Hochschild (HOC : HOLD : TP 300p: MV �920 million)

Hochschild exceeds expectation in June quarter, finishes with an attributable 13.9Mozs silver equivalent for the six months to June and locks-in targeted 28Mozs for the year. - Damien Hackett, 020 7050 6641

Our view

�      Hochschild's attributable 7.2Mozs silver equivalent for the June quarter was 19% higher than the same quarter a year ago and higher than our estimate of 6.8Mozs for the quarter.  It leaves the company comfortably on track to deliver its production target for the year of 28Mozs silver equivalent ounces. Our estimate for the year of 28.2Mozs may have small upside but we are unlikely to be changing our target price or HOLD recommendation on the basis of this production report.

Key features

�      The company exceeded our estimates on silver production at 4.8Mozs compared to an estimated 4.5Mozs and gold production at 40,200ozs compared to an estimated 38,000ozs.  All round we think this was a very good result at the production level.  Most of the production above our estimate came from the company's main contributor, the Arcata mine, which delivered 2.6Mozs compared to our estimate of 2.4Mozs.

�      We were a little concerned by the impact of earlier hedging, albeit undertaken for all the right reasons in the second half of 2008 at a time of extreme metal price volatility. At that time the company sold forward 8.9Mozs of silver and 30,000ozs of gold. The net result has been a realised loss of US$5.3 million for the six months and an unrealised loss of US$11.8 million on the 4.7Mozs of silver outstanding at US$12.0/oz and 18,000ozs of gold outstanding at US$971.80/oz. These losses will be recorded under finance expenses for the first half of 2009.

�      The company also has a "zero cost collar" around 2.2Mozs of 2010 silver production with an average floor price of US$11/oz and an average cap of US$18/oz.  This was put in place to secure the first repayments of the US$200 million long term debt facility, the first of which is due in January 2010 at US$27 million.  Seven repayments of US$27 million each follow at six monthly intervals.    

�      The company finished the period with US$57 million of cash on hand compared to US$116 million as at December 2008,  we estimated US$72 million at 30 June.  On our numbers should finish the 2009 year with US$68 million of cash.

�      The Lake Shore development project in Canada continues to surprise with some spectacular intersections of more than 80m averaging 12.7gm/t gold.  We understand similar intersections have been recorded over approximately 100m of strike length.  The market value of Hochschild's 40% interest in this asset is just C$200 million.

Valuation

�      Our near term target price was set at �3.00/share on 29 June, and is based on a multiple of 8 times CFPS of US$0.56/share for 2010 rising to US$0.78/share for 2011 which together imply a price of �3.35/share.  In setting our target price we are also cogniscent of our longer term net asset value which stands at �2.88/share. We are maintaining our HOLD recommendation ahead of this production report.

�      We will revisit this valuation in detail over the next 24 hours with the benefit of key production from this report but we are unlikely to move significantly from current estimates.