIAL REVIEW 


Key performance indicators:

(before exceptional items, unless otherwise indicated)


 US$(000) unless otherwise indicated
Year ended 31 December 2008
Year ended 31 December 2007
% change
Revenue
433,779
305,021
42%
Attributable silver production (koz)
16,941
13,588
25%
Attributable gold production (koz)
153
201
(24%)
Cash costs ($/oz Ag co-product)1
7.05
4.40
60%
Cash costs ($/oz Au co-product)1
469
212
121%
Adjusted EBITDA2
142,292
147,606
(4%)
Earnings per share
$0.08
$0.27
(70%)
Cash flow from operating activities
78,641
21,404
267%
Reserve life of mine (years)3
3.2
4.6
(30%)


Cash costs are calculated to include cost of sales, treatment charges, and selling expenses less depreciation included in cost of sales. The calculation used in 2007 has been adjusted to include: (i) the termination benefits of mine workers (this amount was previously included in administrative expenses) and (ii) a change in the allocation of depreciation and amortisation in cost of sales. 

Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance income/(cost), foreign exchange (loss)/gain and income tax plus depreciation, amortisation and exploration costs other than personnel and other expenses.

3 Reserve life of mine relates to our underground operations. Moris, our only open pit mine, has a different operational profile and is therefore not included 


The reporting currency of Hochschild Mining plc is U.S. dollars. In our discussion of financial performance we remove the effect of exceptional items, unless otherwise indicated, and in our income statement we show the results 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


Full year revenue from continuing operations, net of commercial discounts, increased by 42% to $433.8 million (2007: $305.0 million), comprising silver revenue of $264.1 million and gold revenue of $169.2 million. The increase was mainly as a result of a higher amount of silver ounces sold and higher gold prices. In 2008, silver accounted for 61% and gold for 39% of consolidated revenue compared to 59% and 41% respectively in 2007. Gross revenue increased 46% to $463.4 million in 2008 (2007: $317.4 million).


Silver: Gross revenue from silver increased 52% in 2008 to $288.8 million (2007: $190.5 million). This change reflects a 50% increase in total ounces sold, partly offset by lower realised silver prices, which were down 2% year on year. The total amount of silver ounces sold in 2008 was 20,593 koz (2007: 13,717 koz). 


Gold: Gross revenue from gold increased 38% in 2008 to $174.6 million (2007: $126.8 million). This change was a result of higher realised gold prices, up 35% in 2008. The total amount of gold ounces sold in 2008 was 198.3 koz in 2008 (2007: 202.1 koz). 


Commercial discounts: Commercial discounts mostly refer to refinery charges for processing mineral ore and are discounted from revenue on a per tonne or per ounce basis. In 2008, commercial discounts were $30.2 million representing a 127% increase on 2007. This was partly due to the Group producing a higher amount of concentrate in 2008 resulting from a full year's production at both Pallancata and San José (which commenced production in Q3 2007). In addition, we incurred higher treatment charges for concentrate in most mines given the less favourable market conditions. The ratio of commercial discounts to gross revenue increased from 4% in 2007 to 7% in 2008. 


Revenue by mine  

US$(000) unless otherwise indicated

Year ended 31 December 2008

Year ended 31 December 2007

% change

Silver revenue




Arcata

119,284

94,754


Ares

38,196

38,078


Selene

29,168

48,593


Pallancata

48,207

8,342


San José

52,942

744


Moris

992

26


Commercial discounts

(24,712)

(11,697)

111%

Net silver revenue

264,077

178,840

48%

Gold revenue




Arcata 

20,344

11,924


Ares

67,899

97,469


Selene

8,714

14,807


Pallancata

13,214

1,749


San José

40,095

532


Moris

24,380

347


Commercial discounts

(5,423)

(1,578)

244%

Net gold revenue

169,223

125,250

35%





Other revenue1

479

931

(49%)

Total revenue

433,779

305,021

42%





1Other revenue includes revenue from base metal components in the concentrate sold from the Arcata mine net of commercial discounts and revenue from sale of energy.


Average realisable prices 


Average realisable precious metals prices, which include commercial discounts, for the twelve months to 31 December 2008 were $853.28/oz for gold and $12.82/oz for silver. The average realisable price for the year was negatively impacted by the significant fall in precious metals prices in the second half of 2008 when silver decreased by an average of 39% and gold by 7%.



Twelve months to 
31 December 2008

Twelve months to 
31 December 2007

% change

Silver ($/oz)

$12.82

$13.08

(2%)

Gold ($/oz)

$853.28

$634.30

35%


Forward sales contracts 


The Group sold forward 778 koz of its silver 2008 production at $10.63/oz and 1.9 koz of its gold 2008 production at $840/oz. Both forward sales matured in January 2009. 


In addition, the Group has sold forward a total of 10.7 million ounces of its 2009 silver equivalent production comprised of 8.9 million ounces of silver at an average price of $12.09/oz and 30.0 thousand ounces of gold at an average price of $972/oz


Of the total amount sold forward, 3.3 million silver ounces and 1.9 thousand gold ounces were sold in December 2008 and the remaining 6.4 million silver ounces and 30.0 thousand gold ounces were sold forward in Q1 2009. 


None of 2010's production has been sold forward. At this time, management does not plan to undertake any further forward sales contracts for 2009 production.


The decision to sell forward a portion of 2009 production was driven by the desire for more stable cash flows which will fund operating capex and future M&A. We remain positive about the long term prospects for silver and gold but in light of current market conditions, we believe that it is prudent to focus on cash preservation in the current financial year. 


Costs 


Management remains focused on cost control and during 2008 a series of productivity measures were implemented including plant expansions, changes in mining methods and procurement initiatives. This has enabled us to offset some of the industry cost inflation experienced in 2008, which was particularly prevalent in the first half of the year.


In our underground mining operations, unit cost per tonne increased by an average of 14.3% from $69.7 in 2007 to $79.7 in 2008. As previously indicated, the increase was driven by industry cost inflation associated with labour, materials (explosives, reagents and steel inputs), energy and supplies. Including Moris, our only open pit operation which has different cost profile to our underground mines, the Group's unit cost per tonne was flat year on year at $59.9 (2007: $59.7).


During the year, the average unit cost per tonne for our three original mines (Ares, Arcata and Selene), was $70.8 representing an annual increase of 16.4%. This cost increase was mainly a result of higher prices of key inputs, such as cyanide, energy, explosives and steel balls as well as higher energy costs. 


Our fourth operation in Peru, Pallancata, was also affected by industry inflationary pressure, with unit cost per tonne increasing 5.8% mostly due to higher energy and maintenance costs.

  

In San José, unit cost per tonne decreased by 16.6% in 2008 as a result of increased throughput and efficiency gains resulting from the optimisation of production processes at both the mine and plant. This reduction was achieved despite increases in overall inflation in Argentina (7.2% in 2008) and higher energy costs.


In Mexico, the average unit cost per tonne at Moris decreased by 2.2% to $18.0. 


Depreciation and amortisation, which is included in costs of sales, increased from $24.7 million in 2007 to $41.4 million in 2008. This increase was driven by the Group's higher production in 2008 and also by its greater net asset base, with six mines in operation as opposed to three in 2007. 


Cash costs


Co-product cash costs include cost of sales, commercial deductions and selling expenses, less depreciation included in cost of sales. Silver/gold cash costs are total cash costs multiplied by the percentage of revenue from silver/gold, divided by the number of silver/gold ounces sold in the year. Cash costs for the year increased from $4.40 to $7.05 per ounce for silver and from $212 to $469 per ounce for gold. The increase is mainly explained by i) the expected decline in extracted grades, especially at Ares and Selene, which accounted for approximately 79% of the total increase of silver cash cost and 53% of the total increase of gold cash cost; and ii) the higher commercial discounts due to less favourable market conditions that represent approximately 11% of the increment of silver cash cost and 8% of the increase of gold cash cost. 


By product cash costs include cost of sales, commercial deductions and selling expenses, less depreciation included in cost of sales. Silver/gold cash costs are total cash costs less revenue from gold/silver, divided by the number of silver/gold ounces sold in the year.


By product cash costs for the period were $3.09 per silver ounce and ($255) per gold ounce. (2007: ($1.80) per silver ounce and ($445) per gold ounce). 


Administrative expenses 


Administrative expenses before exceptional items totalled $68.8 million in 2008 (2007: $68.8 million). On a post exceptional basis, administrative expenses increased 1.6% to $69.9 million in 2008 (2007: $68.8 million). This was due to the one off termination benefit associated with the reduction in the Group's corporate workforce which occurred in the last quarter of 2008. This initiative, which involved 102 redundancies in administrative positions (150 positions in total), was one of a series of measures undertaken by management to reduce operating costs and preserve cash. 


Selling expenses 


Selling expenses increased by $8.5 million to $11.3 million in 2008 (2007: $2.8 million) as a result of:
 
i)                    Higher transportation costs due to the higher volume of concentrate sold at Arcata, San Jose and Pallancata as a result of capacity expansions and a full year production in the case of San José and Pallancata; 
 
ii)                  Increased sales in Argentina resulting in higher export duties. Export duties in Argentina are levied at 10% of revenue for concentrate and 5% of revenue for doré. 


Profit from continuing operations 


Profit from continuing operations before exceptional items, net finance cost, foreign exchange loss and income tax totalled $86.3 million in 2008, representing an annual decrease of 17% (2007: $103.9 million). The decrease is primarily the result of the expected decline in grades at Ares and Selene, higher production costs and commercial discounts, and higher depreciation and amortisation (as detailed above). Profit from continuing operations was also negatively impacted by higher selling expenses, partly offset by increased revenue generated by higher gold prices and a greater amount of silver ounces sold. 


Adjusted EBITDA 


Adjusted EBITDA is calculated as profit from continuing operations before exceptional items, net finance cost, foreign exchange loss and income tax plus depreciation, amortisation and exploration costs other than personnel and other expenses. Adjusted EBITDA decreased by 4% over the year to $142.3 million (2007: $147.6 million) mainly as a result of a decrease in profit from continuing operations as explained above. 


Adjusted EBITDA reconciliation

US$(000) unless otherwise indicated

Year ended 31 December 2008

Year ended 31 December 2007

% change

Profit from continuing operations before exceptional items, net finance income / (cost), foreign exchange gain / (loss) and income tax




86,268




103,930




(17%)

Operating margin

20%

34%


Depreciation and amortisation in cost of sales


41,373


24,685


68%

Depreciation and amortisation in administrative expenses


1,125


525


114%

Exploration expenses

23,841

26,890

(11%)

Personnel and other exploration expenses


10,315


8,424

22%

Adjusted EBITDA

142,292

147,606

(4%)

Adjusted EBITDA margin

33%

48%




Exploration expenses 


In 2008, exploration expenses decreased 11% to $23.8 million (2007: $26.9 million) as a result of the Group's decision, announced in November 2008, to reduce expenditure. This mainly affected greenfield expenditure which decreased to $8.8 million (2007: $13.9 million). However, we remain committed to advancing existing projects and prospects and have therefore maintained our expenditure on brownfield and advanced project exploration, which increased by 7% to $4.3 million (2007: $4.0 million).


Impact of the Group's investments in joint ventures and associates 


The Group's share of the loss of equity accounted investments in joint ventures and associates resulted in a loss of $8.2 million, which has had an impact of $7.4 million on attributable net earnings before exceptional items and $0.02 on EPS. This loss comprises the Group's share of post-tax losses of its associate, Lake Shore Gold (US$3.9 million) and its share of post tax losses of joint venture companies formed to develop the Pacapausa ($2.1 million) and Claudia ($2.2 million) projects.


Notwithstanding these losses recorded in the Income Statement due to this line item, we believe that these investments are valuable components of our growth strategy and will have a positive impact in the medium term.


Finance income & costs 


Finance income decreased 53% to $9.4 million in 2008 (2007: $19.8 million) mainly due to lower interest on time deposits ($11.2 million) as a result of lower average cash balances ($160 million) and lower gains from changes in the fair value of financial instruments. 


Finance costs increased from $7.5 million to $18.8 million during the period primarily due to interest on the $200 million syndicated loan facility which was drawn down during the year.


Foreign exchange loss


The Group recognised a foreign exchange loss of $7.1 million in 2008 (2007: $4.4 million loss), as a result of transactions in other currencies than functional currency. The devaluation of the Peruvian sol (5%) had an impact of ($4.1) million; the Argentinean peso (10%) had an impact of ($3.9) million; and the Mexican peso (27%) had an impact of ($0.7) million. These losses were partially offset by a foreign exchange gain of $1.6 million in the UK generated by primarily as a result of the acquisition of shares in Lake Shore Gold which was effected in Canadian dollars.


Income tax


The pre-exceptional effective income tax rate in 2008 is 48.4%, compared to 30.8% in 2007. The increase in the effective income tax rate has been driven primarily by the following factors:



i)

The reduction in profit following the lower grades and increased costs at the mines has resulted in less tax being paid to the authorities compared to the prior year. However, items for which no tax relief is created (such as the tax losses arising in exploration companies, for which no deferred tax asset can be recognised, and non-deductible expenditure) did not reduce by a similar amount, and as a result they are a larger percentage of prima facie tax expense (profit before tax multiplied by the weighted average statutory tax rate) than they were in the previous year. This has resulted in a 9% increase in the pre-exceptional effective tax rate.


ii)

The significant decline in the Mexican and Argentinean pesos, and the Peruvian soles (being the currencies in which tax calculated and levied in the Group's operations), against the US dollar has resulted in the recognition of additional deferred tax liabilities, and tax being paid on taxable exchange gains which arose in the local operations. The effect of the devaluation of the local currencies was to increase the pre-exceptional effective tax rate by 7%.


On a post-exceptional basis, the effective tax rate for the Group was 243.8%. The significant increase over the post-exceptional effective tax rate for the previous year was the result of:


i)

The factors discussed above, and


ii)

The impairments of the San Felipe project, and the investments in EXMIN and Electrum Capital for which there was no deferred tax relief (refer to the "Exceptional items" discussion below).


However, the actual amount of current tax expense in 2008 was $13.1 million compared to $44.9 million in 2007.


Exceptional items 


Exceptional items, after tax, totalled $45 million in 2008. This mainly includes; 


i)

Impairment of fixed assets: Selene, Moris and San Felipe were impaired by a total consideration of $29.6 million, after tax; 


ii)

Impairment of financial investments in: EXMIN $8.2 million and Electrum Capital $2.6 million; and


iii)

Other exceptional items include: the loss from changes in the fair value of financial instruments of $4.7 million, after tax, termination benefits of $1.1 million and impairments on accounts receivable of $1.3 million. In addition, the Group recorded a credit of $3.9 million mainly as a result of gains on Gold Resources' options ($2.3 million) and on the sale of Fortuna silver shares ($1.3 million). 


Impairments of fixed assets


The Group conducts an impairment review every time indicators of impairment exist, as required by IFRS. Impairment indicators include: declines in metal prices; increases in costs, royalties or taxes; falling grades; lower reserves; production cut backs and significant project development over-runs. The presence of one or more indicators does not necessarily mean that the asset would be impaired but that it must be tested for impairment. Impairment testing should be performed at an individual asset or cash-generating unit level.


Given the impact of lower precious metals prices in the second half of 2008 and the production and cost profiles of some of our operations, we have recorded a total impairment charge of $34.7 million in 2008 (before tax) and $29.6 million after tax which has an impact of $0.09 on the EPS.


Selene has been written down by $13.7 million due to declining grades at the mine and the high level of capital required to extract economic tonnage. Moris has been written down by $5.7 million as a result of the small reserve and resource base at the operation. 


In addition, we have recorded an impairment charge of $15.4 million for the San Felipe project, which was delayed as a result of declining zinc prices in the second half of the year and our commitment to conserve cash holdings. We remain confident about the long term value of San Felipe and will continue to review the timing of the project.  


Dividends


The directors recommend a final dividend of $0.02 per ordinary share which, subject to shareholder approval at the 2009 AGM, will be paid on 28 May 2009 to those shareholders appearing on the register on 1 May 2009. Dividends are declared in US dollars. Unless a shareholder elects to receive dividends in US dollars, they will be paid in pounds sterling with the US dollar dividend converted into pound sterling at exchange rates prevailing at the time of payment. Our dividend policy takes into account the profitability of the business and the underlying growth in earnings of the Company, as well as its capital requirements and cash flow.

    

Dividend dates 

2009

Ex-dividend date

29 April

Record date

1 May

Deadline for return of currency election forms 

5 May

Payment date

28 May


Balance sheet & cash flow review


Working capital:  


 US$(000) unless otherwise indicated

As at 
31 December 2008

As at
31 December 2007

Current assets



Inventories

49,220

47,012

Trade and other receivables

123,726

134,180

Current liabilities



Trade and other payables

82,291

52,176

Pre-shipment loans

49,660

23,750

Working capital

40,995

105,266


The change in the working capital position resulted from a significant increase in trade and other payables from $52.2 million as at 31 December 2007 to $82.3 million as at 31 December 2008 and from an increase in pre-shipment loans from $23.8 million as at 31 December 2007 to $49.7 million as at 31 December 2008. 


Trade payables and other payables increased mainly as a consequence of increased production and higher salaries payable, as well as an increase in taxes and contributions.


Receivables were lower at the end of 2008 because of a decrease in trade receivables and the reclassification of a portion of a loan to Minera Andes from current receivables to non current receivables. The decrease was partially offset by higher prepaid expenses and VAT in Minera Suyamarca and Minera Santa Cruz.  


The reduction in trade receivables is mainly explained by the change in our customers' base and selling contract terms. Trade accounts receivable comprised of amounts receivable from Cormin, Louis Dreyfus, Sudamericana Trading and Norddeutsche Affinerie.


Cashflow 


Total cash decreased $184.4 million in 2008 (2007: $134.2 million decrease). Cash flow from operating activities increased by 267% to $78.6 million mainly as a result of lower working capital. The increase in cash flow from operations was offset by the outflows resulting from investing activities, which totalled $475.8 million in 2008 comparing to $162.3 in 2007. 2008 investments included: 40% of Lake Shore Gold ($164 million), 50% of the Liam JV ($33.3million), 100% in San Felipe ($51.5 million) and 5% of Gold Resource Corp. ($5 million). In 2008, the Group incurred a higher amount of capital expenditure in operating units due to plant expansions at San José, Arcata and Selene. 


Total capital expenditure:  


We continue to invest in our production platform to ensure we have the infrastructure in place for future growth. In 2008, capital expenditure was $311 million (2007: $145 million) due to new investments in PeruArgentina and Mexico. Industry inflation has also impacted capital expenditure in 2008. 


US$(000) unless otherwise indicated

Year ended 
31 December 2008

Year ended 
31 December 2007

Arcata

43,977

22,750

Ares

10,438

3,705

Selene

47,226

27,497

Pallancata1

14,619

12,190

San José1

80,398

62,752

Moris1

2,234

12,099

San Felipe1

63,318

667

Other

49,061

3,078

Total

311,271

144,738

Represents 100% of capital expenditure


The increase of $166.6 million of capital expenditure in 2008 is primarily a result of the mine developments and expansion projects at San José, Arcata and Selene. This increase was also driven by the acquisition of 100% of San Felipe ($51.5 million) and 50% of the Liam JV ($33.3million). 


Net debt:  


US$(000) unless otherwise indicated

As at 
31 December 2008

As at 
31 December 2007

Cash and cash equivalents

116,147

301,426

Long term borrowings

231,692

55,209

Short term borrowings less pre-shipment loans

48,410

9,419

Net debt/(net cash)

163,955

(236,798)


As a result of the syndicated loan facility of $200 million, the Group's balance sheet changed from a net cash position of $236.8 million to a net debt position of $164.0 million. Part of the facility was used for M&A as described under the cash flow section. 


The decrease in cash and cash equivalents from $301 million to $116 million was mainly explained by the increase in capital expenditure in 2008 due to plant expansions at Arcata, Selene and San José




-------------------------------------------------------------------------------------------------------------------------


A conference call will be held at 9.30am (London time) on Wednesday 25 March 2009 for analysts and investors.  


Dial in details as follows:


UK   +44 (0)203 037 9098


A recording of the conference call will be available for one week following its conclusion, accessible from the following telephone numbers:


UK   +44 (0)208 196 1998

Access code: 7521788#      


_____________________________________________________________________


Enquiries:




Hochschild Mining plc


Isabel Lütgendorf

+44 (0)20 7907 2934

Head of Investor Relations




Ignacio Rosado

  +511 437 6007

Chief Financial Officer




Finsbury


Robin Walker

  +44 (0)20 7251 3801

Public Relations


__________________________________________________________________


About Hochschild Mining plc:


Hochschild Mining plc is a leading precious metals company listed on the London Stock Exchange (HOCM.L for Reuters / HOC LN for Bloomberg) with a primary focus on the exploration, mining, processing and sale of silver and gold. Hochschild has over forty years experience in the mining of precious metal epithermal vein deposits and currently operates five underground epithermal vein mines, four located in southern Peru, one in southern Argentina and one open pit mine in northern Mexico. Hochschild also has numerous long-term prospects throughout the Americas


Forward looking Statements


This announcement contains certain forward looking statements, 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 announcement. 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 announcement should be construed as a profit forecast.


Consolidated Income Statement



Year ended 31 December 2008


Year ended 31 December 2007




Before exceptional items


Exceptional items


Total


Before exceptional items


Exceptional items


Total




US$ (000)

Continuing operations 














Revenue    


433,779


-


433,779


305,021


-


305,021


Cost of sales    


(240,441

)

(234

)

(240,675

)

(106,272

)

-


(106,272

)

Gross profit    


193,338


(234

)

193,104


198,749


-


198,749


Administrative expenses    


(68,751

)

(1,127

)

(69,878

)

(68,817

)

-


(68,817

)

Exploration expenses    


(23,841

)

(69

)

(23,910

)

(26,890

)

-


(26,890

)

Selling expenses    


(11,257

)

-


(11,257

)

(2,780

)

-


(2,780

)

Other income    


5,025


252


5,277


5,695


932


6,627


Other expenses    


(8,246

)

(1,984

)

(10,230

)

(2,027

)

(1,501

)

(3,528

)

Impairment of property, plant and equipment    


- 


(34,706)


(34,706

)

- 


- 


- 


Profit from continuing operations before net finance income/(cost), foreign exchange loss and income tax


86,268


(37,868

)

48,400


103,930


(569

)

103,361


Share of post tax losses of associates and joint ventures accounted under equity method    


(8,214

)

-


(8,214

)

-


-


-


Finance income    


9,382


3,914


13,296


19,783


5,474


25,257


Finance costs    


(18,833

)

(18,088

)

(36,921

)

(7,517

)

(71

)

(7,588

)

Foreign exchange loss    


(7,161

)

-


(7,161

)

(4,363

)

-


(4,363

)

Profit/(loss) from continuing operations before income tax    


61,442


(52,042

)

9,400


111,833


4,834


116,667


Income tax expense    


(29,762

)

6,848


(22,914

)

(34,453

)

(1,299

)

(35,752

)

Profit/(loss) for the year from continuing operations    


31,680


(45,194

)

(13,514

)

77,380


3,535


80,915


Attributable to:














Equity shareholders of the Company    


24,643


(43,646

)

(19,003

)

81,538


3,535


85,073


Minority shareholders    


7,037


(1,548

)

5,489


(4,158

)

-


(4,158

)



31,680


(45,194

)

(13,514

)

77,380


3,535


80,915


Basic and diluted earnings per ordinary share from continuing operations and for the year (expressed in U.S. dollars per share)     


0.08


(0.14

)

(0.06

)

0.27


0.01


0.28



  Consolidated Balance Sheet



As at 31 December




2008


2007




US$(000)

ASSETS






Non-current assets






Property, plant and equipment    


488,984


263,062


Intangible assets    


2,668


2,896


Investments accounted under equity method    


136,019


-


Available-for-sale financial assets    


17,794


15,100


Trade and other receivables    


38,304


25,518


Income tax receivable    


802


616


Deferred income tax assets    


20,795


22,400




705,366


329,592


Current assets






Inventories    


49,220


47,012


Trade and other receivables    


123,726


134,180


Income tax receivable    


14,470


1,003


Financial assets at fair value through profit and loss    


5,569


8,039


Cash and cash equivalents    


116,147


301,426




309,132


491,660


Total assets    


1,014,498


821,252








EQUITY AND LIABILITIES






Capital and reserves attributable to shareholders of the Parent






Equity share capital    


146,466


146,466


Share premium    


395,928


395,928


Other reserves    


(250,831

)

(205,556

)

Retained earnings    


182,612


229,202




474,175


566,040


Minority interest    


68,843


50,008


Total equity    


543,018


616,048


Non-current liabilities






Trade and other payables    


627


859


Borrowings    


231,692


55,209


Provisions    


37,687


30,821


Deferred income tax liabilities    


15,839


9,091




285,845


95,980


Current liabilities






Trade and other payables    


82,291


52,176


Borrowings    


98,070


33,169


Provisions    


4,277


13,029


Income tax payable    


997


10,850




185,635


109,224


Total liabilities    


471,480


205,204


Total equity and liabilities    


1,014,498


821,252



Consolidated Cash Flow Statement



Year ended 31 December




2008


2007




US$(000)

Cash flows from operating activities






Cash generated from operations    


102,167


34,338


Interest received    


7,512


18,390


Interest paid    


(4,302

)

(1,217

)

Payments of mine closure costs    


(1,476

)

(2,023

)

Tax paid    


(25,260

)

(28,084

)

Net cash generated from operating activities    


78,641


21,404


Cash flows from investing activities






Purchase of property, plant and equipment    


(296,027

)

(134,119

)

Investment in an associate     


(164,211

)

-


Purchase of available-for-sale financial assets    


(19,240

)

(4,669

)

Purchase of software licences    


(37

)

(876

)

Loan to Exmin, S.A. de C.V.     


-


(746

)

Loan to Minera Andes Inc.     


-


(22,036

)

Proceeds from sale of available-for-sale financial assets    


3,321


-


Proceeds from sale of property, plant and equipment    


392


167


Other    


12


-


Net cash used in investing activities    


(475,790

)

(162,279

)

Cash flows from financing activities






Proceeds of borrowings    


484,041


177,168


Repayment of borrowings    


(257,300

)

(150,194

)

Transaction costs associated with borrowing    


(2,408

)

-


Dividends paid    


(28,531

)

(24,729

)

Transaction costs associated with issue of shares    


-


(11,722

)

Capital contribution from minority shareholders    


16,926


16,175


Cash flows generated from financing activities    


212,728


6,698


Net decrease in cash and cash equivalents during the year    


(184,421

)

(134,177

)

Exchange difference    


(858

)

60


Cash and cash equivalents at beginning of year    


301,426


435,543


Cash and cash equivalents at end of year    


116,147


301,426



Consolidated Statement of Changes in Equity








Other reserves














Equity share capital 




Share premium


Unrealised gain/(loss) on available-for-sale financial assets


Cumulative translation adjustment




Merger reserve


Total

Other

reserves


Retained earnings


Capital and reserves attributable to shareholders of the Parent


Minority interest


Total Equity




US$(000)

Balance at 1 January 2007    


146,466


396,156


1,374


3,633


(210,046

)

(205,039

)

152,577


490,160


14,489


504,649


Fair value gains on available-for-sale financial assets


-


-


1,415


-


-


1,415


-


1,415


87


1,502


Deferred income tax on available-for-sale financial assets    


-


-


(927

)

-


-


(927

)

-


(927

)

-


(927

)

Translation adjustment for the year    


-


-


-


(1,005

)

-


(1,005

)

-


(1,005

)

882


(123

)

Net income recognised directly in equity    


-


-


488


(1,005

)

-


(517

)

-


(517

)

969


452


Profit for the year    


-


-


-


-


-


-


85,073


85,073


(4,158

)

80,915


Total recognised income for 2007    


-


-


488


(1,005

)

-


(517

)

85,073


84,556


(3,189

)

81,367


Transaction costs associated with issue of shares    


-


(228

)

-


-


-


-


-


(228

)

-


(228

)

Dividends    


-


-


-


-


-


-


(8,448

)

(8,448

)

-


(8,448

)

Adjustment to deferred consideration (a)    


-


-


-


-


-


-


-


-


5,627


5,627


Capital contribution from minority shareholders    


-


-


-


-


-


-


-


-


33,081


33,081


Balance at 31 December 2007    


146,466


395,928


1,862


2,628


(210,046

)

(205,556

)

229,202


566,040


50,008


616,048


Net fair value losses on available-for-sale financial assets    


-


-


(3,306


)

-


-


(3,306

)

-


(3,306

)

(127

)

(3,433

)

Deferred income tax on available-for-sale financial assets    


-


-


390


-


-


390


-


390


35


425


Recycling of fair value losses on impairment of available-for-sale financial assets    


-


-


1,979


-


-


1,979


-


1,979


-


1,979


Deferred income tax on impairment of available-for-sale financial assets    


-


-


(151

)

-


-


(151

)

-


(151

)

-


(151

)

Recycling of realised fair value gains on available-for-sale financial assets     


-


-


(1,562

)

-


-


(1,562

)

-


(1,562

)

(51

)

(1,613

)

Deferred income tax on realised fair value gains on available-for-sale financial assets    


-


-


378


-


-


378


-


378


12


390


Share in gains directly recognised in equity by associates    


-


-


-


-


-


-


620


620


-


620


Translation adjustment for the year    


-


-


-


(43,003

)

-


(43,003

)

-


(43,003

)

(76

)

(43,079

)

Net income recognised directly in equity    


-


-


(2,272

)

(43,003

)

-


(45,275

)

620


(44,655

)

(207

)

(44,862

)

(Loss)/profit for the year    


-


-


-


-


-


-


(19,003 

)

(19,003 

)

5,489


(13,514 

)

Total recognised income for 2008    


-


-


(2,272

)

(43,003

)

-


(45,275

)

(18,383 

)

(63,658

)

5,282


(58,376

)

Dividends    


-


-


-


-


-


-


(28,331

)

(28,331

)

-


(28,331

)

Adjustment to deferred consideration (a)    


-


-


-


-


-


-


-


-


1,220


1,220


Expiration of dividends payable    


-


-


-


-


-


-


124


124


4


128


Capital contribution from minority shareholders    


-


-


-


-


-


-


-


-


12,329


12,329


Balance at 31 December 2008    


146,466


395,928


(410

)

(40,375

)

(210,046

)

(250,831

)

182,612


474,175


68,843


543,018


(a)This amount represents the increase in the minority interest's share of the assets of Pallancata, following the Group's investment during the year in accordance with the agreement signed with Minera Oro Vega S.A.C. 


Notes to the Financial Statements

The financial information for the year ended 31 December 2008 and 2007 contained in this document does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the years ended 31 December 2008 and 2007 have been extracted from the consolidated financial statements of Hochschild Mining plc for the year ended 31 December 2008 which have been approved by the directors on 24 March 2009 and will be delivered to the Registrar of Companies in due course. The auditor's report on those financial statements was unqualified and did not contain a statement under section 237 of the Companies Act 1985.

1      Significant accounting policies
(a)          Basis of preparation
The accounting policies adopted in the preparation of the financial information are consistent with those applied to the year ended 31 December 2007 except for the adoption of new and amended standards.
        Adoption of new and amended standards
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the financial performance or position of the Group. 
·        IFRIC 11, IFRS 2 ‘Group and Treasury Shares Transactions’, applicable for annual periods beginning on or after 1 March 2007.
·        IFRIC 14, IAS 19, ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction’, applicable for annual periods beginning on or after 1 January 2008.
·        Amendment to IAS 39 and IFRS 7 ‘Reclassification of Financial Assets’.

 

           

   (b)      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 of assets, including goodwill, assets held for sale, and property, plant and equipment;
·        Gains or losses arising on the disposal of subsidiaries, investments or property, plant and equipment;
·         Fair value gains or losses arising on financial instruments not held in the normal course of trading;
·        Any gain or loss resulting from any restructuring within the Group, and
·        The related tax impacts of these items. 

 

    (c)     Comparatives

 

Where applicable, certain comparatives have been reclassified to present them in a comparable manner to the current period's figures.

 

    2       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 the same distribution channels. The Group has a number of activities that exist solely to support mining operations including power generation and services. As such, the Group has only one business segment as its primary reporting segment. The Group operates in various countries including Peru, Argentina, Mexico, Chile and Canada. Therefore, the geographical segment is the Group’s secondary reporting format.

Transfer prices between geographical 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 business segments. Those transfers are eliminated in consolidation.

 

     (a)   Revenue

 

Revenue for the year is allocated based on the country in which the customer is located.



Year ended 31 December




2008


2007




US$(000)


External customer






USA    


130,631


158,092


Peru    


125,171


48,147


Mexico    


15


47,919


Belgium    


6,011


22,415


Canada    


50,465


9,606


Germany    


54,570


9,370


Switzerland    


66,883


-


United Kingdom    


-


8,202


Chile    


33


1,270




433,779


305,021


Inter-segment






Peru    


25,164


-


Mexico    


4,455


-




463,398


305,021


 

The allocation of revenue based on the country in which the asset is located is as follows.



Year ended 31 December




2008


2007




US$(000)


External customer






Peru    


319,516


303,377


Argentina    


88,891


1,270  


Mexico    


25,372


374




433,779


305,021


Inter-segment






Peru    


2,359


-


Mexico    


4,455


-


Argentina    


22,805


-




463,398


305,021


(b)    Profit/(loss) for the year from continuing operations

 

        Profit/(loss) for year is based on country of operation as follows:



Year ended 31 December 2008


Year ended 31 December 2007




Before exceptional items


Exceptional items


Total


Before exceptional items


Exceptional items


Total




US$(000)


Peru    


71,070


(14,111

)

56,959


94,415


2,454


96,869


Cayman Islands    


-


-


-


68


393


461


Argentina    


(13,925

)

(29

)

(13,954

)

(5,689

)

-


(5,689

)

Mexico    


(8,249

)

(20,776

)

(29,025

)

(11,403

)


(11,403

)

Chile    


(5,593

)

-


(5,593

)

(2,718

)

-


(2,718

)

USA    


(10

)

(7

)

(17

)

(1,212

)

8


(1,204

)

United Kingdom    


(11,613

)


(10,271


)

(21,884

)

  3,919


   

680


4,599




31,680


(45,194

)

(13,514

)

77,380


3,535


80,915



3

Acquisitions

(a)

Acquisition of jointly controlled assets


Liam


On 20 August 2008, the Group signed an assignment agreement with Newmont Peru Limited ('Newmont') by which Newmont assigned all of its rights to acquire, explore and exploit, under its Venture Agreement with Southwestern Resources Corp. ('Southwestern') the Liam properties located in Peru, and transferred its 50% interest in the joint venture with Southwestern, to the Group for a consideration of US$33,333,333.


Under the terms of the agreement, the Group and Southwestern will each contribute 50% of the exploration funding. In addition, when the technical committee determines that any of the properties or group of properties constitutes a viable project, a new company will be incorporated and the Group may elect to increase its interest up to 70% in the new company by producing a feasibility study and financing 100% of the costs to initiate commercial production. 


A total of 38 exploration prospects have been identified and evaluated in the project area with Crespo project being the most important property which is in the inferred mineral resource category. The investment of US$33,333,333 was made mainly to acquire the Crespo resources and immediately commence an exploration programme to transform these inferred resources into reserves. The consideration has been allocated to the mining rights and the subsequent investment of US$197,000 during 2008 has been capitalised within exploration and evaluation costs.



(b)

Acquisition of assets


San Felipe 


On 15 May 2006 the Group signed a joint venture agreement which gave the Group the right to earn a 70% interest in the San Felipe project once investment thresholds in exploration and mine development of US$33,300,000 were met. 


On 4 June 2008 the Group acquired the 100% ownership of the San Felipe project in Mexico for a total consideration of US$51,500,000 payable to its former local partner, Grupo Serrana S.A. de C.V. 


With the acquisition of the San Felipe project, the original joint venture agreement was terminated. As at the acquisition date, the Group had invested approximately US$8,800,000 in the property which has been expensed to the income statement in accordance with the Group's accounting policy (see also note 15).


Further on 4 June 2008, the Group acquired a group of assets related to the project for a total consideration of US$1,000,000 payable to Grupo Serrana S.A. de C.V. 



(c)

Acquisition of associates


Lake Shore Gold Corp.


During 2008, the Group acquired a 39.99% interest in Lake Shore Gold Corp. ('Lake Shore'), a gold mining company listed on the Toronto Stock Exchange for a total consideration of US$163,997,000. The acquisition was made in the following tranches: 


• 19.99% acquired through a share issue on 19 February 2008 for US$64,806,000; 


• 15.00% acquired through a share issue on 13 June 2008 for US$78,029,000, and 


• 5.00% acquired from a third party on 23 June 2008 for US$21,162,000. 


The interest in Lake Shore gives the Group the right to exercise significant influence over that company. In compliance with the Group's policy and IAS 28, the investment has been treated as an associate and accounted for using the equity method.  


Management has assessed the fair value of the Group's interest in the assets and liabilities acquired as being US$151,698,000, resulting in goodwill of US$12,513,000 on acquisition. The fair value includes transaction costs incurred by the Group of US$214,000.



4    Finance income and finance costs



Year ended 31 December 2008


Year ended 31 December 2007




Before exceptional items


Exceptional items


Total


Before exceptional items


Exceptional items


Total




US$(000)


Finance income:














Interest on time deposits(a)     


5,934


-


5,934


17,169


-


17,169


Gain from changes in the fair value of financial instruments(b)    


304


2,301


2,605


-


4,331


4,331


Gain on sale of available-for-sale financial assets(c)     


-


1,613


1,613


-


-


-


Interest on loans to minority shareholders     


2,623


-


2,623


2,324


-


2,324


Discount on purchase of EXMIN shares(d)      


-


-


-


-


1,143


1,143


Interest on loans to third parties     


47


-


47


118


-


118


Other    


474


-


474


172


-


172




9,382


3,914


13,296


19,783


5,474


25,257


Finance costs:














Interest on bank loans and long-term debt     


(13,387

)

-


(13,387

)

(5,966

)

-


(5,966

)

Unwind of discount rate(e)    


(4,590

)

-


(4,590

)

(1,227

)

-


(1,227

)

Loss from changes in the fair value of financial instruments(f)   


-


(6,246

)

(6,246

)

-


-


-


Impairment of available-for-sale financial assets(g)   


-


(11,421

)

(11,421

)

-


(71

)

(71

)

Premium paid on purchase of available-for-sale financial assets(h)  


-


(421

)

(421

)

-


-


-


Other     


(856

)

-


(856

)

(324

)

-


(324

)



(18,833

)

(18,088

)

(36,921

)

(7,517

(71

)

(7,588

)


(a)

Mainly corresponds to interest on liquidity funds.

(b)

In 2008 the amount corresponds to the change in the fair value of an option over 4,330,000 shares of Gold Resource Corp. and a gain of US$304,000 due to changes in the fair value of derivative instruments according to the contracts signed in December 2008 with Citibank and INTL Commodities Inc. with the intention to remove the risk of the fluctuations in metal prices. In 2007 this amount related mainly to the change in the fair value of 2,475,355 warrants over the same number of shares in Fortuna Silver Mine Inc.

(c)

Corresponds to the sale of 1,660,150 shares in Fortuna Silver Mines Inc. at a price of CAD$2 per share for a total consideration of CAD$3,320,300 (US$3,321,450) resulting in a realised gain of US$1,613,000 which has been recycled from equity into the income statement.

(d)

On 9 July 2007 the Group acquired 7,875,000 common shares of EXMIN for US$3,000,000. In addition, on the same date, the Group converted an outstanding loan receivable from EXMIN of US$1,570,000 into 4,127,231 common shares. The common shares were acquired at a discount of 20% to the market price, resulting in a gain on the issue of shares. 

(e)

Corresponds to the unwind of the discount on the provision for mine closure of US$669,000 (2007: US$1,134,000) and the unwind of discount on VAT of Minera Santa Cruz of US$3,921,000 (2007: US$93,000).

(f)

Mainly corresponds to the change in fair value of warrants in Fortuna Silver Mine Inc. of US$6,245,000. 

(g)

Corresponds to the impairment of the investment in the shares of EXMIN Resources Inc. (US$8,229,000), Mirasol Resources Inc. (US$323,000), Electrum Capital Inc. (US$2,637,000), Fortuna River (US$157,000) and Ventura Gold Corp. (US$75,000). 

(h)

Corresponds to the premium paid on the acquisition of the shares of Iron Creek Capital Corp. and Mariana Resources Ltd. amounting to US$173,000 and US$248,000 respectively.


5    Income tax expense



Year ended 31 December 2008


Year ended 31 December 2007




Before exceptional items


Exceptional items(a)


Total


Before exceptional items


Exceptional items


Total




US$(000)


Current tax:














Current tax charge from continuing operations    


13,058


(56

)

13,002


44,933


-


44,933




13,058


(56

)

13,002


44,933


-


44,933


Deferred taxation:














Origination and reversal of temporary differences from continuing operations    

15,809


(6,792

)

9,017


(11,641

)

1,299


(10,342

)



15,809


(6,792

)

9,017


(11,641

)

1,299


(10,342

)















Withholding taxes    


895


-


895


1,161


-


1,161


Total taxation charge in the income statement    


29,762


(6,848

)

22,914


34,453


1,299


35,752



(a)

This amount corresponds to the related tax impact of exceptional items.

 

The weighted average statutory income tax rate was 40.6% for 2008 and 29.7% for 2007. 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 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:



Year ended 31 December




2008


2007




US$(000)

Profit from continuing operations before income tax    


9,400


116,667








At average statutory income tax rate of 40.6% (2007: 29.7%)    


3,818


34,598


Expenses not deductible for tax purposes    


5,315


2,381


Non-taxable income    


(2,055

)

(505

)

Deferred tax recognised on special investment regime(a)     


(6,063

)

(4,479

)

Recognition of previously unrecognised deferred tax assets(b)     


(1,102

)

(2,917

)

Non-taxable share of losses of associates    


2,534


-


Net deferred tax assets generated in the year not recognised(c)    


13,871


5,214


Change in tax regime(d)    


(1,544)


3,403


Change in statutory Income Tax Rate(e)    


786


-


Recognition of deferred tax assets on restructuring    


-


(767

)

Foreign exchange rate effect(f)    


7,731


(1,611

)

Other    


(377

)

435


At average effective income tax rate of 243.8% (2007: 30.6%)    


22,914


35,752








Taxation charge attributable to continuing operations    


22,914


35,752


Total taxation charge in the income statement    


22,914


35,752


                                  

(a)

Corresponds to the deferred tax income asset recognised for the additional tax losses generated during the year arising from the double deduction claimed for tax purposes by Minera Santa Cruz during the year.(refer to note (i) below).

(b)

Mainly corresponds to the tax effect of certain mine closure expenses which are now expected to be deductible against taxable income, when incurred. 

(c)

Deferred tax assets generated in the year not recognised are comprised of:



As at 31 December


2008

2007


US$(000)

Tax losses not recognised

3,851

 4,672 

Impairment of available-for-sale financial assets

 3,234 

 -  

Impairment of the San Felipe project 4,350 -



Provision for mine closure

 1,483 

542 

Write-off of bank account

364 

 -  

Change in fair value of derivative instruments

 341 

 -  

Other

 248 

 -  


 13,871

 5,214


(d)

Corresponds to the effect of the change in the Mexican tax regime (refer to note (ii) below).

(e)

Corresponds to an increase in the statutory corporate income tax rate for the Arcata mining unit from 30% to 32% with effect from 1 January 2009

(f)

Mainly corresponds to the foreign exchange effect from converting tax bases and monetary items from local currency to the functional currency


(i)

Special investment regime


Minera Santa Cruz benefits from a special investment regime that allows for a double deduction in the calculation of its corporate income tax liability for all costs relating to prospecting, exploration and metallurgical analysis, pilot plants and other expenses incurred prior to the completion of the feasibility studies for mining projects. In this regard, the total investment eligible for additional deduction amounts to approximately 95,061,000 Argentinian pesos (US$27,853,000) as at 31 December 2008 (2007: 79,680,000 Argentinian pesos (US$25,596,000). As this additional deduction does not affect either taxable profit or accounting profit on initial recognition, no deferred tax was recognised in accordance with IAS 12 'Income Taxes'. However under the Argentinian tax regime, following commencement of operations in 2007, this amount could be claimed in equal amounts over 1 to 5 years. At 31 December 2007, the Group decided to make this claim over 2 years, resulting in 50% of the available deduction being included in the tax losses for the year 2007. In 2008 the Group included in the tax losses of the year 54,797,000 Argentinian pesos (US$17,324,000). This amount includes the remaining 50% of eligible costs calculated as at 31 December 2007 of 79,680,000 Argentinian pesos plus 15,381,000 Argentinian pesos of additional eligible costs. The balance of the eligible costs of 1,582,000 Argentinean pesos (US$464,000) will be claimed in 2009. 

(ii)

Change in Mexican tax regime 


On 28 September 2007, the Mexican Government enacted a bill for tax reform that significantly changed the current income tax structure in Mexico. Effective from 1 January 2008, the tax reform requires companies to pay tax equal to the greater of the tax charge calculated under the new flat rate business tax ("IETU" as abbreviated in Spanish) or the tax change calculated under the current income corporate tax regime ("ISR" as abbreviated in Spanish).  

The Group has performed an analysis of the future impact of this tax reform on its Mexican companies and has determined that Santa Maria de Moris S.A. de C.V. (the operator of the Moris mine) will be required to pay IETU in each period until the end of the mine's life. Therefore, as at 31 December 2007 the Group recognised a deferred tax liability in connection with IETU of US$3,403,000 due to the resulting reduction in the amount of capital allowances arising on the investment in the mine to date. As at 31 December 2008 the IETU deferred tax liability had decreased by US$1,554,000 to US$ 1,859,000. 


   

6         Property, plant and equipment



Exploration and evaluation costs


Mining properties and development costs


Land and buildings


Plant and equipment(a)


Vehicles


Mine closure asset


Construction in progress and capital advances


Total




US$(000)


Year ended 31 December 2007


















Cost


















At 1 January 2007    


1,282


106,011


23,706


53,456


1,528


34,516


23,851


244,350


Additions    


8,279


48,004


1,004


9,450


400


1,056


77,601


145,794


Change in discount rate    


_


_


_


_


_


2,611


_


2,611


Disposals    


_


_


(110

)

(2,221

)

(104

)

_


(6

)

(2,441

)

Sale of subsidiary - Colorada    


_


_


_


(2

)

_


_


_


(2

)

Change in mine closure estimate    


_


_


_


_


_


105


_


105


Transfers and other movements    


(3,535)


3,535


40,717


45,114


976


_


(86,807

)

_


Foreign exchange    


8


161


118


149


24


_


(618

)

(158

)

At 31 December 2007    


6,034


157,711


65,435


105,946


2,824


38,288


14,021


390,259


Accumulated depreciation


















At 1 January 2007    


_


37,360


9,417


24,554


528


31,104


_


102,963


Depreciation for the year    


_


12,665


3,548


8,767


421


599


_


26,000


Disposals    


_


_


(110

)

(1,615

)

(82)


_


_


(1,807

)

Sale of subsidiary - Colorada     


_


_


_


(2

)

_


_


_


(2

)

Foreign exchange    


_


2


3


45


(7

)

_


_


43


At 31 December 2007    


_


50,027


12,858


31,749


860


31,703


_


127,197


Net book amount at 31 December 2007


6,034


107,684


52,577


74,197


1,964


6,585


14,021


263,062


Year ended 31 December 2008


















Cost


















At 1 January 2008    


6,034


157,711


65,435


105,946


2,824


38,288


14,021


390,259


Additions    


68,311


79,496


4,253


9,375


77


_


149,759


311,271


Change in discount rate    


_


_


_


_


_


3,113


_


3,113


Disposals    


_


_


_


(120

)

(158

)

_


_


(278

)

Write-off    


_


_


_


(24

)

_


_


_


(24

)

Change in mine closure estimate    


_


_


_


_


_


280


_


280


Transfers and other movements    


(2,960

)

768


30,748


68,535


746


_


(97,837

)

_


Sales during preoperating stage in Minera Santa Cruz    


_


(125

)

_


_


_


_


_


(125

)

Foreign exchange    


(10,905

)

(32

)

(43

)

(467

)

(69

)

_


(10

)

(11,526

)

At 31 December 2008    


60,480


237,818


100,393


183,245


3,420


41,681


65,933


692,970


Accumulated depreciation and impairment


















At 1 January 2008    


_


50,027


12,858


31,749


860


31,703


_


127,197


Depreciation for the year    


_


19,732


7,697


13,729


455


730


_


42,343


Impairment(b)    


15,754


10,076


754


6,286


105


943


788


34,706


Disposals    


_


_


_


(54

)

(84)


_


_


(138

)

Write-off    


_


_


_


(4

)

_


_


_


(4

)

Sales during preoperating stage in Minera Santa Cruz    


_


(12

)

_


_


_


_


_


(12

)

Foreign exchange    


_


_


2


(78

)

(30

)

_


_


(106

)

At 31 December 2008    


15,754


79,823


21,311


51,628


1,306


33,376


788


203,986


Net book amount at 31 December 2008


44,726


157,995


79,082


131,617


2,114


8,305


65,145


488,984



a)

The carrying value of plant and equipment held under finance leases at 31 December 2008 was US$7,482,000. Additions during the year include US$7,872,000 of plant and equipment under finance leases. Leased assets are pledged as security for the related finance lease.

b)

The amount of impairment losses recognised in profit and loss during the period was US$34,706,000. As a result of the impairment testing, the Group has impaired the Selene mine by US$ 13,651,000, the Moris mine by US$ 5,652,000 and the San Felipe project by US$15,403,000. The triggers for the impairment test were primarily the effect of the current economic environment and significantly reduced gold, silver and zinc prices. The Group tested all its mining units for impairment: Arcata, Ares, Selene, Pallancata, San José, Santa Maria de Moris and its project San Felipe. In assessing whether impairment is required to the carrying value of the assets related to each mining unit, its carrying value is compared with its recoverable amount. The recoverable amount is the higher of the asset´s fair value less costs to sell and the value in use. Given the nature of the Group´s activities, information on the fair value of an asset is usually difficult to obtain unless negotiations with potential purchasers or similar transactions are taking place. Consequently, unless indicated otherwise, the recoverable amount used in assessing the impairment charges described below is value in use. The Group generally estimates value in use using a discounted cash flow model for each mining unit covering its remaining useful life. 


The calculation of value in use is most sensitive to the following assumptions:


  • Commodity prices - Commodity prices of gold and silver are based on external market consensus forecasts. Gold prices range from US$750 to US$879, silver prices range from US$11.84 to US$13.00 and zinc prices range from US$1.521 to US$1.984. 
  • Estimation of reserves and resources - Reserves and resources are based on management's estimate using appropriate exploration and evaluation techniques.
  • Production volumes and grades - Tonnage produced was estimated at plant capacity with twelve days of maintenance per year.  
  • Capital expenditure - The cash flows for each mining unit include capital expenditures to maintain the mine and to convert resources to reserves.
  • Operating costs - Costs are based on historical information from previous years and current market conditions. 
  • Discount rates - The cash flows are discounted at real pre-tax rates that reflect the current market assessments of the time value of money and the risks specific to the cash-generating unit. These rates are based on the weighted average cost of capital specific to each cash-generating unit.



Mining unit 


Real pre-tax discount rate


Real post-tax rate



%


%

Arcata    


20.5%


5.1%

Ares    


28.5%


5.1%

Selene    


5.0%


5.1%

Pallancata    


18.5%


5.1%

San José    


17.0%


9.2%

Santa Maria de Moris    


19.0%


4.3%

San Felipe    


11.5%


8.2%


7    Subsequent events

 

 

(a) On 25 February 2009 the Group exercised its option to purchase further 4,330,000 shares of Gold Resource Corporation for approximately US$12,900,000 (US$3 per share), representing a 41% discount to the closing price of the same date. Alter the purchase the Group owns 14.6% interest in Gold Resource Corporation. 

(b) On 6 March 2009 the Group served a notice of termination of the existing commercial agreement to Argor Heraeus. We are in the process of seeking more favourable commercial terms for the Group from alternative customers.

(c) On 9 March 2009 the Group acquired 14,900,000 shares of its associate Lake Shore Gold for CAD$23,100,000 (approximately US$18,000,000) as part of its commitment to participate in the bought-deal financing agreement entered by Lake Shore Gold to raise approximately CAD$60,000,000. The proceeds from the financing will be used for the advancement of Lake Shore Gold's mineral projects. After completion of the transaction, the Group's ownership in Lake Shore Gold is maintained at 40%. 

(d) On 23 March 2009 the Group signed a definitive Arrangement Agreement to acquire all the outstanding shares of Southwestern Resources Corp. ("Southwestern"), a Canadian listed mineral exploration company with a number of gold, silver and base metals projects in southern Peru, for a total cash consideration of US$17,600,000 (US$0.39 per share). Southwestern is the strategic partner of the Group in the Liam and Pacapausa joint ventures. With the acquisition, the Group will own the remaining 50% of the Liam joint venture property and increase its interest in the Pacapausa joint venture from 30% to 80%. This transaction is subject to the approval of Southwestern's shareholders which is expected to occur by 8 May 2009.

  Reserves & Resources (Audited by IMC Group Consulting Limited)

Attributable metal reserves 

As at 31 December 2008*

Reserve category

Proved

Probable

Proved And probable

 Ag

Au

 

Ag

Au

Ag Eq.

 

(t)

(t)

(t)

(g/t)

(g/t)

 

(moz)

(koz)

(moz)

Arcata

 

 

 

 

 

 




Proved

929,683

 

 

575

  1.80 

 

17.19

53.78

20.42

Probable

 

681,241

 

495

  1.38 

 

10.85

30.20

12.66

Total

 

 

1,610,924

541

  1.62 

 

28.04

83.98

33.08

Ares

 

 

 

 

 

 




Proved

464,180

 

 

124

  5.01 

 

1.84

74.77

6.33

Probable

 

185,225

 

112

  4.49 

 

0.67

26.72

2.27

Total

 

 

649,405

120

  4.86 

 

2.51

101.49

8.60

Selene


 

 

 

 

 




Proved

75,686

 

 

275

  2.04 

 

0.67

4.97

0.97

Probable

 

51,662

 

257

  1.94 

 

0.43

3.22

0.62

Total

 

 

127,348

268

  2.00 

 

1.10

8.19

1.59

Pallancata

 

 

 

 

 

 




Proved

1,179,218

 

 

380

  1.60 

 

14.40

60.70

18.04

Probable

 

1,402,004

 

354

  1.43 

 

15.94

64.31

19.80

Total

 

 

2,581,222

366

  1.51 

 

30.34

125.02

37.84

San José 

 

 

 

 

 

 




Proved

264,461

 

 

508

  7.92 

 

4.32

67.36

8.36

Probable

 

567,958

 

529

  7.90 

 

9.65

144.17

18.30

Total

 

 

832,419

522

  7.90 

 

13.97

211.53

26.66

Moris

 

 

 

 

 

 




Proved

1,132,556

 

 

  4.60 

  1.44 

 

0.18

57.39