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Hochschild Prospectus FINAL
Hochschild Prospectus FINAL
with the Prospectus Rules of the Financial Services Authority made under section 73A of the Financial Services and Markets Act 2000 (as amended) (FSMA), has been led with the Financial Services Authority (FSA) and has been made available to the public as required by the Prospectus Rules. Application has been made to the FSA for all of the Ordinary Shares, issued and to be issued in connection with the Global Offer, to be admitted to the Ofcial List of the FSA (the Ofcial List) and to the London Stock Exchange plc (the London Stock Exchange) for such Ordinary Shares to be admitted to trading on the London Stock Exchanges main market for listed securities (together Admission). Admission to trading on the London Stock Exchanges main market for listed securities constitutes admission to trading on a regulated market. In the Global Offer, 77,250,000 Ordinary Shares are being offered by the Company. Conditional dealings in the Ordinary Shares are expected to commence on the London Stock Exchange on 3 November 2006. It is expected that Admission will become effective, and that unconditional dealings will commence in the Ordinary Shares on the London Stock Exchange, at 8.00 a.m. (London time) on 8 November 2006. All dealings in the Ordinary Shares prior to the commencement of unconditional dealings will be of no effect if Admission does not take place and such dealings will be at the sole risk of the parties concerned. The Company and its Directors (whose names appear on page 11 of this document) accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information. For a discussion of certain risk and other factors that should be considered in connection with an investment in the Ordinary Shares, see Risk Factors.
Prospectus
Global Offer of 77,250,000 Ordinary Shares at a price of 350p per Ordinary Share Admission to the Ofcial List and to trading on the London Stock Exchange Financial Adviser
In connection with the Global Offer, JPMorgan Cazenove, as Stabilising Manager, or any of its agents, may (but will be under no obligation to) over-allot Ordinary Shares or effect other stabilisation transactions with a view to supporting the market price of the Ordinary Shares at a higher level than that which might otherwise prevail in the open market. Such stabilisation activities may be effected on any securities market, over-the-counter market, stock exchange or otherwise and may be undertaken at any time during the period commencing on the date of the commencement of conditional trading and ending no later than 30 calendar days thereafter. However, there is no obligation on the Stabilising Manager or any of its agents to effect stabilising transactions and there is no assurance that stabilising transactions will be undertaken. Such stabilisation, if commenced, may be discontinued at any time without prior notice. In no event will measures be taken to stabilise the market price of the Ordinary Shares above the Offer Price. Except as required by law or regulation above, the Stabilising Manager does not intend to disclose the extent of any over-allotments made and/or stabilisation transactions conducted in relation to the Global Offer In connection with the Global Offer, the Stabilising Manager may, for stabilisation purposes, over-allot Ordinary Shares up to a maximum of 15 per cent. of the total number of Ordinary Shares comprised in the Global Offer. For the purposes of allowing it to cover short positions resulting from any such over-allotments and/or from sales of Ordinary Shares effected by it during the stabilising period, the Stabilising Manager has entered into the Over-allotment Option with the Over-allotment Shareholders pursuant to which the Stabilising Manager may, acting as principal, purchase or procure purchasers for additional Ordinary Shares up to a maximum of 15 per cent. of the total number of Ordinary Shares comprised in the Offer (the Over-allotment Shares) at the Offer Price. The Over-allotment Option is exercisable in whole or in part, upon notice by the Stabilising Manager, at any time on or before the 30th calendar day after the commencement of conditional trading of the Ordinary Shares on the London Stock Exchange. Any Over-allotment Shares made available pursuant to the Over-allotment Option will rank pari passu in all respects with the Ordinary Shares, including for all dividends and other distributions declared, made or paid on the Ordinary Shares, will be purchased on the same terms and conditions as the Ordinary Shares being sold in the Offer and will form a single class for all purposes with the other Ordinary Shares. JPMorgan Cazenove Limited and Goldman Sachs International have been appointed as Joint Sponsors, Joint Global Co-ordinators, Joint Bookrunners and, in the case of JPMorgan Cazenove Limited only, Financial Adviser, and are advising the Company and no one else in connection with the Global Offer and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients or for providing any advice in relation to the Global Offer.
Recipients of this document in the United States are authorised to use it solely for the purpose of considering the purchase of the Ordinary Shares and may not reproduce or distribute this document, in whole or in part, and may not disclose any of the contents of this document or use any information herein for any purpose other than considering an investment in the Ordinary Shares. Such recipients of this document agree to the foregoing by accepting delivery of this document. The Ordinary Shares are subject to selling and transfer restrictions in certain jurisdictions. Prospective purchasers should read the restrictions described under paragraph 7 Selling and Transfer Restrictions in Part XII: Details of the Global Offer. Each purchaser of the Ordinary Shares will be deemed to have made the relevant representations described therein. The Ordinary Shares have not been and will not be registered under the US Securities Act of 1933, as amended (the Securities Act) or under the applicable securities laws of any state of the United States and, subject to certain exceptions, may not be offered or sold within the United States. The Global Offer is being made in the United States to certain qualied institutional buyers (each a QIB) as dened in Rule 144A under the Securities Act (Rule 144A) in reliance on Rule 144A or another exemption from registration under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act. Each prospective purchaser in the United States is hereby notied that the offer and sale of the Ordinary Shares to it may be made in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A. In addition, until 40 days after the commencement of the Global Offer, an offer or sale of any of the Ordinary Shares within the United States by any dealer (whether or not participating in the Global Offer) may violate the registration requirements of the Securities Act if the offer or sale is made otherwise than in accordance with Rule 144A or pursuant to another applicable exemption from registration under the Securities Act. THE ORDINARY SHARES OFFERED BY THIS DOCUMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE US SECURITIES AND EXCHANGE COMMISSION, ANY OTHER FEDERAL OR STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER US REGULATORY AUTHORITY, NOR HAVE ANY SUCH AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE GLOBAL OFFER OR CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES. NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (RSA 421-B) WITH THE STATE OF NEW HAMPSHIRE, NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE, CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
Table of Contents
Page
Summary information *************************************************************** Risk factors************************************************************************* Directors, secretary, registered and head ofce and advisers ************************** Global Offer statistics *************************************************************** Expected timetable of principal events *********************************************** Presentation of information ********************************************************* Part I: Information on Hochschild Mining **************************************** Overview **************************************************************** History of the Hochschild Mining Group *********************************** Key strengths ************************************************************ The Hochschild Mining Groups strategy *********************************** Principal Group Mines, Facilities, Projects and Prospects********************* Arcata***************************************************************** Ares******************************************************************* Selene***************************************************************** San Jose *************************************************************** Pallancata ************************************************************* Mina Moris ************************************************************ San Felipe ************************************************************* Sales, markets and customers ********************************************* Environmental and health and safety matters ****************************** Operational hazards and insurance **************************************** Social and Community Programmes *************************************** Employees and contractors************************************************ Employee relations ******************************************************* Dividend Policy ********************************************************** Part II: Use of proceeds********************************************************** Part III: Management, corporate governance and the major shareholder ************ Part IV: Information on Peru, Mexico and Argentina ******************************* Part V: Market and industry overview ******************************************** Part VI: Selected nancial and operating information ****************************** Part VII: Operating and nancial review ******************************************* Part VIII: Capitalisation and indebtedness statement ******************************** Part IX: IFRS historical nancial information *************************************** Section A: Accountants report on IFRS nancial information**************** Section B: IFRS historical nancial information ***************************** Part X: Unaudited pro forma nancial information ******************************** Section A: Unaudited pro forma balance sheet ***************************** Section B: Accountants report on unaudited pro forma nancial information Part XI: Summary of differences between IFRS and US GAAP *********************** Part XII: Details of the Global Offer *********************************************** Part XIII: Taxation ***************************************************************** Part XIV: Additional information *************************************************** Part XV: Technical report ********************************************************** Part XVI: Denitions ************************************************************** Part XVII: Glossary of technical terms ***********************************************
4 12 26 27 27 28 35 35 36 37 39 40 45 47 49 51 53 55 56 58 60 62 62 63 64 64 65 66 74 90 96 101 132 134 134 136 186 186 189 191 197 205 212 252 344 348
Summary information
This summary should be read as an introduction to this Prospectus only. Any decision to invest in the Ordinary Shares should be based on the consideration of this Prospectus as a whole by the investor and not just this summary. Under the Prospectus Directive (Directive 2003/71/EEC) in each member state of the European Economic Area (EEA) civil liability attaches to those persons who are responsible for the summary, including any translations of the summary, but only if the summary is misleading, inaccurate or inconsistent when read together with other parts of this prospectus. Where a claim relating to the information contained in this Prospectus is brought before a court, the plaintiff investor might, under the national legislation of the EEA States, have to bear the costs of translating the Prospectus before the legal proceedings are initiated.
Overview
The Hochschild Mining Group is a leading precious metals company with a primary focus on the exploration, mining, processing and sale of silver and gold. The Group is the fourth largest primary silver producer globally1 (having produced approximately 10.5 million ounces in 2005) and produces a signicant quantity of gold (approximately 233 thousand ounces in 2005). The Hochschild Mining Group has over forty years of experience in the exploration, evaluation and extraction of precious metal epithermal vein deposits. Currently, it has three underground, epithermal vein mines located in Southern Peru which are supported by fully developed infrastructure. The Group has two advanced stage development projects, one in Argentina and one in Peru, as well as two early stage development projects, both of which are in Mexico. In addition to its development projects, the Group has over twenty long-term prospects throughout Latin America which are at various stages of development. A number of these projects and prospects are structured as joint ventures or option arrangements with local or overseas mining partners, whilst others are owned and operated exclusively by the Group. The Directors believe the Groups mines, projects and prospects provide substantial potential for growth. The Group has a high-grade reserve base and a proven track record of consistent reserves replacement, sustaining the reserve and resource base at each of its current operating mines in step with production over many years. The focus of this reserve development strategy has been to maximise the cash ow from its operations rather than extend the lives of its operating mines, although, going forward, the Group intends to invest in further extending mine life. The table below sets out the reserves and resources at each of the operating mines and development projects as at 30 June 2006, such information having been extracted without material adjustment from the Technical Report in Part XV.
Reserves Proved and probable (in tonnes) Silver grade (g/t) Gold grade (g/t) Measured and indicated (in tonnes)(1) Silver grade (g/t) Resources Gold grade (g/t) Silver grade (g/t) Gold grade (g/t)
Operating Mines Arcata (Peru) ******************** Ares (Peru) ********************** Selene (Peru) ******************** Advanced Development Projects San Jose (Argentina) ************* Pallancata (Peru) **************** Early Stage Development Projects Mina Moris (Mexico) ************* San Felipe (Mexico)(3) ************ Total****************************
Notes: (1) Measured and indicated resources are stated inclusive of reserves but with no allowance for ore loss or dilution (2) Inferred resources are stated exclusive of reserves and measured and indicated resources (3) Resources also have a combined metal content of 6.5% zinc, 2.7% lead and 0.4% copper
The Hochschild Mining Group has a track record of sustained protability underpinned by its low cash costs of production. In 2005 its cash costs of production on a co-product basis were US$2.65/oz for silver and US$169/oz for gold. This places the Hochschild Mining Group within the rst quartile of the cost curve for silver, according to CRU Strategies and for gold, according to GFMS Limited. In 2005, the Hochschild Mining Group generated EBITDA (as dened below) of US$70.8 million1 against revenues of US$151.3 million, a margin of 46.8 per cent. The Groups headquarters are in Lima. As at 30 June 2006, the Hochschild Mining Group had a total of 3,100 employees, of which 1,935 were contracted personnel.
PRA1 6.1.1
Ore production (t) ************************************** Concentrate production (t) ****************************** Ore production (t) ************************************** Dore production (Koz) ********************************** Ore production (t) ************************************** Concentrate production (t) ******************************
Total silver produced (Koz)*********************************************** Total gold produced (Koz) *********************************************** Total silver equivalent (Koz) ********************************************* Notes: (1) The Selene unit commenced production in October 2003
The Group has two advanced development projects, both of which are structured as Hochschild Mining Group controlled joint-ventures: San Jose in Argentina (in which the Group has a 51 per cent. interest) and Pallancata in Peru (in which the Group has a 60 per cent. interest). Both of these projects are scheduled to commence production in 2007. In addition, the Group has two early stage development projects, which are also structured as Hochschild Mining controlled jointventures: Mina Moris and San Felipe, both of which are located in Mexico and in both of which the Group has an option to acquire an interest of up to 70 per cent.. Mina Moris is currently expected to commence production in 2007, whilst at San Felipe, the Group is currently engaged in verication drilling on the site. The Group also has over twenty long-term prospects of which San Luis del Cordero (Mexico), Sierra de las Minas (Argentina) and San Martn (Peru) are the most advanced.
1 Source: Company (unaudited)
PRA1 6.1.2
Key strengths
The Directors believe that the key strengths of the Hochschild Mining Groups business are: ) its leading position as a precious metals producer, the fourth largest primary silver producer globally and a signicant producer of gold; ) its low cash costs and strong returns on invested capital; ) its proven track record of production growth and reserves replacement; ) its expertise in underground mining in Latin America; ) its attractive growth opportunities from both development projects and long-term prospects; and ) its approach to and investment in its employees, the environment and local communities.
Strategy
The Hochschild Mining Groups strategy is to achieve growth as a low-cost, cash generative, precious metals producer in Latin America, continuing its primary focus on silver and gold production, and to enhance overall value for its shareholders, whilst maintaining a strong focus on its social and environmental responsibilities. The Hochschild Mining Group intends to pursue this strategy: ) ) by continuing to maximise the potential of its existing operations through increased efciency and increased investment in exploration and facilities; by delivery of its project pipeline and development of its portfolio of long-term prospects into producing mines, with plans to further increase annual production to approximately 50 million silver equivalent ounces (830,000 gold equivalent ounces) from both its existing operations and its development projects by 2011; and by seeking additional growth opportunities through exploration, acquisitions or joint ventures, with a focus on mid-sized, high-grade, underground precious metal assets.
PRA1 3.1
Six month period ended 30 June Year ended 31 December 2003 2004 2005 US$(000) 2005 (unaudited) 2006
93,771 (41,514)
159,052 (82,292) 76,760 (22,997) (23,063) (3,880) 7,081 (7,395) 26,506 1,296 (6,702) 299 21,399 (11,453) 9,946 (731) 9,215 13,500 (4,285) 9,215
151,319 (73,592) 77,727 (24,371) (28,057) 14,558 (3,161) 13,016 (2,821) 46,891 4,144 (10,105) (552) 40,378 (9,673) 30,705 12,179 42,884 46,737 (3,853) 42,884
65,779 (30,805) 34,974 (10,829) (18,657) 14,558 (1,338) 3,199 (1,280) 20,627 1,555 (4,463) 1,085 18,804 (5,966) 12,838 9,395 22,233 27,744 (5,511) 22,233
92,286 (33,705) 58,581 (15,814) (7,654) (1,366) 10,495 (4,636) 39,606 2,843 (5,121) (27) 37,301 (14,733) 22,568 22,568 24,198 (1,630) 22,568
Gross prot ********************************************** 52,257 Administrative expenses*********************************** (16,472) Exploration expenses************************************** (11,822) Gain on sale of zinc project ******************************* Selling expenses ****************************************** (1,794) Other income ******************************************** 5,457 Other expenses ******************************************* (2,936) Prot from continuing operations before net nance costs and income tax***************************************** Finance income ******************************************* Finance costs ********************************************* Foreign exchange gain/(loss)******************************* Prot from continuing operations before income tax ******* Income tax expense *************************************** Prot for the year/period from continuing operations ****** Discontinued operations (Loss)/prot for the year/period from discontinued operations ********************************************* Prot for the year/period ********************************* Attributable to: Equity shareholders of the Company *********************** Minority interest****************************************** 24,690 326 (4,977) 579 20,618 (9,108) 11,510 (1,371) 10,139 11,900 (1,761) 10,139 Earnings per share for prot attributable to the equity shareholders of the Company during the year (expressed in US$ per share)(1) Basic and diluted ***************************************** 0.05 Cash ow data: Net cash generated from operating activities *************** 7,830 Net cash (used in)/generated from investing activities ******* (29,866) Cash ows generated from/(used in) nancing activities ***** 21,278 Net (decrease)/increase in cash and cash equivalents during the year/period ***************************************** (758) Other nancial and operating data: (2) EBITDA ************************************************* 46,518 Total cash costs(3) ***************************************** 33,576 Cash and cash equivalents ********************************* 4,242
Non-current assets ******************************************************* Total assets************************************************************** Borrowings (short- and long-term) **************************************** Other current liabilities ************************************************** Other non-current liabilities ********************************************** Total equity ************************************************************* Notes:
(1) Based on the 230,000,000 ordinary shares expected to be outstanding immediately prior to Admission. (2) EBITDA is calculated as prot from continuing operations before net nance costs and income tax plus depreciation (included in both cost of sales and administrative expenses), increase in provision for mine closure, exploration costs other than personnel and other, and non-recurring cash items included in other expenses, less gain on sale of zinc project and non-recurring cash items included in other income. EBITDA is not a measure of nancial performance under IFRS or US GAAP. See Part VI: Selected Financing and Operating Information for a reconciliation of prot for the period to EBITDA. (3) Total cash costs are calculated to include cost of sales, commercial deductions, and selling expenses less depreciation included in cost of sales. Total cash costs and total cash costs per ounce are not measures of nancial performance under IFRS or US GAAP. See Part VI: Selected Financing and Operating Information for a reconciliation of cost of sales from continuing operations to total cash costs.
PRA3 5.1.2
Use of proceeds
The Group intends to use the net proceeds of the Global Offer primarily in the following ways: ) ) ) ) approximately US$140 million to maximise the potential of existing operations; approximately US$250 million to achieve growth through delivery of its project pipeline; approximately US$40 million to repay existing debt; and the remainder of the net proceeds to exploit market and geographic niches to seek additional growth opportunities, whether by way of further exploration, joint ventures or strategic acquisitions.
PRA3 3.4
Pending their use as described above, the Group intends to invest the net proceeds in short term investments with internationally recognised nancial institutions.
provided by the Groups project pipeline and its low cost base, enable the Directors to look ahead with condence.
Signicant change
There has been no signicant change in the nancial or trading position of the Hochschild Mining Group since 30 June 2006, the date to which the nancial information for the Hochschild Mining Group in Section B of Part IX: IFRS Historical Financial Information was prepared.
PRA1 20.9
Dividend policy
The Directors intend to adopt a dividend policy which will take into account the protability of the business and underlying growth in earnings of the Group, as well as its capital requirements and cash ows, while maintaining an appropriate level of dividend cover. Following Admission, in the absence of unforeseen circumstances and assuming the Groups performance continues in line with the Boards expectations, subject to there being available reserves for the purpose, the Directors intend to declare a dividend of one third of prots after tax for the nancial year ending 31 December 2006 in respect of the period from Admission until 31 December 2006. Thereafter, the Directors intend that interim and nal dividends will be paid in the approximate proportions of one-third and two-thirds of the total annual dividend, respectively. Dividends will be declared by the Company 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 being converted into pound sterling at exchange rates prevailing at the time of payment.
PRA1 20.7
Risk factors
The Groups results of operations and nancial condition could be materially affected by: Risks relating to the Hochschild Mining Groups operations: ) the risks and hazards involved in the business of mining metals, not all of which are fully covered by insurance; ) the prices of silver and gold; ) the substantial capital expenditure required by the business; ) the Groups ability to realise its existing reserves base, convert resources into reserves and mineralised potential into resources, and conduct successful exploration; ) an increase in production costs; ) inadequacy in or unavailability of the infrastructure on which its production, processing and product delivery relies; ) delay or failure by the Group in completing its development projects; ) the Groups joint venture arrangements and options not being successful; ) failure to consummate or integrate acquisitions successfully; ) uctuations in currencies; ) future changes in commodity prices; ) the fact that the Groups revenues are currently derived from production at only three facilities, all in Peru; ) any reduction or discontinuance in the Groups rening arrangements; ) any reduction or discontinuance of purchases of concentrate by its main customer; 9
PRA1 4
) competition from other mining companies for the acquisition of new mineral assets; ) failure to retain or attract key personnel; ) failure to maintain good relations with its employees; ) termination of the Groups stability arrangements; ) cost of compliance with governmental regulations; ) costs associated with environmental hazards; ) termination of the Groups mining concessions; ) costs associated with the Peruvian Mine Closure Law; ) costs and delays associated with governmental permits to expand or commence operations; Risks relating to operating in Peru, Mexico and Argentina: ) local economic and political conditions; ) localised violence in Mexico linked to drug-trafcking; ) potential local opposition to mining, leading to disruption in the Groups mines, development projects and prospects; and ) failure to obtain proper redress in the courts of the jurisdictions in which the Group operates or might operate in the future. It should also be noted that: Risks relating to the Hochschild Mining Groups structure: ) certain major shareholders will exercise signicant control over the Group after the Global Offer and, as a result, investors may not be able to inuence the outcome of important decisions in the future; ) as the Company is primarily a holding company, its ability to pay dividends depends upon the ability of its subsidiaries to pay dividends and to advance funds; Risks relating to the Ordinary Shares: ) there has been no prior public trading market for the Ordinary Shares, and an active trading market may not develop or be sustained in the future; ) the Group cannot assure investors that it will pay dividends in the future; ) future sales of Ordinary Shares could depress the market price of the Ordinary Shares; and ) holders of Ordinary Shares outside the United Kingdom may not be able to exercise their preemptive rights. Working capital The Company believes, taking account of the net proceeds of the Global Offer, the working capital available to the Group is sufcient for the Groups present requirements, that is, for the next 12 months following the date of this document. 10
PRA1 10.1 PRA3 3.1 PRA3 2
Capitalisation and indebtedness The Groups capitalisation as at 30 June 2006 was US$10.883 million1 and its net nancial indebtedness as at 31 August 2006 was US$86.772 million2.
PRA3 3.2
Lock-ups
The Company, each of the Directors, the Senior Management and the Over-allotment Shareholders have agreed to enter into lock-up arrangements. The Company has agreed, inter alia, not to offer, issue, or sell any Ordinary Shares for a period of 12 months after Admission and the Directors, the Senior Management and the Over-allotment Shareholders have agreed, inter alia, not to sell Ordinary Shares for a period of 12 months after Admission, in each case subject to certain exceptions.
Documents on display
Copies of this document, the Companys constitutional documents, service agreements of all of the Executive Directors and letters of appointment of all of the Non-Executive Directors, the reports prepared by Ernst & Young LLP, the technical report by IMC Group Consulting Limited and the letters of consent referred to in paragraph 18 of Part XIV: Additional Information shall be on display during normal business hours at the ofces of Linklaters, One Silk Street, London EC2Y 8HQ from the date of this document until 14 days following Admission.
1 Source: Section B of Part IX: IFRS Historical Financial Information. 2 Source: Company (unaudited) PRA1 24
11
Risk factors
In addition to the other information contained in this Prospectus, prospective subscribers or purchasers of the Ordinary Shares should consider carefully the specic risks set out below before making a decision to invest in the Ordinary Shares. These risks and uncertainties may not be the only ones facing the Hochschild Mining Group. Additional risks and uncertainties not presently known to the Hochschild Mining Group or that the Hochschild Mining Group currently deems immaterial may also impair the Hochschild Mining Groups business operations. The business, nancial condition or results of the operations of the Hochschild Mining Group could be materially and adversely affected by any of these risks. The trading price of the Ordinary Shares could decline due to any of these risks and investors could lose part or all of their investment.
PRA1 4
PRA1 8.2
generally understood to contribute to a decline in the price of silver and gold include sales by private and government holders, and a general global economic slowdown. Future prolonged reductions or declines in the world silver and gold prices could have a material adverse effect on the Hochschild Mining Groups revenues, protability and reserves. The Hochschild Mining Groups business requires substantial capital expenditure. The mining business is capital intensive and the development and exploitation of silver and gold reserves and the acquisition of machinery and equipment require substantial capital expenditure. The Hochschild Mining Group has a number of development projects and prospects, as well as plans for its existing operations, which involve signicant capital expenditure. In particular, the Hochschild Mining Group must continue to invest signicant capital to maintain or to increase the amount of reserves that it exploits and the amount of metal that it produces. Some of the Hochschild Mining Groups development projects and prospects may require greater investment than currently planned. There can be no assurance that the Hochschild Mining Group will be able to maintain its production levels and generate sufcient cash ow, or that the Hochschild Mining Group will have access to sufcient investments, loans or other nancing alternatives, to continue its exploration, exploitation, development and processing activities at or above present levels. The Hochschild Mining Groups future performance will be affected by its ability to realise its existing reserves base, convert resources into reserves and mineralised potential into resources, and conduct successful exploration. As at 30 June 2006, the average life of mine of the Groups operating mines was 2.8 years and the average projected mine life of its advanced development projects was 4.1 years. To extend the lives of its mines and projects, ensure the continued operation of the business and realise its growth strategy, it is essential that the Hochschild Mining Group continues to realise its existing identied reserves, convert resources into reserves, develop its resource base through the realisation of identied mineralised potential, and/or undertake successful exploration or acquire new resources. The Hochschild Mining Groups mineral reserves and resources described in this Prospectus constitute estimates that comply with standard evaluation methods generally used in the international mining industry and are stated in conformity with the JORC Code. In respect of these estimates, no assurance can be given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realised or that mineral reserves can be mined or processed protably. Actual reserves may not conform to geological, metallurgical or other expectations, and the volume and grade of ore recovered may be below the estimated levels. In addition, there can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in larger-scale tests under on-site conditions or during production. Lower market prices, increased production costs, reduced recovery rates and other factors may render the Hochschild Mining Groups reserves uneconomic to exploit and may result in revision of its reserve estimates from time to time. Reserve data are not indicative of future results of operations. If the Hochschild Mining Groups actual mineral reserves and resources are less than current estimates or, if the Group fails to develop its resource base through the realisation of identied mineralised potential, the Hochschild Mining Groups results of operations or nancial condition may be materially and adversely affected. Minerals exploration is highly speculative in nature, involves many risks and is frequently unsuccessful. Once mineralisation is discovered, it may take a number of years to complete the geological surveys to assess whether production is possible and, even if production is possible, the economic feasibility of production may change during that time. Substantial capital expenditure is required to identify and delineate ore reserves through geological surveying and trenching and drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct mining and processing facilities. In particular, the geological characteristics of the Groups operating mines mean that it is difcult to prove up reserves 13
without signicant investment in underground development. Consequently, the Groups strategy to date has been to undertake a continuing exploration and development programme to ensure the reserve and resource base is developed in step with production and planned expansion as well as identifying mineralised potential to supplement the resource base going forward. The focus of this reserve development strategy has been to maximise the cash ow from its operations rather than extend the lives of its operating mines. Notwithstanding the Hochschild Mining Groups consistent track record of replacing its reserves and the Hochschild Mining Groups expertise in relation to mineral deposits of this nature, there can be no assurance that the Hochschild Mining Group will be able to identify future reserves or continue to extend the mine life of its existing operations. Any failure by the Hochschild Mining Group to identify and delineate ore reserves in the future could have a material adverse effect on its results of operations or nancial condition. An increase in the Hochschild Mining Groups production costs could materially and adversely affect its protability. Changes in the Hochschild Mining Groups production costs could have a major impact on its protability. Its main production expenses are contractor costs, materials, personnel costs and energy. Changes in the costs of the Hochschild Mining Groups mining and processing operations could occur as a result of unforeseen events, including international and local economic and political events, and could result in changes in protability or reserve estimates. Many of these factors may be beyond the Hochschild Mining Groups control. The Hochschild Mining Group relies on third party suppliers for a number of its raw materials, including for the supply of cement, wood, cyanide and steel used in the construction and continuing development of its mines and the processing of ore. Any material increase in the cost of raw materials, or the inability by the Hochschild Mining Group to source third party suppliers for the supply of its raw materials, could have a material adverse effect on the Hochschild Mining Groups results of operations or nancial condition. The Hochschild Mining Groups current operations, projects and prospects are located in remote areas and the Hochschild Mining Groups production, processing and product delivery relies on the infrastructure being adequate and remaining available. The Hochschild Mining Groups mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure. The regions where the Groups current operations, projects and prospects are located are sparsely populated and difcult to access. The Group requires reliable roads, bridges, power sources and water supplies to access and conduct its operations and the availability and cost of this infrastructure affects capital and operating costs and the Hochschild Mining Groups ability to maintain expected levels of production and sales. Unusual weather or other natural phenomena, sabotage or government or other interference in the maintenance or provision of such infrastructure could impact development of a project, reduce mining volumes, increase mining or exploration costs or delay the transportation of raw materials to the mines and projects or dore and concentrate to customers. Any such issues arising in respect of the infrastructure supporting or on the Hochschild Mining Groups sites could materially and adversely affect the Hochschild Mining Groups results of operations or nancial condition. Furthermore, any failure or unavailability of the Hochschild Mining Groups operational infrastructure (for example, through equipment failure at its concentrator or leaching facilities or disruption to its transportation arrangements) could adversely affect the production output from its mines or impact its exploration activities or development of a mine or project. In particular, the Hochschild Mining Group sources the electricity supply for each of its operating units from the Peruvian national grid via two separate supply lines. Whilst back-up power generators are located at each of the operating units, in the event of a failure of both of these supply lines from the national grid, there can be no assurance that these back-up generators will be effective in preventing any interruption to the operations of the Hochschild Mining Group and, 14
at the Arcata unit, the back-up generators currently provide only around 33 per cent. of the generation capacity required to maintain full operations at the unit. Any prolonged or persistent failure of the power supply from the national grid could increase production costs, signicantly delay or halt operations and, consequently, have a material adverse effect on the Hochschild Mining Groups results of operations or nancial condition. The Hochschild Mining Group depends upon trucking to deliver fuel, wood, cement, cyanide, steel and other supplies to its operations and to deliver its commodities to its customers. These transport services in some cases may not be adequate to support the Hochschild Mining Groups existing operations or to support the Hochschild Mining Groups expanded operations. Disruptions of these transport services because of weather-related problems, key equipment failures, strikes, lock-outs or other events could temporarily impair the Hochschild Mining Groups ability to supply its commodities to its customers which could materially and adversely affect the Hochschild Mining Groups results of operations or nancial condition. The Hochschild Mining Group depends on a pumping system to extract water located underground at the Arcata unit and to prevent the Arcata mine from ooding. Whilst the Group has infrastructure in place for the extraction and storage of water, any prolonged or persistent failure in the operation of the pumping system leading to a signicant delay in extracting water could lead to ooding of the Arcata mine which, in turn, could result in damage to, or destruction of, a portion of the Hochschild Mining Groups production facilities or injury to the Hochschild Mining Groups employees and contracted personnel. Any damage to or destruction of such production facilities or injury to employees or contracted personnel could have a material adverse effect on the Hochschild Mining Groups results of operations, nancial condition or reputation. Delay or failure by the Hochschild Mining Group in completing its development projects could have a material adverse effect on the Hochschild Mining Groups growth prospects. Successful completion of the Hochschild Mining Groups development projects is subject to various factors, many of which are not within its control. These factors include the granting of consents and permits from the relevant government departments, the availability, terms, conditions and timing of acceptable arrangements for transportation, construction and rening and the performance of engineering and construction contractors, mining contractors, suppliers and consultants. The lack of availability of acceptable contractual terms, or a slower than anticipated performance by any contractor, could delay or prevent the successful completion of any of the Hochschild Mining Groups development projects. Completion or further expansion of the Hochschild Mining Groups development projects may be compromised in the event of a prolonged decline in price levels for silver and gold. There can be no guarantee as to when the Hochschild Mining Groups development projects will be completed, whether the resulting operations will achieve the anticipated production volumes or whether the costs in developing these projects will be in line with those anticipated. The Hochschild Mining Groups inability to complete its development projects as planned may have a material adverse effect on the results of operations or nancial condition of the Hochschild Mining Group. The Hochschild Mining Groups joint venture arrangements and options may not be successful. The Hochschild Mining Group has entered into joint venture arrangements and options for certain of its development projects in order to gain access to mineral assets as part of its growth strategy. Some of these joint ventures are fundamental to the Hochschild Mining Groups business plan to achieve production growth. The Hochschild Mining Group is currently developing the San Jose (Argentina) and Pallancata (Peru) projects, amongst others, under joint venture arrangements. Although the Hochschild Mining Group has sought to protect its interests in these development projects by ensuring it has management control and through the terms of the governing agreements (for example, through the inclusion in a number of the relevant agreements of a call option over its joint venture partners share of the project in the event of a breach by its joint venture partner), joint ventures necessarily involve special risks associated with the possibility that 15
the joint venture partners may (i) have economic or business interests or goals that are inconsistent with those of the Hochschild Mining Group, (ii) take action contrary to the Hochschild Mining Groups policies or objectives with respect to its investments, for instance by veto of proposals in respect of the joint venture operations or (iii) as a result of nancial or other difculties, be unable or unwilling to full their obligations under the joint venture or other agreements. Any of the foregoing may have a material adverse effect on the results of operations, nancial condition or prospects of the Hochschild Mining Group through the delay or noncompletion of these development projects. In addition, the termination of certain of these joint ventures, if not replaced on similar terms, could have a material adverse effect on the results of operations, nancial condition or prospects of the Hochschild Mining Group. If the Hochschild Mining Group fails to consummate or integrate acquisitions successfully, the Hochschild Mining Groups rate of expansion could slow and its results of operations or nancial condition could suffer. The Hochschild Mining Group has expanded operations in Latin America through both development and acquisition of new projects, and the Hochschild Mining Group expects to continue to do so in the future. The Hochschild Mining Group intends to pursue a strategy of identifying and acquiring early stage projects and/or existing businesses with a view to expanding its operating businesses. There can be no assurance that the Hochschild Mining Group will continue to identify suitable projects, acquisitions and strategic investment opportunities or that any business acquired will prove to be protable at all, or as protable as its current operations. In addition, acquisitions and investments involve a number of risks, including possible adverse effects on the Hochschild Mining Groups operating results, diversion of managements attention, failure to retain key personnel in the acquired businesses, risks associated with unanticipated events or liabilities and difculties in the integration of the operations. Fluctuations in currencies may adversely affect the Hochschild Mining Groups results of operations and nancial condition. The Hochschild Mining Groups revenues are almost entirely in US dollars, whilst a substantial proportion of the Hochschild Mining Groups costs are incurred in Nuevos Soles. In addition, the Hochschild Mining Group expects the proportion of the costs it incurs in other local currencies to increase if its pipeline of Latin American development projects and prospects commences production. The Hochschild Mining Group does not undertake any hedging activities in relation to exchange rates. As a result, if the Nuevo Sol, or any of these other local currencies, were to strengthen against the US dollar, this could have a material adverse effect on the Hochschild Mining Groups nancial condition and results of operations. Similarly, Peru and the other Latin American countries where the Hochschild Mining Groups projects are located have experienced periods of high ination and substantial currency devaluation over recent decades. Although ination has been largely stable in recent years in these jurisdictions, if it were to increase without a corresponding devaluation of the relevant local currency relative to the US dollar, the Hochschild Mining Groups nancial condition and results of operations could be materially and adversely affected. The Hochschild Mining Group only engages in limited hedging activities and, therefore, is exposed to future changes in commodity prices. The Hochschild Mining Group is exposed to the effect of changes in commodity prices (in particular, to the price of silver and gold and to changes in interest rates). The Hochschild Mining Group only engages in limited hedging activities in relation to prices of silver and gold, principally in connection with the security arrangements for its long-term nancing. Accordingly, the Hochschild Mining Groups results of operations are exposed to changes in commodity prices.
16
The Hochschild Mining Groups revenues are currently derived from silver and gold production at only three facilities, all in Peru. The Hochschild Mining Groups current revenues are derived from silver and gold produced by the Arcata, Ares and Selene mines, all of which are located in Peru. If mining or processing operations in any one of these complexes were materially reduced, interrupted or curtailed, then the Hochschild Mining Groups results of operations or nancial condition could be materially and adversely affected. A reduction or discontinuance in the Hochschild Mining Groups rening arrangements could have an adverse effect on the Groups cashows, results of operations or nancial condition. There are a limited number of reneries available throughout the world for the rening of the Hochschild Mining Groups dore. All of the dore produced by the Hochschild Mining Group is currently sent to Johnson Matthey for rening under a contract which expires on 31 December 2006. If Johnson Matthey were to reduce or discontinue the arrangements it has in place with the Hochschild Mining Group or did not agree to a renewal of its contract, no assurance can be given that an alternative rener would be available on acceptable contractual terms, or that delays or disruptions in sales would not be experienced that could result in an adverse effect on the Hochschild Mining Groups cash ows, results of operations or nancial condition. The Hochschild Mining Groups sales of concentrate could be adversely affected if there were to be a reduction or discontinuance of purchases by the Hochschild Mining Groups main customer. The Hochschild Mining Group currently sells its concentrate production from the Arcata unit exclusively to Penoles under a one-year contract. If Penoles were unexpectedly to reduce or discontinue its purchasing of the Hochschild Mining Groups concentrate or did not agree to a renewal of its contract, no assurance can be given that delays or disruptions in sales would not be experienced until such time as alternative customers could be found, or that arrangements with alternative customers would be entered into on terms as favourable to the Hochschild Mining Group. Any of the foregoing risks could result in an adverse effect on the Hochschild Mining Groups cash ows, results of operations or nancial condition. The Hochschild Mining Group faces competition from other mining companies for the acquisition of new properties. Mines have nite lives and, as a result, the Hochschild Mining Group seeks to replace and expand its reserves through the acquisition of new properties and by developing projects. There is a limited supply of desirable properties with potential mineralisation available in the areas where the Hochschild Mining Group would consider conducting exploration and/or production activities. Because the Hochschild Mining Group faces competition for new properties from other mining companies, some of which may have greater nancial resources than the Hochschild Mining Group, the Hochschild Mining Group may be unable to acquire attractive new mining properties on terms that it considers acceptable. As a result, the Hochschild Mining Groups revenues from the sale of silver and gold may decline over time, thereby materially and adversely affecting its results of operations or nancial condition. The Hochschild Mining Group depends on its key personnel. If the Hochschild Mining Group is unable to attract and retain key personnel, its business may be materially and adversely affected. The Hochschild Mining Groups business depends in signicant part upon the contributions of a number of the Hochschild Mining Groups key senior management and personnel, in particular its highly skilled team of engineers and geologists. There can be no certainty that the services of its key personnel will continue to be available to the Hochschild Mining Group. Factors critical to retaining the Hochschild Mining Groups present staff and attracting additional highly qualied 17
personnel include the Hochschild Mining Groups ability to provide these individuals with competitive compensation arrangements. If the Hochschild Mining Group is not successful in retaining or attracting highly qualied individuals in key management positions and highly skilled engineers and geologists, its business may be materially harmed. In some of the jurisdictions where the Hochschild Mining Groups operations and development projects are located, particularly Argentina, it may be difcult for the Hochschild Mining Group to nd or hire qualied people in the mining industry who are situated in those jurisdictions or to obtain all of the necessary services or expertise locally or to conduct operations on its projects at reasonable rates. If qualied people and services or expertise cannot be obtained in those jurisdictions, those services will need to be obtained from people located elsewhere which will require work permits and compliance with applicable laws and could result in delays and higher costs to develop its projects. The Hochschild Mining Groups business depends on good relations with its employees. Although management believes its present labour relations are good, there can be no assurance that a work slowdown, a work stoppage or strike will not occur at any of the Hochschild Mining Groups operating units or development projects. In recent months, there have been a number of instances of mining companies facing industrial action and work stoppages at their Latin American operations which, in certain instances, have led to the operations being shut down. Work slowdowns, stoppages or other labour-related developments or disputes could result in a decrease in the Hochschild Mining Groups production levels and adverse publicity, which could have a material adverse effect on the Hochschild Mining Groups results of operations or nancial condition. Termination of the Hochschild Mining Groups stability arrangements could have a material adverse effect on its nancial condition or operating results. The Hochschild Mining Group has entered into a mining stability agreement with the Peruvian government in respect of its operations at the Ares operating unit. The stability agreement freezes the mining regulatory regime applicable to the Group as at the date of the stability agreement. Under the terms of the stability agreement, the Peruvian government has given various guarantees to the Hochschild Mining Group, including that all taxes applicable to it (such as income tax, municipal tax and customs duties) will not be increased (and the way such taxes are determined will not be modied) throughout the period of the stability agreement. The stability agreement also guarantees the Group free access to foreign currency with no exchange controls and the ability to trade its products freely. As a result of the Groups stability agreement currently in force, the Group pays income tax in Peru at a rate of 30 per cent. in respect of income generated by the Ares operating unit, the rate in force at the date the stability agreement was entered into. On 24 June 2004, the Peruvian Congress approved Law 28258Mining Royalties Law, which established a mining royalty to be paid by holders of mining concessions at rates of between 1 and 3 per cent. of revenues. The Directors believe that the stability agreement entered into by the Ares operating unit exempts the Hochschild Mining Group from paying royalties with respect to revenues generated at the Ares operating unit for so long as the stability agreement remains in effect. The Hochschild Mining Groups stability agreement is scheduled to terminate on 31 December 2008 and there can be no assurance that the Hochschild Mining Group will enter into a new stability agreement or, if it does, on what terms that agreement will be entered into. In addition, the Hochschild Mining Group has been granted stability certicates by the Ministry of Mines in Argentina in respect of its advanced development project at San Jose whereby the national and provincial tax regimes are frozen for a period of 30 years from 15 May 2006 and 20 June 2006, respectively. 18
The termination or renegotiation of the Hochschild Mining Groups stability agreement, withdrawal of its stability certicates, or any successful challenge as to the validity of these stability arrangements could result in an increase in the amount of tax or royalties the Hochschild Mining Group might have to pay or the imposition of new duties or charges, including a claim for previous non-payment of tax or governmental royalties covered by these arrangements, which in turn could have a material adverse effect on the nancial condition and operating results of the Hochschild Mining Group. In particular, legislators in Peru have recently indicated their intention to revive a bill enabling the Peruvian government to charge a royalty on all mining operators, regardless of any previously agreed stability agreements. The bill, which was rejected by the previous administration of President Alejandro Toledo, is currently being reviewed by the Peruvian Committee of Energy and Mines and is scheduled to be debated by the Peruvian Congress, although no timetable has been set for such debate. If the bill is approved by the Peruvian Congress, there can be no assurance that the Groups current stability arrangements protecting the Group against such payments in respect of revenues from the Ares operating unit will be respected, which could result in new royalty payments being imposed on the Hochschild Mining Group. The Hochschild Mining Group is subject to signicant laws and governmental regulations, and their related costs may negatively affect the Hochschild Mining Groups business. The Hochschild Mining Groups operations and exploration and development activities are subject to extensive laws and regulations governing various matters. These include laws and regulations relating to environmental protection, management and use of toxic substances and explosives, management of natural resources, exploration, development of mines, production and postclosure reclamation, exports, price controls, repatriation of capital and exchange controls, taxation, mining royalties, labour standards and occupational health and safety, including mine safety, and historic and cultural preservation. The costs associated with compliance with these laws and regulations are substantial and possible future laws and regulations, changes to existing laws and regulations (including the imposition of higher taxes and mining royalties) or more stringent enforcement or restrictive interpretation of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspensions of the Hochschild Mining Groups operations and delays in the development of its properties. Moreover, these laws and regulations may allow governmental authorities and private parties to bring lawsuits based upon damages to property and injury to persons resulting from the environmental, health and safety impacts of the Hochschild Mining Groups past and current operations, and could lead to the imposition of substantial nes, penalties or other civil or criminal sanctions. In Peru, whilst the new administration of Alan Garca has, to date, avoided any plans to impose new taxes on mining operators, the government has outlined proposals for mining operators to make a one-time voluntary payment calculated as a percentage of net prot for the purposes of supporting social programmes aimed at reducing extreme poverty. The Hochschild Mining Group has agreed to make such a payment in 2007 estimated at approximately US$850,000 in respect of the nancial year ending 31 December 2006, although the Company may agree to pay a portion of this amount before 31 December 2006, such amount still to be negotiated and agreed. As the details of the agreement negotiated by the Peruvian government and the mining industry in Peru are still to be nalised, there can be no assurance that the estimated amount to be paid by the Hochschild Mining Group will not increase materially or that the Peruvian government will not impose further payments on mining operators in general or the Hochschild Mining Group in particular. Any further payments or a material increase in the one-time payment to be made by the Group could have a material adverse effect on the nancial condition or operating results of the Hochschild Mining Group.
19
The Hochschild Mining Groups activities are subject to environmental hazards as a result of the processes and chemicals used in the Groups extraction and production methods, which could have a material adverse effect on the Hochschild Mining Groups business, nancial condition or result of operations. Mining activities are generally subject to environmental hazards as a result of the processes and chemicals used in the extraction and production methods. In particular, the Hochschild Mining Group employs cyanide in the production of its dore and high levels of naturally occurring arsenic may be found in its concentrate production at the Arcata unit. As a result, environmental hazards may exist on the Hochschild Mining Groups properties which are currently unknown to it or may arise irrespective of whether the Hochschild Mining Group is in compliance with current environmental regulations. In addition, the storage of tailings may present a risk to the environment, property and persons. Whilst the design of the Hochschild Mining Groups tailings dams is in accordance with Peruvian government guidance and the Hochschild Mining Group has only previously experienced minor leakage from one of its dams at the Arcata unit, there remains a risk of leakage from or failure of the Hochschild Mining Groups tailings dams. Furthermore, whilst the Hochschild Mining Group treats the water discharged from its operating facilities in accordance with Peruvian law and current international standards, the long term implications of such discharge on the environment are difcult to predict. The Hochschild Mining Group may be liable for losses associated with such hazards, or may be forced to undertake extensive remedial clean-up action or to pay for governmental remedial clean-up actions, even in cases where such hazards have been caused by previous or subsequent owners or operators of the property, or by the past or present owners of adjacent properties or by natural conditions. Although the Directors believe the Hochschild Mining Group is in substantial compliance with applicable laws and regulations, they cannot guarantee that any such law, regulation, enforcement or private claim will not have a material adverse effect on the Hochschild Mining Groups business, nancial condition or results of operations. In addition, Peru, Argentina and Mexico are all signatories to, and have each ratied, the Kyoto Protocol. The Kyoto Protocol is intended to limit or capture emissions of greenhouse gases such as carbon dioxide and methane. Whilst the precise nature of the revised environmental regulations and enforcement regime within these jurisdictions is yet to be nalised, compliance with new environmental requirements that may be enacted to ensure compliance with the Kyoto Protocol may require the Hochschild Mining Group to incur signicant capital expenditure and failure to comply with any new legislation could result in the Group incurring nes and other penalties. The Hochschild Mining Groups mining concessions may be terminated in certain circumstances. Under the laws of the jurisdictions where the Hochschild Mining Groups operations, development projects and prospects are located, mineral resources belong to the state and government concessions are required to explore for and exploit mineral reserves. The Hochschild Mining Group holds mining, exploration and other related concessions in each of the jurisdictions where it is operating and where it is carrying on development projects and prospects. The concessions held by the Hochschild Mining Group in respect of its operations, development projects and prospects may be terminated under certain circumstances, including where minimum production levels are not achieved by the Group (or a corresponding penalty is not paid), if certain fees are not paid or if environmental and safety standards are not met. Termination of any one or more of the Hochschild Mining Groups mining, exploration or other concessions could have a material adverse effect on the Hochschild Mining Groups nancial condition or results of operations. Costs associated with the Peruvian Mine Closure Law could have a material adverse effect on the Hochschild Mining Groups nancial condition or results of operations. Mine operators in Peru are subject to the Mine Closure Law which establishes provisions relating to mine closure plans. The law provides that a mine operator must grant an 20
environmental warranty for the estimated costs associated with its mine closure plan. The law does not establish when such warranties must be in place and does not specify the form of the required warranty. However, the law indicates that a warranty may take the form of insurance, cash collateral, a trust agreement or other form, as permitted by the Civil Code of Peru. Although the Company has provisions for mine closures, as the implementing regulations of the Mine Closure Law have yet to be nalised by the Peruvian government, there can be no assurance that costs associated with the closure of the Hochschild Mining Groups operating mines would not exceed such provisions, which could have a material adverse effect on its nancial condition or results of operations. The Hochschild Mining Group is required to obtain governmental permits to expand operations or commence new operations. The costs and delays associated with such approvals could affect the Hochschild Mining Groups operations, reduce the Hochschild Mining Groups revenues, and negatively affect the Hochschild Mining Groups business as a whole. The Hochschild Mining Group is required to seek governmental permits for the expansion of existing operations or for the commencement of new operations in each of the jurisdictions where its operations, development projects and prospects are located. Obtaining the necessary governmental permits is a complex and time-consuming process often involving public hearings and costly undertakings. The duration and success of permitting efforts are contingent on many factors that are outside the Hochschild Mining Groups control. The governmental approval process may increase costs and cause delays, depending on the nature of the activity to be permitted, and could cause the Hochschild Mining Group not to proceed with the development of a mine.
PRA1 4
disobedience, which could have a material adverse effect on the Peruvian economy and cause material disruption to the Hochschild Mining Groups operations. In Mexico, the losing presidential candidate, Andres Manuel Lopez Obrador, refused to accept the election results, alleging fraud and called for a full recount of the votes cast in the elections. Since the results were announced on 2 July 2006, Lopez Obrador and his supporters have led a number of mass demonstrations and street protests, and a recent protest in Mexicos Congress by left-wing legislators forced the outgoing Mexican President, Vicente Fox, to abandon his nal annual state of the nation address. On 5 September 2006, the Mexican electoral court, in a decision that cannot be appealed, unanimously ruled against annulling the 2 July elections and declared Calderon the president-elect. Notwithstanding the Mexican electoral courts ruling, Lopez Obrador has expressed his intention to establish a parallel government and has publicly stated that he and his supporters will never recognise Calderon as President. Whilst it is not clear what form Lopez Obradors and his supporters opposition will take, any protests against the new government, or any attempt by Lopez Obrador to establish a parallel government, could lead to further public strikes, mass demonstrations and civil disobedience, as well as increased political instability and uncertainty, which could have a material adverse effect on the Mexican economy which, in turn, could cause material disruption to the Hochschild Mining Groups Mexican projects and prospects. Localised violence in Mexico linked to drug-trafcking could lead to disruption in the Hochschild Mining Groups Mexican development projects and prospects which, in turn, could have a material adverse effect on the Hochschild Mining Groups nancial condition or results of operations. Certain areas in the north of Mexico have experienced outbreaks of localised violence linked to drug-trafcking in the region. Whilst the Hochschild Mining Groups Mexican projects and prospects have, to date, been unaffected by such outbreaks, any increase in the level of violence, or a concentration of the violence in areas where the Groups Mexican projects and prospects are located, could have a material adverse effect on the Groups nancial condition or results of operations. Potential local opposition to mining could lead to disruption in the Hochschild Mining Groups mine development projects and prospects which could have a material adverse effect on the Hochschild Mining Groups nancial condition or results of operations. There is the potential for local opposition to mine development projects and prospects. Opposition in each of the jurisdictions where the Hochschild Mining Groups operations, development projects and prospects are located has arisen in the past. Whilst the Hochschild Mining Group believes it maintains good relations with local communities, the Hochschild Mining Group cannot rule out the possibility of local opposition arising in the future in respect of its existing operations, development projects or prospects or in relation to obtaining concessions for current or future projects. If the Hochschild Mining Group were to experience opposition in connection with its existing operations or current or future projects, it could have a material adverse effect on the Hochschild Mining Groups nancial condition or results of operations. The courts of the jurisdictions in which the Hochschild Mining Group operates or might operate in the future may offer less certainty as to the judicial outcome or less effective forms of redress or a more protracted judicial process than is the case in the United States and western Europe which could result in risks for the Hochschild Mining Group. The courts and legal systems in the jurisdictions in which the Hochschild Mining Group operates or might operate in the future may offer less certainty as to judicial outcome and less effective forms of redress than is the case in the United States or western Europe. Accordingly, the Hochschild Mining Group could, inter alia, face risks from (i) a higher degree of discretion on the part of governmental authorities; (ii) the lack of judicial or administrative guidance on interpreting 22
applicable rules and regulations; (iii) inconsistencies or conicts between and with various laws, regulations, decrees, orders and resolutions; (iv) relative inexperience of the judiciary and courts in such matters; or (v) a more protracted judicial process resulting in delays in reaching a judicial outcome. Similarly, there may be less certainty that government ofcials and agencies will abide by legal requirements, licences, permits and negotiated agreements. There can be no assurance that the foregoing would not have an adverse effect on the validity or enforceability of the joint ventures, licences, permits or other legal arrangements entered into by the Hochschild Mining Group or the application or enforcement of laws and regulations to which the Hochschild Mining Group is subject.
PRA1 4
contractual and legal restrictions applicable to the Companys subsidiaries could also limit its ability to obtain cash from them, including under the terms of the Secured Loan Agreement, details of which are set out in paragraph 12 of Part XIV: Additional Information. The Companys rights to participate in any distribution of its subsidiaries assets upon their liquidation, reorganisation or insolvency would generally be subject to prior claims of the subsidiaries creditors, including any trade creditors.
outside the United Kingdom may not be able to exercise their pre-emptive rights for Ordinary Shares unless Hochschild Mining decides to comply with applicable local laws and regulations and, in the case of holders in the United States, a registration statement under the Securities Act is effective with respect to such rights, or an exemption from the registration statement under the Securities Act is available. Hochschild Mining intends to evaluate at the time of any rights or similar offering the costs and potential liabilities associated with any such registration statement or an exemption from registration, as well as the indirect benets of enabling holders of Hochschild Minings Ordinary Shares in the United States to exercise any pre-emptive rights for Ordinary Shares and any other factors considered appropriate at the time, and then to make a decision as to how to proceed. Hochschild Mining cannot assure its US shareholders that steps will be taken to enable them to exercise their pre-emptive rights, or to permit them to receive any proceeds or other amounts relating to their pre-emptive rights.
25
PRA1 5.1.4
Advisers
Financial Adviser ************************ JPMorgan Cazenove Limited 20 Moorgate London EC2R 6DA United Kingdom Joint Sponsors, Joint Global Co-ordinators and Joint Bookrunners ***************** JPMorgan Cazenove Limited 20 Moorgate London EC2R 6DA United Kingdom Co-Lead Manager************************ Canaccord Adams Limited Brook House, 1st Floor 27 Upper Brook Street London W1K 7QF United Kingdom Co-Manager***************************** Nomura International plc Nomura House 1 St. Martins-Le-Grand London EC1A 4NP United Kingdom Legal Adviser to Hochschild Mining as to English law and US law ************* Linklaters One Silk Street London EC2Y 8HQ United Kingdom Legal Adviser to the Joint Sponsors, Joint Global Co-ordinators, Joint Bookrunners and Managers as to English law and US law *********************************** Freshelds Bruckhaus Deringer 65 Fleet Street London EC4Y 1HS United Kingdom Auditors and Reporting Accountants ******** Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom Registered to carry out audit work by the Institute of Chartered Accountants in England & Wales Technical Consultant ********************* IMC Group Consulting Ltd Innovate Ofce Building Lakeview Drive Sherwood Park Nottinghamshire NG15 ODT United Kingdom Registrar and Paying Agent ************** Capita Registrars Northern House Woodsome Park Fenay Bridge Hudderseld HD8 OLA PRA3 10.1 Goldman Sachs International Peterborough Court 133 Fleet Street London EC4A 2BB United Kingdom PRA3 5.4.1 PRA3 5.4.3 PRA3 10.1
PRA3 10.1
PRA3 4.3 PRA3 5.4.2 PRA1 23.1 PRA3 10.1 PRA3 10.3
26
350p 77,250,000 307,350,226 25% 11,587,500 307,350,226 1,076 million 249 million
PRA3 5.3.1 PRA3 5.1.2 PRA3 5.2.5(a)
3 November 2006 8.00 a.m. (London time) on 8 November 2006 8.30 a.m. (London time) on 8 November 2006 Week commencing 20 November 2006
It should be noted that if Admission does not occur, all conditional dealings will be of no effect and any such dealings will be at the sole risk of the parties concerned.
27
Presentation of information
Investors should rely only on the information in this document. No person has been authorised to give any information or to make any representations other than those contained in this document in connection with the Global Offer and, if given or made, such information or representations must not be relied upon as having been authorised by or on behalf of the Company, the Directors or the Managers. No representation or warranty, express or implied, is made by any Manager or selling agent as to the accuracy or completeness of such information, and nothing contained in this document is, or shall be relied upon as, a promise or representation by any Manager or selling agent as to the past, present or future. Without prejudice to any obligation of the Company to publish a supplementary prospectus pursuant to section 87G of the FSMA and PR 3.4.1 of the Prospectus Rules, neither the delivery of this document nor any subscription or sale made under this document shall, under any circumstances, create any implication that there has been no change in the business or affairs of the Company or of the Hochschild Mining Group taken as a whole since the date hereof or that the information contained herein is correct as of any time subsequent to its date. The contents of this document are not to be construed as legal, business or tax advice. Each prospective investor should consult his or her own lawyer, nancial adviser or tax adviser for legal, nancial or tax advice in relation to any purchase or proposed purchase of Ordinary Shares. In connection with the Global Offer, the Managers and any of their affiliates, acting as investors for their own accounts, may take up Ordinary Shares and in that capacity may retain, purchase, sell, offer to sell or otherwise deal for their own accounts in such Ordinary Shares and other securities of the Company or related investments in connection with the Global Offer or otherwise. Accordingly, references in this document to the Ordinary Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, placing or dealing by the Managers and any of their affiliates acting as investors for their own accounts. The Managers do not intend to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligations to do so. None of the Company, the Directors or the Managers is making any representation to any offeree or purchaser of the Ordinary Shares regarding the legality of an investment by such offeree or purchaser. Apart from the responsibilities and liabilities, if any, which may be imposed on Goldman Sachs International, JPMorgan Cazenove Limited, J.P. Morgan Securities Limited, Canaccord Adams Limited and Nomura International plc by the FSMA or the regulatory regime established thereunder or any other applicable regulatory regime, each of Goldman Sachs International, JP Morgan Cazenove Limited, J.P. Morgan Securities Limited, Canaccord Adams Limited and Nomura International plc accepts no responsibility whatsoever for the contents of this document or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company, the Shares or the Global Offer. Each of Goldman Sachs International, JPMorgan Cazenove Limited, J.P. Morgan Securities Limited, Canaccord Adams Limited and Nomura International plc accordingly disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of such document or any such statement. Prior to making any decision as to whether to purchase the Ordinary Shares, prospective investors should read this document. In making an investment decision, prospective investors must rely upon their own examination of the Company and the terms of this document, including the risks involved. Presentation of nancial information Unless otherwise indicated, nancial information in this Prospectus has been prepared in accordance with International Financial Reporting Standards (IFRS) , except, for the purposes of 28
presenting the nancial information on a combined basis, in respect of certain matters explained in Section B of Part IX: IFRS Historical Financial Information and in US dollars. IFRS differ in certain signicant respects from US GAAP. The underlying nancial information stated in local currency has been translated into US dollars on the basis set out in Currencies below. For a discussion of the most signicant differences between IFRS and US GAAP as they relate to the Hochschild Mining Group, see Part XI: Summary of Differences between IFRS and US GAAP. All unaudited nancial information in this Prospectus has been extracted without material adjustment from the Groups accounting records. The Hochschild Mining Group has not in the past formed a separate legal group. The Company was incorporated on 11 April 2006 and acquired its shareholding in the companies constituting the Hochschild Mining Group pursuant to a share exchange agreement dated 2 November 2006 (see paragraph 2 of Part XIV: Additional Information). The combined historical nancial information contained in Part IX: IFRS Historical Financial Information has been prepared on a basis that combines the results and assets and liabilities of the companies comprising the Hochschild Mining Group. Internal transactions within the Hochschild Mining Group have been eliminated on combination. The nancial information contained in Part IX: IFRS Historical Financial Information for the nancial years ended 31 December 2003, 2004 and 2005 and the six months ended 30 June 2006 has been audited, whilst the nancial information for the six months ended 30 June 2005 is unaudited. The Hochschild Mining Group calculates EBITDA as prot from continuing operations before net nance costs and income tax plus depreciation (included in both cost of sales and administrative expenses), increase in provision for mine closure, exploration costs other than personnel and other, and non-recurring cash items included in other expenses, less gain on sale of zinc project and non-recurring cash items included in other income. The Company presents EBITDA because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance. EBITDA is not a measure of nancial performance under IFRS or US GAAP. Investors should not consider EBITDA in isolation, as an alternative to prot from continuing operations, as an indicator of operating performance, as an alternative to cash ows from operating activities or as a measure of the Companys protability or liquidity. EBITDA as presented in this Prospectus may not be comparable to other similarly titled measures of performance of other companies. The Hochschild Mining Group calculates total cash costs to include cost of sales, commercial deductions and selling expenses, less depreciation included in cost of sales. Commercial deductions are the treatment charges for the processing of concentrate from Arcata and, while it was producing concentrate, Selene and penalty charges related to levels of impurities in the concentrate in excess of specied thresholds. These charges are deducted when the Hochschild Mining Group calculates the price it invoices its customer for the sale of concentrate and therefore the revenues received by the Hochschild Mining Group are shown net of these charges. See Part VII: Operating and Financial ReviewRevenues. Total cash costs and total cash costs per ounce are presented because the Company believes they provide a measure for comparing the Hochschild Mining Groups operational performance against that of its peer group. In addition, management uses these measurements to compare the performance of the Hochschild Mining Groups operations period-to-period from a cash ow perspective, to monitor costs and to evaluate operating efciency. Total cash costs and total cash costs per ounce are not measures of nancial performance under IFRS or US GAAP. Investors should not consider total cash costs or total cash costs per ounce in isolation, as an alternative to prot from continuing operations, as an indicator of operating performance, as an alternative to cash ows from operating activities or as a measure of the Hochschild Mining Groups protability or liquidity. Total cash costs and total cash costs per ounce as presented in this Prospectus may not be comparable to other similarly titled measures of performance of other companies. 29
Return on invested capital is calculated by dividing the Groups prot from continuing operations before net nance costs and income tax by the aggregate of the Groups total equity plus borrowings less loans due from related parties. Pro forma nancial information In this Prospectus, any reference to pro forma nancial information is to information which has been extracted without material adjustment from the unaudited pro forma nancial information contained in Part X: Unaudited pro forma Financial Information. The unaudited pro forma balance sheet contained in Part X: Unaudited pro forma Financial Information is based on the consolidated balance sheet of the Hochschild Mining Group as at 30 June 2006 extracted without material adjustment from, Section B IFRS Historical Financial Information in Part IX: IFRS Historical Financial Information. The unaudited pro forma balance sheet includes certain adjustments in respect of the proposed Global Offer. However, the unaudited pro forma balance sheet is not necessarily indicative of what the nancial position of the Hochschild Mining Group would have been had the Global Offer occurred on 30 June 2006. In the compilation of such unaudited pro forma balance sheet, balance sheet information has been translated at the period end rate as set out below. The unaudited pro forma nancial information is for illustrative purposes only. Because of its nature, the pro forma nancial information addresses a hypothetical situation and, therefore, does not represent the Hochschild Mining Groups actual nancial position. Currencies In this Prospectus, references to Nuevo Sol or PEN are to the lawful currency of Peru; references to Mexican Peso or MXN are to the lawful currency of Mexico; references to Argentinian Peso or ARS are to the lawful currency of Argentina; references to pounds sterling, , pence or p are to the lawful currency of the United Kingdom; and references to US dollars, dollars, $, US$, cents or c are to the lawful currency of the United States of America. The Offer Price will be stated in pounds sterling. On 2 November 2006 (being the latest practicable date prior to the publication of this Prospectus), 1.00 = $1.9088, based on the Noon Buying Rate in New York City, as certied by the New York Federal Reserve Bank. Unless otherwise indicated, the nancial information contained in this Prospectus has been expressed in US dollars. The functional currency of the production companies of the Hochschild Mining Groups operations is the US dollar. The functional currency of the exploration companies of the Hochschild Mining Group is the local currency. On consolidation, income statements of subsidiaries for which the US dollar is not the functional currency are translated into US dollars, the presentation currency for the Hochschild Mining Group, at average rates of exchange. Balance sheet items are translated into US dollars at period end exchange rates. These translations should not be construed as representations that the relevant currency could be converted into US dollars at the rate indicated or at any other rate. Indicative exchange rates of the US dollar against the Nuevo Sol, Mexican Peso and Argentinian Peso, comprising the average rate used for income statements and the period end rate used for balance sheet information, are shown below: Nuevo Sol
Period Average rate Period end rate
Year ended 31 December 2003 ******************************************************* Year ended 31 December 2004 ******************************************************* Year ended 31 December 2005 ******************************************************* Six months ended 30 June 2005 ****************************************************** Six months ended 30 June 2006 ******************************************************
30
Mexican Peso
Period Average rate Period end rate
Year ended 31 December 2003 ******************************************************* Year ended 31 December 2004 ******************************************************* Year ended 31 December 2005 ******************************************************* Six months ended 30 June 2005 ****************************************************** Six months ended 30 June 2006 ******************************************************
Argentinian Peso
Period Average rate Period end rate
Year ended 31 December 2003 ******************************************************* Year ended 31 December 2004 ******************************************************* Year ended 31 December 2005 ******************************************************* Six months ended 30 June 2005 ****************************************************** Six months ended 30 June 2006 ******************************************************
The basis of translation of foreign currency transactions and amounts in the nancial information set out in Part IX: IFRS Historical Financial Information is described in that Part IX. Ore reserve and mineral resource reportingbasis of preparation IMC Group Consulting Ltd (IMC) has reviewed the reserves and resources statements compiled by the Company and has stated the reserves and resources as set out in Tables 2-5 and 2-6 of the Technical Report in Part XV in compliance with the Prospectus Rules and the CESR recommendations and in accordance with the criteria for internationally recognised reserve and resource categories as included in the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code). In this Prospectus, all reserve and resource estimates initially prepared by the Hochschild Mining Group have been substantiated by evidence obtained from IMCs site visits and observation and are supported by details of drilling results, analyses and other evidence and take account of all relevant information supplied by the Companys management and the Directors. Mineral resources are based on mineral occurrences quantied on the basis of geological data and an assumed cut-off grade, and are divided into measured, indicated and inferred categories reecting decreasing condence in geological and/or grade continuity. No allowances are included for dilution and losses during mining, but the reporting of resource estimates carries the implication that there are reasonable prospects for eventual economic exploitation. Resources may therefore be viewed as the estimation stage prior to the application of more stringent economic criteria for reserve denition, such as a rigorously dened cut-off grade and mine design outlines, along with allowances for dilution and losses during mining. It is common practice, for example, for companies to include in the resources category material with a reasonable expectation of being converted to reserves, but for which either the detailed mine planning work has not been undertaken or for which an improvement in economic conditions or exploitation efciencies would be required to enable the company to exploit the resources economically. An inferred resource is that part of a mineral resource for which tonnage, grade and mineral content can be estimated with a low level of condence. This categorisation is inferred from geological evidence and assumed, but not veried, geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability. Ore reserves (as dened by the JORC Code) are designated as proved and probable, and are derived from the corresponding measured and indicated resource estimates by including allowances for dilution and losses during mining. It is an explicitly stated further requirement that other modifying economic, mining, metallurgical, marketing, legal, environmental, social and governmental factors also be taken into account. The measured and indicated mineral resources can be reported as either being inclusive of those mineral resources modied to produce the ore reserves or additional to the ore reserves. In this Prospectus, 31
measured and indicated resources are stated inclusive of reserves but with no allowance for ore loss or dilution. Inferred resources are stated on an exclusive basis. Included in this Prospectus are various statements relating to mineralised potential at the Companys exploration targets. IMC has reviewed the information supporting these statements compiled by the Company and has stated the mineralised potential as set out in section 6 of the Technical Report in Part XV in compliance with section 18 of the JORC Code. The disclosure of mineralised potential follows specic guidance in section 18 of the JORC Code; specically, that the mineralised potential should be expressed as a range of quantity and grade, with an explanation of the basis of the statement. The summary statement of potential for each target is expressed explicitly on the basis that (i) the potential range of quantity and grade is conceptual in nature, there has been insufcient exploration to dene a mineral resource on the target and it is uncertain if further exploration will result in the discovery of a mineral resource on the target; and (ii) the mineralised potential constitutes a possible mineral deposit that is to be the target of further exploration. The geological characteristics of epithermal vein precious metal mineral deposits means that surface drilling is seldom sufcient to dene future prospects at a level greater than that of inferred resources. Resource and reserve denition is primarily dependent on mine developments planned specically to upgrade the resource and reserve base, in conjunction with an extensive programme of underground drilling. As a result the reserves are, excluding the discounts included in the reserves for losses and dilution, nearly identical to the measured and indicated resources. The reserve and resource estimates provided in this Prospectus comply with the reserve and resource denitions of the JORC Code. The relevant denitions from the 2004 edition of the JORC Code can be found in Part XVII: Glossary of Technical Terms. Information included in the main body of this Prospectus relating to reserve and resource estimates has been extracted from or derived from the Technical Report in Part XV and must be read in conjunction with this full Technical Report. Production reporting Production gures in this Prospectus which are stated in silver equivalent ounces and gold equivalent ounces have been calculated on a ratio of 60 ounces of silver : 1 ounce of gold. Cost curves This Prospectus contains references to cost curves. A cost curve is a graphic representation in which the production volume of a given commodity across the relevant industry is arranged on the basis of average unit costs of production from lowest to highest to permit comparisons of the relative cost positions of particular production sites, individual producers or groups of producers within a given country or region. Generally, a producers position on a cost curve is described in terms of the particular quartile or tercile, the rst quartile or tercile being the lowest cost and the fourth quartile or the third tercile being the highest, in which the production of a given plant or producer or group of producers appears. The cost curves referred to in this Prospectus have been obtained by the Company from independent industry analysts, CRU Strategies (in respect of silver) and GFMS Limited (in respect of gold), with recognised experience in constructing cost curves for the relevant commodities. To construct cost curves, the analyst compiles information from a variety of sources, including reports made available by producers, site visits, personal contacts, trade publications and other analysts reports. Although producers may thus participate to some extent in the process through which cost curves are constructed, they are typically unwilling to validate cost analyses directly because of commercial sensitivities. Inevitably, assumptions must be made by the analyst with respect to data that such analyst is unable to obtain and judgment must be brought to bear in the case of virtually all data, however obtained. In addition, the time required to produce cost curves means that even the most recent available examples will be unable to take account of recent 32
developments; in some cases, the most recent available cost curve may be based on data that is several years old. Costs data for specic producers may be based on costs incurred by the producers over their respective accounting years; to the extent these differ, the direct comparability of their costs may be limited. The cost curves referred to in this Prospectus reect direct cash costs of production and include non-cash and indirect costs (such as depreciation, interest and unrelated overhead expenses) and costs relating specically to marketing and export, but exclude all centralised and greeneld exploration costs. Delivery costs reect estimates for each producer to accepted selling points, based on actual sales. They include estimates for all costs involved in delivery, including freight, insurance, warehousing and nancing costs as well as sales commissions. Costs at operations producing more than one product are estimated on a pro-rata basis (weighted according to each metals share of revenue), so treating the metals on co-products. Moreover, all cost curves embody a number of signicant assumptions with respect to exchange rates and other variables. In summary, the manner in which cost curves are constructed means that they have a number of signicant inherent limitations. In certain cases, cost curves produced by more than one reputable industry analyst may exist with regard to a specic commodity. The methodologies employed and conclusions reached by such analysts may differ. Moreover, the reliability of any given cost curve may be difcult to assess, as the accuracy of the data, and the reasonableness of the assumptions on which it has been based, usually cannot be tested directly. Particular producers are, however, in a position to validate the accuracy of the presentation with respect to their own costs subject to adjustments to bring their methodology in line with the methods of the others. This can provide a useful indication of the reliability of a cost curve overall and, notwithstanding their shortcomings, independently produced cost curves are widely used in the industries in which the Hochschild Mining Group operates. The cost curves to which this Prospectus refers are the most recent cost curves that have been obtained by the Company from CRU Strategies (in respect of silver) and GFMS Limited (in respect of gold). All such cost curves are based on 2005 data. The cost curves have been prepared using cost data for the Hochschild Mining Groups and other producers operations. The Directors have satised themselves that the Hochschild Mining Groups own production costs which were used in the preparation of the cost curves are reasonably represented. See also Part VI: Selected Financial and Operating InformationTotal Cash Costs for further details as to the cash costs of production for the Hochschild Mining Group. Forward-looking statements This document includes statements that are, or may be deemed to be, forward-looking statements. These forward-looking statements can be identied by the use of forward-looking terminology, including the terms believes, estimates, plans, projects, anticipates, expects, intends, may, will, or should or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include, but are not limited to, statements regarding the Hochschild Mining Groups intentions, beliefs or current expectations concerning, amongst other things, the Hochschild Mining Groups results of operations, nancial position, liquidity, prospects, growth, strategies and the silver and gold industries. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of the Hochschild Mining Groups operations, nancial position and liquidity, and the development of the markets and the industry in which the Hochschild Mining Group operates, may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. In addition, even if the results of operations, nancial position and liquidity, and the development of the markets and the industry 33
in which the Hochschild Mining Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in regulation, currency uctuations (including the US dollar and Nuevo Sol exchange rates), the Hochschild Mining Groups ability to recover its reserves or develop new reserves, including its ability to convert its resources into reserves and its mineral potential into resources or reserves, changes in its business strategy, political and economic uncertainty and other factors discussed in the sections: Risk Factors, Part I: Information on Hochschild Mining and Part VII: Operating and Financial Review. Forward-looking statements may, and often do, differ materially from actual results. Any forwardlooking statements in this document reect the Hochschild Mining Groups current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Hochschild Mining Groups operations, results of operations, growth strategy and liquidity. Investors should specically consider the factors identied in this document which could cause actual results to differ before making an investment decision. Subject to the requirements of the Prospectus Rules, the Disclosure Rules and the Listing Rules, the Hochschild Mining Group undertakes no obligation publicly to release the result of any revisions to any forward-looking statements in this document that may occur due to any change in the Companys expectations or to reect events or circumstances after the date of this document.
US Considerations
Available information The Company has agreed that, for so long as any of the Ordinary Shares are restricted securities within the meaning of Rule 144(a)(3) under the Securities Act, the Company will, during any period in which it is neither subject to Section 13 or 15(d) of the US Securities Exchange Act of 1934, as amended (the Exchange Act), nor exempt from reporting under the Exchange Act pursuant to Rule 12g3-2(b) thereunder, make available to any holder or benecial owner of such restricted securities or to any prospective purchaser of such restricted securities designated by such holder or benecial owner, upon the request of such holder, benecial owner or prospective purchaser, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Enforceability of US judgments The Company is a holding company organised as a public company incorporated under the laws of England and Wales with business operations conducted through various subsidiaries. The majority of the Companys directors and all of its ofcers reside outside the United States. In addition, substantially all of the Companys assets and the majority of the assets of its directors and ofcers are located outside of the United States. As a result, it may not be possible for US investors to effect service of process within the United States upon the Company or its directors and ofcers located outside the United States or to enforce in the US courts or outside the United States judgments obtained against them in US courts or in courts outside the United States including judgments predicated upon the civil liability provisions of the US federal securities laws or the securities laws of any state or territory within the United States. There is also doubt as to the enforceability in England and Wales, whether by original actions or by seeking to enforce judgments of US courts, of claims based on the federal securities laws of the United States. In addition, punitive damages in actions brought in the United States or elsewhere may be unenforceable in England and Wales.
34
Overview
The Hochschild Mining Group is a leading precious metals company with a primary focus on the exploration, mining, processing and sale of silver and gold. The Group is the fourth largest primary silver producer globally1, (having produced approximately 10.5 million ounces in 2005) and produces a signicant quantity of gold (approximately 233 thousand ounces in 2005). The Hochschild Mining Group has over forty years of experience in the exploration, evaluation and extraction of precious metal epithermal vein deposits. Currently, it has three underground, epithermal vein mines (Arcata, Ares and Selene) located in Southern Peru which are supported by fully developed infrastructure. The Group also has two advanced development projects, San Jose (Argentina) and Pallancata (Peru), which are both scheduled to commence production in 2007, and two early stage development projects, Mina Moris and San Felipe, both of which are located in Mexico. Mina Moris is scheduled to commence production in 2007, whilst at San Felipe, the Group is currently engaged in verication drilling on the site. In addition to its development projects, the Group has over twenty long-term prospects throughout Latin America which are at various stages of development, the most advanced of which are San Luis del Cordero (Mexico), Sierra de las Minas (Argentina) and San Martn (Peru). A number of these projects and prospects are structured as joint ventures or option arrangements with local or overseas mining partners, whilst others are owned and operated exclusively by the Group. The Directors believe the Groups mines, projects and prospects provide substantial potential for growth. The Group has a high-grade reserve base and a proven track record of consistent reserves replacement, sustaining the reserve and resource base at each of its current operating mines in step with productionin the case of Arcata, over many years and, in the case of Ares and Selene, since production commenced in 1998 and 2003 respectively.
PRA1 6.1.1 PRA1 6.5
35
Operating Mines Arcata (Peru) ************************* Ares (Peru) *************************** Selene (Peru) ************************* Advanced Development Projects San Jose (Argentina) ****************** Pallancata (Peru) ********************* Early Stage Development Projects Mina Moris (Mexico) ****************** San Felipe (Mexico)(3) ***************** Total********************************* Notes:
462 1.26 327 12.24 377 2.56 418 263 7.90 1.09
561 1.55 291 13.78 398 1.96 473 289 3.96 9.32 1.20 1.31
(1) Measured and indicated resources are stated inclusive of reserves but with no allowance for ore loss or dilution (2) Inferred resources are stated exclusive of reserves and measured and indicated resources (3) Resources also contain a combined metal content of 6.5% zinc, 2.7% lead and 0.4% copper
As set out below, the Hochschild Mining Group has a track record of sustained protability underpinned by low cash costs of production (in 2005, the Groups cash costs of production on a co-product basis were US$2.65/oz for silver and US$169/oz for gold, placing the Hochschild Mining Group within the rst quartile of the cost curve for silver, according to CRU strategies and for gold, according to GFMS Limited. In 2005, the Hochschild Mining Group generated EBITDA of US$70.8 million1 against revenues of US$151.3 million, a margin of 46.8 per cent. The table below sets out the Hochschild Mining Groups production output, revenues and EBITDA, for the nancial periods ended 31 December 2003, 2004 and 2005 and the six months ended 30 June 2005 and 30 June 2006, which have been extracted without material adjustment from the Technical Report in Part XV and from Part IX: IFRS Historical Financial Information respectively, except for EBITDA which has been calculated as set forth in Part VI: Selected Financial and Operating Information.
6 months ended 30 June 2006
Silver production (Koz)***************************************************** 7,504 Gold production (Koz) ***************************************************** 211 Total silver equivalent (Koz) ************************************************ 20,217 Revenue (US$000) ********************************************************* 93,771 EBITDA (US$000) ********************************************************** 46,518
36
Key strengths
The Directors believe that the key strengths of the Hochschild Mining Groups business are: ) One of the leading precious metals producers globally The Hochschild Mining Group is a leading precious metals producer and the fourth largest primary silver producer globally1, producing approximately 10.5 million ounces of silver in 2005. The Group is also a signicant producer of gold, producing approximately 233 thousand ounces in 2005. The Hochschild Mining Group is embarking upon an important growth phase in its business, with plans to further increase production to approximately 50 million silver equivalent ounces (or 830,000 gold equivalent ounces annually) from both its existing mines and its development projects and to double the number of its producing mines, in each case by 2011, with over fty per cent. of production derived from the Groups operations outside Peru. The Group has a policy of limited hedging of its production and, therefore, has signicant leverage and exposure to the market prices of silver and gold. ) Low cash costs and strong returns on invested capital According to CRU Strategies (in respect of silver) and GFMS Limited (in respect of gold), the Hochschild Mining Group is positioned in the rst quartile of the global cash cost curve (US$2.65 per ounce of silver and US$169 per ounce of gold on a co-product basis in the nancial year ended 31 December 2005). The Group has a sustained track record of low cash costs and high cash ows resulting from its strategy of acquiring and exploiting high-grade ore reserves and the efciency of its operations. The Groups operational performance and productivity are driven by its
1 Source: CRU Strategies. PRA1 6.5
37
39
The Groups current operations and most advanced projects and prospects are located in three countries in Latin America: Peru, Mexico and Argentina. The Hochschild Mining Group has focused on these three key jurisdictions for the following main reasons: ) Peru: the Groups connections with Peru stretch back to the 1920s when the Hochschild Group commenced commercialisation of minerals in Peru. In addition, the Directors believe that Peru benets from further mining potential and, as an established mining country, has the benet of local mining expertise, as well as an attractive legal and regulatory framework for mining companies. ) Mexico: the Directors believe that Mexico similarly benets from further mining potential and, as an established mining country, has the benet of local mining expertise and an attractive legal and regulatory framework for mining companies. ) Argentina: the Directors believe that Argentina has further geological potential, a developing mining industry and an attractive legal and regulatory framework for mining companies. Further information on the legal and regulatory framework for mining companies in Peru, Mexico and Argentina is set out in Part IV: Information on Peru, Mexico and Argentina. For risks associated with operating in Peru, Mexico and Argentina, see Risk FactorsRisks relating to operating in Peru, Mexico and Argentina. 41
43
ARCATA (Peru) 1990 ****************** 1991 ****************** 1992 ****************** 1993 ****************** 1994 ****************** 1995 ****************** 1996 ****************** 1997 ****************** 1998 ****************** 1999 ****************** 2000 ****************** 2001 ****************** 2002 ****************** 2003 ****************** 2004 ****************** 2005 ****************** 2006 (to 30 June) ****** ARES (Peru) 1998 ****************** 1999 ****************** 2000 ****************** 2001 ****************** 2002 ****************** 2003 ****************** 2004 ****************** 2005 ****************** 2006 (to 30 June) ****** SELENE (Peru) 2003 ****************** 2004 ****************** 2005 ****************** 2006 (to 30 June) ******
1,503,780 1,252,030 1,159,150 1,211,600 1,312,210 1,477,500 1,340,830 1,028,190 817,030 546,000 681,550 447,851 539,474 315,166 440,402 768,716 929,999 1,098,042 655,743 838,290 831,333 960,765 1,031,540 761,619 828,399 834,820 722,633 903,837 829,681 799,331
576 563 569 522 541 552 560 553 567 423 429 398 531 715 492 545 462 207 214 264 324 302 318 301 307 327 384 398 408 377
27,865 22,649 21,212 20,331 22,819 26,211 24,148 18,281 14,903 7,431 9,405 5,732 9,218 7,245 6,968 13,482 13,796 7,308 4,512 7,115 8,660 9,340 10,548 7,363 8,182 8,777 8,926 11,566 10,877 9,689
1.50 1.85 1.87 1.64 1.81 1.88 2.00 2.10 2.14 1.26 1.30 1.35 1.45 1.432 1.21 1.54 1.26 24.19 23.21 24.47 22.71 21.52 22.32 19.92 14.43 12.24 4.35 3.53 3.07 2.56
72.52 74.47 69.69 63.88 76.36 89.31 86.22 69.42 56.21 22.12 28.49 19.44 25.21 14.43 17.11 37.96 37.77 853.98 489.33 659.51 606.99 664.62 740.26 487.81 384.20 328.52 101.03 102.72 81.92 65.79
310,709 262,415 260,020 259,036 326,304 356,734 357,212 373,984 375,448 380,468 371,098 358,859 236,292 236,108 290,603 282,199 135,526 129,216 240,866 272,668 282,176 271,489 276,653 272,986 281,095 141,529 44,061 253,605 288,919 178,044
564 617 638 581 622 646 676 687 679 671 518 488 432 506 615 539 542 228 355 310 261 287 336 346 352 332 348 385 399 379
5,637 5,209 5,331 4,836 6,522 7,406 7,760 8,257 8,190 8,212 6,179 5,627 3,280 3,841 5,746 4,890 2,362 947 2,751 2,716 2,369 2,506 2,989 3,037 3,181 1,511 493 3,137 3,707 2,169
2.03 2.36 2.34 1.99 2.35 2.86 2.70 2.68 2.85 3.21 2.57 2.54 2.26 1.29 1.14 1.19 1.35 22.99 26.21 24.60 20.69 22.70 21.78 22.98 22.80 19.01 3.78 3.78 3.43 2.93
20.28 19.91 19.56 16.57 24.65 32.80 31.01 32.22 34.40 39.27 30.66 29.31 17.17 9.79 10.65 10.80 5.88 95.51 202.97 215.66 187.70 198.14 193.72 201.69 206.05 86.50 5.35 30.82 31.86 16.77
4.8 4.8 4.5 4.7 4.0 4.1 3.8 2.7 2.2 1.4 1.8 1.2 2.3 1.3 1.5 2.7 3.4 8.5 2.7 3.1 2.9 3.6 3.8 2.6 2.9 2.9 14.8 3.3 2.6 2.1
Table 2 below sets out the Hochschild Mining Groups silver and gold reserves and resources as at 30 June 2006 at each of its operating units and development projects. The reserves and resources gures have, in each case, been extracted without material adjustment from the Technical Report in Part XV: Table 2
Reserves Operating Unit/ Development Project(1) Proved and probable (in tonnes) Silver grade (g/t) Gold grade (g/t) Measured and indicated (in tonnes)(1) Silver grade (g/t) Resources Gold grade (g/t) Inferred (in tonnes)(2) Silver grade (g/t) Gold grade (g/t)
Arcata (Peru) **************** Ares (Peru) ****************** Selene (Peru) **************** San Jose (Argentina) ********* Pallancata (Peru) ************ Mina Moris (Mexico) ********* San Felipe (Mexico)(3) ********
Total************************ 3,849,114
44
Mineral potential The historical success and continuing capacity of the Group to maintain and expand the reserves and resources base to assure continuing levels of production is dependent on the Groups commitment to wide-ranging research, investigation and exploration of potential mineral prospects. The Group has an extensive portfolio of exploration targets at different stages of evaluation. The Group maintains an internal assessment of mineral potential within its exploration targets as the basis for planning exploration priorities and long term development options. The table below sets out details of the Groups mineral potential at each of its operating units and at certain of its projects and prospects. Further information on the Groups mineral potential is set out below in this Part I. It should be noted that the ranges quoted are conceptual in nature, there has been insufcient exploration to dene a mineralised resource and it is uncertain whether further exploration would result in the determination of a mineral resource. A detailed explanation of the basis for the ranges is set out in Section 6 of Part XV: Technical ReportFurther Disclosure on Mineral Potential, and that section must be read in conjunction with these ranges:
Operating Unit/Project/Prospect Quantity(1) (millions of tonnes) Grade(1) (g/t)
Arcata (Peru) ***************** Ares (Peru) ******************* Selene (Peru) ***************** San Jose (Argentina) ********** Pallancata (Peru) ************** Mina Moris (Mexico) ********** San Felipe (Mexico) *********** Sierra de las Minas (Argentina) Note:
2.2 - 4.7 1.5 - 2.3 3.2 - 5.5 3.3 - 7.1 3.0 - 7.0 14.5 - 28.9 5.7 - 10.9 0.6 - 1.0
350 - 700 silver and 0.6 - 3.6 gold 150 - 300 silver and 2.0 - 6.5 gold 200 - 400 silver and 0.4 - 0.5 gold 150 - 450 silver and 3.7 - 8.8 gold 250 - 300 silver and 1.0 - 2.0 gold 25 - 50 silver and 1.4 - 2.5 gold 40 - 70 silver and 5 - 8% zinc, 2 - 4% lead and 0.1 - 0.4% copper 8.0 - 15.0 gold
(1) The total mineralised potential by operating unit/project/prospect is calculated on the basis of weighted averages for the low and high ranges of quantity and grades for individual prospects.
Arcata Overview of operations and history The Arcata unit is located in the district of Cayarani, department of Arequipa, on an approximately 47,000 hectare site approximately 800 kilometres from Lima at an altitude of approximately 4,600 metres above sea level. The nearest town is Arcata Viejo, located approximately 15 minutes from the Arcata unit by road. The property is accessed by road from Arequipa, approximately 300 kilometres away, travel time from which is approximately ve to six hours. The seaport of Matarani is approximately 700 kilometres away. There is also a landing strip for small aircraft located at Orcopampa, approximately 25 kilometres from the Arcata unit. The unit consists primarily of an underground mine and concentrator and produces silver concentrate with gold content. The Group began developing and preparing the Arcata mine in 1961 and the rst concentrate was produced in 1964. As at 30 June 2006, a total of 1041 individuals were employed at the Arcata unit, consisting of 254 Hochschild Mining Group employees and 787 contracted personnel. Two 10.5 hour shifts are worked on site each day at Arcata, with the unit conducting operations 365 days a year. 45
Ore production (in tonnes) ******************************************* 236,108 Concentrate produced (in tonnes) ************************************ 8,999 Silver grade in concentrate (kg/t) ************************************* 11.94 Silver produced (Koz) ************************************************ 3,453 Gold produced (Koz)************************************************* 7.15
Ares Overview of operations and history The Ares site is located in the district of Orcopampa, department of Arequipa, approximately 800 kilometres from Lima, on a site covering an area of approximately 22,700 hectares at an altitude of approximately 4,900 metres above sea level. The nearest town is Tolconi, located approximately 20 minutes from the Ares unit by road. The property is accessed by way of a 275 kilometre road from Arequipa, travel time from which is approximately ve hours. The unit consists primarily of an underground mine and a processing plant where a Merrill-Crowe leaching process using a standard cyanidation technique is applied to produce dore. The Ares site was discovered by the Hochschild Mining Group in 1988 with underground exploration commencing in 1993. The mine was commissioned into production in 1998. As at 30 June 2006, a total of 811 individuals were employed at the Ares unit, consisting of 253 Hochschild Mining Group employees and 558 contracted personnel. Two 10.5 hour shifts are worked on site each day at Ares, with the unit conducting operations 365 days a year. Geology and reserves The Ares mine is conformed by vein systems where the epithermal vein deposits represent gold and silver mineralisation of intermediate and low sulphidation type. The mineralisation is signicantly different from Arcata and Selene, containing a higher abundance of gold, although there are silver-rich veins in the Ares vein system which share some of the features of the epithermal veins located at Arcata and Selene. The Hochschild Mining Group has succeeded in maintaining stable reserves at Ares since production commenced. 47
48
Ore production (t) ***************************************************** 276,653 Dore total (Koz) ******************************************************* 2,793 Silver produced (Koz) ************************************************** 2,600 Gold produced (Koz) ************************************************** 184.74
Selene Overview of operations and history The Selene unit is located in the district of Cotaruse, department of Apurmac, approximately 650 kilometres from Lima in southern Peru and approximately 180 kilometres from the Ares unit, at an altitude of approximately 4,600 metres above sea level covering an area of approximately 19,500 hectares. The nearest town is Izcahuaca, located approximately 40 minutes from the Selene unit by road. The property is accessed by road from Cuzco, travel time from which is approximately ve to six hours. The unit consists primarily of an underground mine and concentrator and, like the Arcata unit, produces silver concentrate with gold content. Under the Hochschild Mining Groups ownership, development and preparation of the mine commenced in 1998, with the rst concentrate being produced in 2003. The land where the Selene unit is located is owned by two local communities to whom the Hochschild Mining Group made one-off payments in 1998 for the right to use the land for its mining operations for a period of thirty years. In addition, the mining concession rights to the land where veins currently being exploited at Selene are located were originally held by Compana Minera Kusama, S.A. (a Peruvian private company) which assigned its rights to the mining concessions to the Hochschild Mining Group in return for a one-off payment of US$160,000 and a monthly payment equal to two per cent. of the net sales of concentrate produced at Selene. Since production at Selene commenced in 2003, the Hochschild Mining Group has made payments totalling approximately US$2.1 million to Compana Minera Kusama, S.A. As at 30 June 2006, a total of 618 individuals were employed at the Selene unit, consisting of 170 Hochschild Mining Group employees and 448 contracted personnel. Two 10.5 hour shifts are worked on site each day, with the unit conducting operations 365 days a year. Geology The Selene mine is conformed by two vein systems where the mineralisation represents a low sulphidation, precious metal epithermal system. Mineral potential The Hochschild Mining Group has a number of exploration targets within the Selene mining concession. Set out below are ranges for the potential quantity and grade of the relevant targets. It should be noted that the ranges quoted are conceptual in nature, there has been insufcient exploration to dene a mineralised resource and it is uncertain whether further exploration would result in the determination of a mineral resource. A detailed explanation of the basis for the ranges is set out in Section 6 of Part XV: Technical Report and that section must be read in conjunction with these ranges: Explorador/Sophia Vein System: the Group considers there to be mineralised potential of 1,200,000 to 1,500,000 tonnes at a grade of 200 to 400 grams per tonne of silver and 1.0 to 2.0 grams per tonne of gold. 49
Ore production (in tonnes) ********************************************** 44,061 Concentrate produced (in tonnes) *************************************** 488 Silver grade in concentrate (kg/t) **************************************** 27.47 Silver produced (Koz) *************************************************** 417 Gold produced (Koz)**************************************************** 4.32 Note: (1) Selene commenced production in November 2003
From October 2006, the silver-gold concentrate produced by the Selene concentrator has been transported by unsurfaced road over a distance of 175 kilometres to the processing plant at the Ares unit for processing into dore and then for rening by Johnson Matthey. Previously, the Selene concentrate was sold directly to Penoles in Mexico. Further details of the arrangements between the Hochschild Mining Group and Johnson Matthey and Penoles are set out in Part I: Information on Hochschild MiningSales, markets and customers. 50
641,697 Notes:
597,007
253,059
(1) Measured and indicated resources are stated inclusive of reserves but with no allowance for ore loss or dilution (2) Inferred resources are stated exclusive of reserves and measured and indicated resources
Mineral potential The Hochschild Mining Group has a number of exploration targets within the San Jose property. Set out below are ranges for the potential quantity and grade of the relevant targets. It should be noted that the ranges quoted are conceptual in nature, there has been insufcient exploration to dene a mineralised resource and it is uncertain whether further exploration would result in the determination of a mineral resource. A detailed explanation of the basis for the ranges is set out below in Section 6 of Part XV: Technical Report and that section must be read in conjunction with these ranges: Kospi Vein Extension: the Group considers there to be mineralised potential of 1,100,000 to 1,400,000 tonnes at a grade of 200 to 400 grams per tonne of silver and 3.0 to 8.0 grams per tonne of gold. Frea Vein Extension: the Group considers there to be mineralised potential of 1,000,000 to 2,000,000 tonnes at a grade of 120 to 400 grams per tonne of silver and 4.0 to 9.0 grams per tonne of gold. Odin Vein System: the Group considers there to be mineralised potential of 700,000 to 1,700,000 tonnes at a grade of 150 to 500 grams per tonne of silver and 4.0 to 9.0 grams per tonne of gold. Ayelen Vein: the Group considers there to be mineralised potential of 500,000 to 2,000,000 with 150 to 500 grams per tonne of silver and 4.0 to 9.0 grams per tonne of gold. Investment costs The total estimated capital costs to design and build the facilities at San Jose are US$77.1 million, of which US$6.6 million is reserved for contingencies. As at 30 June 2006, US$11 million had been spent and US$6.8 million was committed. This estimate covers the direct eld costs of executing the San Jose project, plus the indirect costs associated with design, procurement and construction efforts, including contingency and working capital. The investment costs will be paid by MSC, 51 per cent. of which will be funded by the Hochschild Mining Group. 52
PRA1 5.2.2 PRA1 5.2.3
PRA1 6.1.2
643,267 Note:
614,418
981,673
(1) Measured and indicated resources are stated inclusive of reserves but with no allowance for ore loss or dilution (2) Inferred resources are stated exclusive of reserves and measured and indicated resources
53
3,354,439 Notes:
4,563
(1) Measured and indicated resources are stated inclusive of reserves but with no allowance for ore loss or dilution (2) Inferred resources are stated exclusive of reserves and measured and indicated resources
The Hochschild Mining Group has a number of exploration targets within the Mina Moris project. Set out below are ranges for the potential quantity and grade of the relevant targets. It should be noted that the ranges quoted are conceptual in nature, there has been insufcient exploration to dene a mineralised resource and it is uncertain whether further exploration would result in the determination of a mineral resource. A detailed explanation of the basis for the ranges is set out in Section 6 of Part XV: Technical Report and that section must be read in conjunction with these ranges: Tecolote Vein System (underground): the Group considers there to be mineralised potential of 2,000,000 to 4,000,000 tonnes at a grade of 6.0 to 15.0 grams per tonne of silver and 1.0 to 2.0 grams per tonne of gold. 55
Prospects
In addition to its development projects, the Group has over twenty long-term prospects, the most advanced of which are: San Luis del Cordero (Mexico) Mining concessions over the San Luis del Cordero property are currently held by Exploraciones del Altiplano S.A. de C.V., a privately owned mining company based in Colonia Roma, Mexico, covering a potentially mineralised area of approximately 2,800 hectares. The Group entered into an agreement on 12 May 2006 with Exploraciones del Altiplano to undertake exploration with an option to acquire all of its rights and ownership over the San Luis del Cordero property. In consideration for the option, the Group must invest US$2.7 million over four years in order to maintain the enforceability of the contract. Under the terms of the agreement with Exploraciones del Altiplano, the Group also has the right to call for the assignment to it of Exploraciones del Altiplanos rights under its mining concessions in return for payments totalling US$500,000, together with a royalty payment equal to 3 per cent. of net smelter return (which is net revenue including all rebates and subsidies paid for the smelting service or renery after deducting all costs and expenses paid or incurred in relation to the products). For further information on the agreement with Exploraciones del Altiplano, see Part XIV: Additional Information. Sierra de las Minas (Argentina) The property at Sierra de las Minas comprises approximately 65,500 hectares and includes approximately 58,600 hectares of exploration claims wholly owned by the Group, approximately 6,800 hectares of exploration and discovery claims in joint venture with Golden Peaks Resources Limited and 54 hectares of mine claims owned by a local property owner with which the Group has entered into an agreement to purchase such mine claims. For further information on the joint venture arrangements with Golden Peaks, see Part XIV: Additional Information. The Hochschild Mining Group has a number of exploration targets within the Sierra de las Minas property. The Group is currently undertaking a mapping, sampling and diamond drilling programme on the property to determine the viability of delineating ore reserves. Set out below are ranges for the potential quantity and grade of the relevant targets. It should be noted that the ranges quoted are conceptual in nature, there has been insufcient exploration to dene a mineralised resource and it is uncertain whether further exploration would result in the determination of a mineral resource. A detailed explanation of the basis for the ranges is set out in Section 6 of Part XV: Technical Report and that section must be read in conjunction with these ranges: The Group considers there to be mineralised potential of 600,000 to 1,000,000 tonnes at a grade of 8.0 to 15.0 grams per tonne of gold. 57
58
59
62
Other programmes
In addition to its programmes of engagement with local communities, in 1984 the Group founded TECSUP, a non-prot, technical university which has provided young people with the opportunity to study practical degree courses linked to the needs of industry. The university has two campuses, one in Lima and the other in Arequipa. Considerable resources have been invested by the Hochschild Mining Group in the development of this university which currently has a total of approximately 1,600 students attending regular degree programmes and 18,000 participants taking part in short training courses annually. Since being founded in 1984, TECSUP has awarded approximately 4,200 degrees, with approximately 94 per cent. of its graduates on average entering employment after graduating. In addition to its degree programme, TECSUP has provided training to more than 113,000 engineers and specialised workers through its short training courses.
Employee relations
Except in respect of Argentina, where employees of Minera Santa Cruz, S.A. are voluntarily afliated to the Asociacion Obrera Minera Argentina (the Argentine Mineworkers Union), the Group workforce is not represented by a works council and no unions have yet been formed, either in respect of the employees or the contracted personnel. The Group maintains good relations with its workforce and, for almost twenty years, has not experienced any interruptions in production at any of its operating sites as a result of workplace disputes.
Dividend policy
The Directors intend to adopt a dividend policy which will take into account the protability of the business and underlying growth in earnings of the Group, as well as its capital requirements and cash ows, while maintaining an appropriate level of dividend cover. Following Admission, in the absence of unforeseen circumstances and assuming the Groups performance continues in line with the Boards expectations, subject to there being available reserves for the purpose, the Directors intend to declare a dividend of one third of prots after tax for the nancial year ending 31 December 2006 in respect of the period from Admission until 31 December 2006. Thereafter, the Directors intend that interim and nal dividends will be paid in the approximate proportions of one-third and two-thirds of the total annual dividend, respectively. Dividends will be declared by the Company 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 being converted into pound sterling at exchange rates prevailing at the time of payment. The Company may only pay dividends if distributable reserves are available for this purpose. The Board is intending to implement the Capital Reduction shortly after Admission. If this were not to proceed, as a holding company, the ability of the Company to pay dividends will principally depend upon dividends or interest paid by its subsidiaries. See also Risk Factors.
PRA1 20.7
64
65
Eduardo Hochschild ************************** Roberto Danino ***************************** Alberto Beeck ******************************* Sir Malcolm Field **************************** Jorge Born Jr. ******************************* Nigel Moore********************************* Dionisio Romero *****************************
42 55 50 69 44 62 70
Executive Chairman Deputy Chairman and Executive Director Executive Director, Strategy and Corporate Development Senior Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director
Eduardo Hochschild, aged 42 (Executive Chairman) Mr. Hochschild joined the Hochschild Mining Group in 1987 when he was appointed Safety Assistant at the Arcata unit, becoming head of the Hochschild Mining Group in 1998 and Chairman in 2006. Mr. Hochschild graduated from Tufts University, Boston with a Bachelor of Science degree in physics and mechanical engineering. He holds numerous board appointments, including directorships with COMEX Peru, the Banco de Credito del Peru, the Sociedad Nacional de Minera y Petroleo, the Asian Pacic Economic Council Business Advisory Committee, the Conferencia Episcopal Peruana, Pacco Peruano Suiza, TECSUP, the Universidad Nacional de Ingeniera and the Universidad de Ciencias Aplicadas. Mr. Hochschild is also currently Vice Chairman of Cementos Pacasmayo. Roberto Danino, aged 55 (Deputy Chairman and Executive Director) Mr. Danino joined the Hochschild Mining Group in 1995, where he remained until 2001 when he joined the Peruvian government. From 2003 to 2006, Mr. Danino was Senior Vice President and General Counsel of the World Bank Group and Secretary General of the International Centre for Settlement of Investment Disputes (ICSID). From 2001 to 2003, he served in the Peruvian government, rst as Prime Minister and then as Perus Ambassador to the United States. Prior to joining the Peruvian government, Mr. Danino had participated as an attorney in numerous investment projects throughout Latin America. From 1993 to 2001, he was a partner in Washington D.C. of two international law rms, rstly of Rogers & Wells (from 1993 to 1996) and subsequently of Wilmer, Cutler & Pickering (from 1996 to 2001), and was Chairman of these rms respective Latin American Practice Groups. He was also founding General Counsel of the Inter American Investment Corporation in Washington D.C. Mr. Danino was educated at Harvard Law from which he obtained degrees in law. School and the Ponticia Universidad Catolica del Peru, Alberto Beeck, aged 50 (Executive Director, Strategy and Corporate Development) Mr. Beeck commenced working with the Hochschild Mining Group in 1998. Prior to this, Mr. Beeck served from 1992 to 1997 as Managing Director and Head of Latin American Investment Banking for Barings, Inc. in New York and Baring Brothers, in London. From 1988 to 1992, Mr. Beeck served in the London Corporate Finance Group of Dillon, Read Ltd, as Vice President with responsibility for Spain and Portugal. Mr. Beeck also served as Vice President of Lehman Brothers, New York, from 1982 to 1988 in the International Corporate Finance and government advisory group. Mr. Beeck received a BS in mechanical engineering from Purdue University in 1978, and an MBA in nance and international business from Columbia University in 1982. Mr. Beeck is also currently Chairman of Cementos Pacasmayo. 66
67
PRA1 14.1(d)
Miguel Aramburu**************************** Jorge Benavides ***************************** Ignacio Rosado ****************************** Eduardo Loret de Mola*********************** Ricardo Arrarte ****************************** Gonzalo Freyre ******************************
43 52 36 51 40 40
General Manager, Mining Division General Manager, Exploration and Geology Division Chief Financial Ofcer Manager, International Operations Manager, Peruvian Operations Manager, Argentinian Operations
Miguel Aramburu, aged 43 (General Manager, Mining Division) Mr. Aramburu joined the Hochschild Mining Group in 1995, when he was appointed CEO of Compana Minera Pativilca. He was appointed Chief Financial Ofcer of the Hochschild Mining Group in 2002 and General Manager, Mining Division in 2006. Mr. Aramburu graduated from the Ponticia Universidad Catolica del Peru in 1987 in industrial engineering and holds a MBA from Stanford University, California. Jorge Benavides, aged 52 (General Manager, Exploration and Geology Division) Mr. Benavides has nearly thirty years of experience in the mining industry. He was exploration and geology manager for the Hochschild Mining Group from 2001 until December 2005 and, since then, has been General Manager, Exploration and Geology Division. Prior to joining the Hochschild Mining Group, Mr. Benavides spent eight years working for the Phelps Dodge Mining Company in South America and Mexico, including as Exploration Manager for the Andean Region from 1998 to 2001. Mr. Benavides holds an MSc. in Ore Deposits and Exploration from Stanford University, California and a BSc. in Geological Engineering from the Colorado School of Mines, Colorado. Ignacio Rosado, aged 36 (Chief Financial Ofcer) Mr. Rosado has been the Chief Financial Ofcer of the Hochschild Mining Group since 2005. Prior to joining the Hochschild Mining Group, he worked from 2000 to 2005 as Senior Engagement Manager for Latin America for McKinsey & Company. Mr. Rosado began his career with Banco Wiese Sudameris in Peru, where he spent two years as a corporate banker from 1992 to 1994. He then joined Banco de Credito del Peru as a Project Manager and spent two years as a Project Development Manager for Backus & Johnston Corporation in Peru. Mr. Rosado holds a MBA from the University of Michigan Business School and a BSc. in Economics from the Universidad del Pacco, Lima. Eduardo Loret de Mola, aged 51 (Manager, International Operations) Mr. Loret de Mola has twenty-ve years of experience in the mining sector. He has been Head of Operations of the Hochschild Mining Group since 2004. Prior to joining the Hochschild Mining Group, Mr. Loret de Mola spent three years as an independent consultant at Nueva Condor S.A., Lima and three years as Operations Manager at Minas de Venturosa S.A., Lima. From 1983 to 1996 Mr. Loret de Mola was Managing Director at Compana Minera Acobamba S.A., Lima. Mr. Loret de Mola holds a Masters in Mining Economy and a BSc. in Mining Engineering from the University of Minnesota. Ricardo Arrarte, aged 40 (Manager, Peruvian Operations) Mr. Arrarte has over ten years of experience in the mining industry. He joined the Hochschild Mining Group in 2004 as Deputy Operations Manager. Prior to joining the Hochschild Mining Group, Mr. Arrarte worked as general manager of Compana Minera Caudalosa between 1996 68
(j)
The Directors believe that the terms of the Relationship Agreement as described above will enable the Group to carry on its business independently of the Major Shareholder and the Benecial 72
PRA1 17.1
5 Executive Long Term Incentive Plan The Company has not yet adopted an executive long term incentive plan. It is intended, however, that the Company will, following Admission, seek advice on the form of long term incentive plan that is most suitable for the Company with a view to adopting a plan or plans, subject to shareholder approval (if required). Details of the statutory prot sharing arrangements which the Group has in place with its employees in Peru are set out in Part VII: Operating and Financial Review. 6 Pension Schemes The Hochschild Mining Group does not currently operate any pension schemes for the employees of the Group for its employees and has no present intention of introducing such schemes. Details of the Groups statutory contributions to pension accounts for its employees in Peru, Mexico and Argentina are set out in Part VII: Operating and Financial Review.
PRA1 17.3
73
(A) PERU
1. Introduction Peru, the third largest country in South America, borders Ecuador and Colombia to the North, Brazil and Bolivia to the East, and Chile to the South. Its western border anks the Pacic Ocean. The country spans approximately 1.28 million square kilometres and is divided into three distinct regions: the Andes mountain region, the western lowland coastal region and the rain forest region. The western lowland coastal region is the most populated and prosperous of the three regions and contains the countrys political and nancial capital, Lima. Peru has a population of approximately 28 million people. With an estimated population of almost nine million people, Lima is signicantly larger than Perus next largest city, Arequipa, which has an estimated population of less than one million. Perus population is composed of several ethnic groups: 45 per cent. indigenous peoples, 37 per cent. of mixed background, 15 per cent. European, and the remaining 3 per cent. African, Japanese, or Chinese. Although Spanish is the principal national language, other indigenous languages are spoken and Quechua is ofcially recognised. As at January 2006, approximately 54 per cent. of the population of Peru were estimated to be living below the poverty line. 2. Perus Political and Economic Environment Government and Government Policy Peru is a constitutional republic where power is balanced between executive, legislative, and judicial branches. The judicial branch comprises three tiers of lower courts which culminate in a Supreme Court, and the legislative branch takes the form of a unicameral congress. The executive branch is led by a president, two vice presidents, and a prime minister who oversees a council of ministers. Ministers are appointed for specic sectors. At the local level, Peru is divided into 24 political sub-divisions known as departments. The citizens of each department elect a regional president as well as local municipal authorities. In the 2006 presidential election, Alan Garca, of the Partido Aprista Peruano, was elected President. Whilst the new governments policies are yet to be fully developed, Mr Garca has conrmed that he will not reverse the economic policies of the previous administration and has conrmed that his government wishes to encourage foreign investment. The defeated presidential candidate, Ollanta Humala, has signalled his determination to continue his opposition to the new administration and has ruled out any form of political alliance with Mr. Garcas party. Economy Peru has experienced periods of very high ination in the last few decades, the economy has now largely stabilised. Since 1990, the ofcial ination rate has fallen from a high of over 7,400 per cent. to 1.6 per cent. in 2005. In recent years, the economy has been growing strongly in real terms with average GDP growth of 4 per cent. between 2001 and 2005, leading to an average per capita 74
79
Sources: (a) US Department of State, Bureau of Western Hemisphere Affairs, June 2006: Prole on Peru (b) The World Fact Book prepared by the C.I.A., September 2006: Prole on Peru (c) British Broadcasting Corporation News articles entitled: Devil in the detail for Perus voters (30 May 2006); Garca begins fresh term in Peru (29 July 2006); Humala to lead Perus opposition (07 June 2006) (d) Bloomberg Newspaper article entitled: Perus Garca plans to Triple Foreign Investment (09 June 2006) (e) The Economist website on Peru: Factsheet (24 March 2006) (f) Americas SocietyCouncil of The Americas: Economic Outlook for Peru (June 2006) (g) Latin Business ChroniclePeru: Economic and Political Overview (14 August 2006) (h) Ofce of the US Trade Representative Press Release: United States and Peru Sign Trade Promotion Agreement (12 April 2006) (i) Peru Tax Desk Book (March 2006) (j) Central Bank of Peru StatisticsPeruvian Exchange Rate as against the US Dollar
80
Environmental Legislation The Companys development projects and prospects in Mexico are subject to Mexican federal, state and municipal environmental laws, and to regulations for the protection of the environment. The principal environmental legislation applicable to mining projects in Mexico is the federal Ley General del Equilibrio Ecologico y la Proteccion del Ambiente (the General Law of Ecological Balance and Environmental Protection), which is enforced by the Procuradura Federal de la Proteccion del Ambiente (the Federal Bureau of Environmental Protection, or the PROFEPA). The PROFEPA monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and ofcial standards. If warranted, the PROFEPA may initiate administrative proceedings against companies that violate environmental laws which, in the most extreme cases, may result in the temporary or permanent closure of non-complying facilities, the revocation of operating licences and/or other sanctions or nes. According to the Codigo Penal Federal (Federal Criminal Code), the PROFEPA must inform the relevant governmental authorities of any environmental crimes that are committed by a mining company in Mexico. Concession holders may agree to comply with the Mexican Ofcial Norm: NOM-120-ECOL-1997, which provides, amongst other things, that mining exploration activities to be carried out within specic climates and ora must be conducted in accordance with the provisions set forth in NOM-120-ECOL-1997. Otherwise concession holders are required to le a preventative report or an environmental impact study prior to the commencement of the exploration, exploitation and processing of minerals. However, if the exploration works are to be carried out in areas described in NOM-120-ECOL-1997, the environmental impact study will not be required, but an application must be led by the concession holder with the environmental authorities conrming the concession holders commitment to observe and comply with the NOM-120-ECOL-1997. Mexican environmental regulations have become increasingly stringent over the last decade, and this trend is likely to continue and may be inuenced by the environmental agreement entered into by Mexico, the United States and Canada in connection with the North American Free Trade Agreement in February 1999.
Sources: (a) Index Mundi website: Mexico population below the poverty line (b) The Washington Times Article: Court declares Calderon winner (06 September 2006) (c) British Broadcasting Corporation News article entitled: Mexico court rejects fraud claim (29 August 2006) (d) The Silver Institute: The Silver News (edition December 1998/January 1999) (e) The World Fact Book prepared by the C.I.A., September 2006: Prole on Mexico (f) US Department of State, Bureau of Western Hemisphere Affairs, December 2005: Prole on Mexico
84
Sources: (a) US Department of State, Bureau of Western Hemisphere Affairs, September 2006: Prole on Argentina (b) British Broadcasting Corporation News article entitled: Argentine President Resigns (21 December 2001) (c) British Broadcasting Corporation News Prole: Fernando De La Rua; Country Prole: Argentina (d) The World Fact Book prepared by the C.I.A., September 2006: Prole on Argentina (e) Energy Information Administration (Ofcial Energy Statistics from the US Government), January 2005: Country Analysis Brief on Argentina
89
PRA1 6.2
Sources: (a) The Silver Institute: article entitled Demand and Supply in 2005 (b) The Silver Institute: Silver News: Silver Market Shines in 2005Silver Fabrication and Investment Demand Sharply Up (24 May 2006); Silver Price in 2005 Continues to Rise (21 November 2005) (c) CRU International Limited Precious Metals Quarterly 2Q 2006 on Silver (d) 321 Gold: article entitled Whats Next for Silver? (Doug Casey, 22 August 2006) (e) World Silver Survey 2005 (f) World Silver Survey 2006: A Summary produced for The Silver Institute by GFMS Limited (g) US Department of the Interior: US Geological Survey Circular 1196-N: Silver Recycling in the United States in 2000 (Henry E Hilliard, 2003) (h) International Financial Services, LondonNewsletters: January 2005 Bullion Markets: City Business Series and July 2006 Commodities Trading: City Business Series (i) London Bullion Market Association: 2006 London Silver Fixings price data (3 January 20063 August 2006); 2005 Monthly High, Low and Average statistics; 2006 Monthly Silver Averages; Silver Forecast for 2006 (Dr P Richardson, Deutsche Bank AG, Melbourne); Good Delivery Rules for Gold and Silver Bars (April 2004); Facts about the London Bullion Market: The London Gold & Silver Fixings (j) American Metal Market: Silver recovery protable (Christopher Munford, 19 December 1990) (k) Mining MX: Silver Price Growth Hinges on Investment (Allan Seccombe, 17 August 2006)
92
Sources: (a) 321 Gold: Global WatchThe Gold Forecaster: The Indian Gold Market 2004/2005 (Julian DW Philips, 26 September 2005) (b) London Bullion Market Association 2006 London Gold Fixings price data (3 January 200623 August 2006); Monthly High, Low and Average statistics (2005); Good Delivery Rules for Gold and Silver Bars (April 2004); Facts about the London Bullion Market: The London Gold & Silver Fixings (c) World Gold Council: paper entitled Central Bank Gold ReservesA historical perspective since 1845 (Timothy Green, November 1999); Research Study No. 32 Short-run and Long-run Determinants of the Price of Gold (E J Levin & R E Wright, June 2006); articles entitled Gold and the International Monetary Systema Chronology, How to Buy Gold: Exchange Traded Gold, Investment in Gold, Current Use of Gold, Recycled Gold, Central Banks and Ofcial Institutions, Ofcial Agreements on Gold (13 April 2006); Gold Supply and Demand StatisticQ1 2006; News Release Slow-down expected in short-term forward gold sales... long-term growth to continue (12 May 1998); Press Release Record Demand for Gold in 2005 (22 February 2006); article entitled Factors Affecting Gold (N Head, 10 March 2005) (d) HM Treasury: Review of the sale of part of the UK gold reserves (October 2002) (e) AME InfoMiddle East Finance and Economy: article entitled Gold starts 2006 well, but this is not a 25-year high! (14 January 2006) (f) CRU International Limited Precious Metals Quarterly 2Q 2006 on Gold (g) Paul van Eeden: article entitled Understanding the Gold Price (h) US Department of the Interior: US Geological Survey Circular 1196-A: Gold Recycling in the United States in 1998 (Earle B Amey, 2001) (i) Bank of England: The United Kingdoms Ofcial Reserves of Foreign Currency and Gold (j) Reuters: article entitled Gold Jumps 2.4 percent on weaker dollar, rm oil (21 August 2006) (k) GFMS: Gold Survey 2006 (Philip Klapwijk, 12 April 2006) (l) Au: Annual Average Gold Price (Earle B Amey)
95
The tables below set out selected nancial and operating information of the Hochschild Mining Group as at and for the years ended 31 December 2003, 2004 and 2005 and the six months ended 30 June 2005 and 2006, in each case prepared in accordance with IFRS for the purposes of presenting the nancial information on a combined basis, in respect of certain matters explain in Section B of Part IX: IFRS Historical Information. The selected nancial and operating information of the Hochschild Mining Group as at and for the years ended 31 December 2003, 2004 and 2005 and the six months ended 30 June 2006 has been audited whilst the selected nancial and operating information of the Hochschild Mining Group as at and for the months ended 30 June 2005 is unaudited. See Part IX: IFRS Historical Financial Information. The Hochschild Mining Group has not in the past formed a separate legal group. The Company was incorporated on 11 April 2006 and acquired its shareholding in the companies constituting the Hochschild Mining Group (other than the Company) pursuant to a share exchange arrangement dated 2 November 2006. The combined historical nancial information has been prepared on a basis that combines the results and assets and liabilities of the companies comprising the Hochschild Mining Group. Internal transactions within the Hochschild Mining Group have been eliminated on combination. Other than gold and silver produced, which has been extracted without material adjustment from the Technical Report in Part XV, this information has been extracted without material adjustment from Part IX: IFRS Historical Financial Information and has been prepared on the basis described in the footnotes to the combined historical nancial information of the Hochschild Mining Group in Part IX, except for the EBITDA and cash costs information, which have each been calculated as set forth in this Part VI. Investors should read the whole of this Prospectus and not rely solely on summarised information.
PRA1 9.1
96
Income statement data: Continuing operations Revenue ************************************************ Cost of sales ******************************************** Gross prot ********************************************* Administrative expenses ********************************* Exploration expenses ************************************ Gain on sale of zinc project ****************************** Selling expenses ***************************************** Other income ******************************************* Other expenses****************************************** Prot from continuing operations before net nance costs and income tax *************************************** Finance income****************************************** Finance costs ******************************************** Foreign exchange gain/(loss) ***************************** Prot from continuing operations before income tax ****** Income tax expense************************************** Prot for the year/period from continuing operations ***** Discontinued operations (Loss)/prot for the year/period from discontinued operations ******************************************** Prot for the year/period ******************************** Attributable to: Equity shareholders of the Company********************** Minority interest **************************************** Earnings per share for prot attributable to the equity shareholders of the Company during the year (expressed in US$ per share)(1) Basic and diluted **************************************** Cash ow data: Net cash generated from operating activities ************** Net cash (used in)/generated from investing activities ****** Cash ows generated from/(used in) nancing activities**** Net (decrease)/increase in cash and cash equivalents during the year/period**************************************** Other nancial and operating data: EBITDA ************************************************* Total cash costs****************************************** Cash and cash equivalents********************************
93,771 (41,514) 52,257 (16,472) (11,822) (1,794) 5,457 (2,936) 24,690 326 (4,977) 579 20,618 (9,108) 11,510
159,052 (82,292) 76,760 (22,997) (23,063) (3,880) 7,081 (7,395) 26,506 1,296 (6,702) 299 21,399 (11,453) 9,946
151,319 (73,592) 77,727 (24,371) (28,057) 14,558 (3,161) 13,016 (2,821) 46,891 4,144 (10,105) (552) 40,378 (9,673) 30,705
65,779 (30,805) 34,974 (10,829) (18,657) 14,558 (1,338) 3,199 (1,280) 20,627 1,555 (4,463) 1,085 18,804 (5,966) 12,838
92,286 (33,705) 58,581 (15,814) (7,654) (1,366) 10,495 (4,636) 39,606 2,843 (5,121) (27) 37,301 (14,733) 22,568
Non-current assets *************************************************** Total assets ********************************************************** Borrowings (short- and long-term) ************************************ Other current liabilities ********************************************** Other non-current liabilities ****************************************** Total equity ********************************************************* Note:
(1) Based on the 230,000,000 ordinary shares expected to be outstanding immediately prior to Admission.
97
Prot from continuing operations before net nance costs and income tax ************************************************ 24,690 Plus: Depreciation ************************************************ 13,825 Increase in provision for mine closure ************************* 1,199 Exploration expenses (other than personnel and other) ******** 8,879 Non-recurring cash items included in other expenses Allowance SEAL/Electroperu ******************************** Impairment of Sipan assets held for sale ******************** Loss on sale of xed assets and assets classied as held for sale***************************************************** 28 Loss on sale of other assets********************************* Loss on sale of investments********************************* Loss on sale of MHC (subsidiary) **************************** Write off of xed assets *********************************** 184 Minus: Gain on sale of zinc project ********************************** Non-recurring cash items included in other income Income from mine concession ****************************** 2,148 Cancellation of service agreement ************************** Gain on sale of xed assets ******************************** Gain on sale of other assets ******************************** 139 Gain on sale of Corianta *********************************** Gain on spin-off of Sipan ********************************** Decrease in provision for mine closure ********************** EBITDA ***************************************************** 46,518
26,506 22,907 1,170 18,689 760 2,181 26 923 499 187 784 510 71,182
Total cash costs The Hochschild Mining Group calculates total cash costs to include cost of sales, commercial deductions and selling expenses, less depreciation included in cost of sales. Commercial deductions are the treatment charges for the processing of concentrate from Arcata and, while it was producing concentrate, Selene and penalty charges related to levels of impurities in the concentrate in excess of specied thresholds. These charges are deducted when the Hochschild Mining Group calculates the price it invoices its customer for the sale of concentrate and therefore the revenues received by the Hochschild Mining Group are shown net of these charges. See Part VII: Operating and Financial ReviewRevenues. Total cash costs and total cash costs per ounce are presented because the Company believes they provide a measure for comparing the 98
Cost of sales from continuing operations ******************* Plus: Commercial deductions ************************************ Selling expenses ******************************************* Less: Depreciation included in cost of sales *********************** Total cash costs********************************************
Total cash costs (US$000) ********************************** Silver sold (000 oz) **************************************** Total cash costs per ounce of silver (US$/oz) **************** By-product credits (US$000) ******************************** By-product credit per silver ounce (US$/oz) ****************** Total cash costs per ounce of silver after by-product credit (US$/oz) ************************************************
99
Total cash costs (US$000) ********************************** Gold sold (000 oz) ***************************************** Total cash costs per ounce of gold (US$/oz) ***************** By-product credits (US$000) ******************************** By-product credit per gold ounce (US$/oz)******************* Total cash costs per ounce of gold after by-product credit (US$/oz) ************************************************
Total cash costs (US$000) ************************************ Credit from other minerals revenues ************************** Total cash costs net of other minerals credit (US$000) ********* Silver sold (000 oz) ****************************************** Gold sold (000 oz) ******************************************* Revenues from continuing operations (excluding services and other minerals) from silver (%) ***************************** Revenues from continuing operations (excluding services and other minerals) from gold (%)****************************** Total cash costs per ounce of silver (US$/oz) ****************** Total cash costs per ounce of gold (US$/oz) *******************
100
Overview
General The Hochschild Mining Group is a leading precious metals company with a primary focus on the exploration, mining, processing and sale of silver and gold. The Group is the fourth largest primary silver producer globally and produces a signicant quantity of gold. The Hochschild Mining Group produced approximately 10.5 million ounces of silver and approximately 233 thousand ounces of gold in 2005 and approximately 5.5 million ounces of silver and approximately 103 thousand ounces of gold in the rst six months of 2006. The Hochschild Mining Group had revenues from continuing operations of US$151.3 million and EBITDA of US$70.8 million in 2005 and US$92.3 million and US$55.6 million in the rst six months of 2006. As of 30 June 2006 the Hochschild Mining Group reported total reserves of 3.9 million tonnes with an average grade of 372 g/t of silver and 4.98 g/t of gold. The Hochschild Mining Group has three operating mines (Ares, Arcata and Selene) located in Southern Peru which are supported by fully developed infrastructure. The Hochschild Mining Group also has a portfolio of projects located across Peru, Mexico and Argentina at various stages of development, several of which are expected to start production in 2007. The Hochschild Mining Group is the group of companies which previously comprised the mining division of the Hochschild Group. The Company was formed on 11 April 2006 and acquired the companies comprising the Hochschild Mining Group (other than the Company) pursuant to a share exchange agreement dated 2 November 2006. Factors affecting results of operations Commodity prices The Hochschild Mining Group generates its revenues from the sale of silver and gold. As a result, its revenues are directly related to the prices of these metals. Historically, the prices of silver and gold have uctuated widely and they are affected by numerous factors over which producers do not have control including international economic and political conditions, levels of supply and demand, the availability and costs of substitutes, inventory levels maintained by producers and others and actions of participants in the commodities markets. See Risk FactorsThe Hochschild Mining Groups nancial performance is highly dependent upon the price of silver and gold. Price variations and market cycles have historically inuenced the nancial results of the Hochschild Mining Group and the Directors expect they will continue to do so. Currently, the Hochschild Mining Group has a number of forward sales contracts in relation to the gold rened from its dore which it has entered into as part of the security package for a syndicated loan, the last of which will expire in June 2007. The Hochschild Mining Group also has a limited number of other forward sale and option arrangements in relation to the silver produced from its dore which are due to expire in December 2006. Going forward, the Hochschild Mining 101
PRA1 9.2.1, 9.2.3
1,400
1,200
1,000
800
600
400
200 Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06 Jun-06
700
600
500
400
300
200 Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06 Jun-06
Source: Datastream
On 18 October 2006, the London Bullion Market Association spot xing price of silver was US$11.76 per ounce and the London Bullion Market Association PM spot xing price of gold was US$594 per ounce. For a discussion of recent market conditions for the silver and gold market, see Part V: Market and Industry Overview. Production costs and efciency As the Hochschild Mining Group, in common with its competitors, is unable to inuence market commodity prices directly, its competitiveness and long-term protability are, to a signicant 102
2004 3.28
2004 3.40
The nominal exchange rate has varied little since 1999, despite periods of political uncertainty. A weak US dollar and record high levels of international reserves drove the strengthening of the Nuevo Sol against the US dollar in 2004 and 2005, leading the Central Bank to intervene on occasions to maintain export competitiveness. According to the Economist Intelligence Unit (the EIU), the Central Bank is expected to manage the oat of the Nuevo Sol in the 2006-2007 period, intervening when needed to smooth volatility, or to maintain the competitiveness of the exchange rate, in order to assist export performance and accumulate reserves. The EIU forecasts that upward pressure on the local currency is expected to continue in 2006-2007 in line with growth in export earnings and improved terms of trade. The EIU has forecast that the exchange rate will remain broadly stable in nominal terms at an average of approximately PEN3.27:US$1 in the 2006-2007 period. In Argentina, according to the EIU the ARS:US$ exchange rate averaged 2.90 in 2003, 2.92 in 2004, 2.90 in 2005 and 3.06 in the rst six months of 2006. The Argentine Government maintains a policy of intervening to maintain stability in the exchange rate against the US dollar. Were it not for ofcial intervention, the EIU believes that the Argentina Pesos nominal exchange rate would strengthen against the US dollar given the countrys surplus on its external accounts. The EIU has forecast that the nominal exchange rate will average ARS3.07:US$1 in 2006 and ARS3.15:US$1 in 2007. In Mexico, according to the EIU the MXN:US$ exchange rate averaged 10.8 in 2003, 11.3 in 2004, 10.9 in 2005 and 11.0 in the rst six months of 2006. Having weakened 11.3 per cent in 2003, the Mexican Peso underwent moderate further depreciation of 4.6 per cent against the US dollar in 2004 and moderate appreciation of 3.5 per cent against the US dollar in 2005. Notwithstanding high oil prices, strong inows of workers remittances and direct investment, and the prenancing of public external obligations falling due during 2006, which are expected to continue to support the Mexican Peso, the EIU expects the Mexican Peso to depreciate gradually in 2006 and 2007, as some of the factors supporting it, such as strong portfolio ows and high oil prices, may begin to reverse. By the end of 2007 the EIU forecasts an exchange rate of MXN11.43:US$1. Timing of sales The Hochschild Mining Group generally makes sales of its silver and gold concentrate production four or ve times per year and recognises revenue at the time of sale. See Combined Income 105
110
Continuing operations Revenues ************************************************************* 100 Cost of sales ********************************************************** (44.3) Gross prot *********************************************************** Administrative expenses *********************************************** Exploration expenses ************************************************** Gain on sale of zinc project ******************************************** Selling expenses ******************************************************* Other income ********************************************************* Other expenses******************************************************** Prot from continuing operations before net nance costs and income tax ***************************************************************** Finance income ******************************************************* Finance costs ********************************************************** Foreign exchange gain/(loss) ******************************************* Prot from continuing operations before income tax ******************** Income tax expense *************************************************** Prot for the year/period from continuing operations(1) ***************** 55.7 (17.6) (12.6) (1.9) 5.8 (3.1) 26.3 0.4 (5.3) 0.6 22.0 (9.7) 12.3
100 (51.7) 48.3 (14.5) (14.5) (2.4) 4.4 (4.6) 16.7 0.8 (4.2) 0.2 13.5 (7.2) 6.3
100 (48.6) 51.4 (16.1) (18.5) 9.6 (2.1) 8.6 (1.9) 31.0 2.7 (6.7) (0.3) 26.7 (6.4) 20.3
100 (46.8) 53.2 (16.5) (28.4) 22.1 (2.0) 4.9 (1.9) 31.4 2.4 (6.8) 1.6 28.6 (9.1) 19.5
100 (36.5) 63.5 (17.1) (8.3) (1.5) 11.4 (5.0) 43.0 3.1 (5.6) 40.5 (16.0) 24.5
113
Borrowings ******************************************* Gold and silver futures contracts(1) ********************** Mining rights purchase options************************* Capital expenditurecommitted *********************** Pallancata project(2) ************************************ Exmin Project (Mina Moris mine)(3) ********************** San Felipe Project(4) ************************************ Operating lease *************************************** Total ************************************************* Notes:
15,522 15,522
13,300 13,300
(1) Calculated using the number of ounces of gold or silver committed to be sold under the contracts, the London Bullion Market Association spot xing price for silver on 30 June 2006 of US$10.70 per ounce and the London Bullion Market Association PM spot xing price for gold on 30 June 2006 of US$613.50 per ounce. See Disclosures about market risk Commodity price risk.
125
Off balance sheet items The Hochschild Mining Group had no off balance sheet items at 31 December 2003, 2004 or 2005 or at 30 June 2006. Capital expenditure In 2003, 2004 and 2005, the Hochschild Mining Groups capital expenditure was US$18.8 million, US$12.3 million and US$18.9 million, respectively (including intangibles such as licenses and mine development costs). The expenditure in 2003 primarily related to additional development at Arcata and Selene. Expenditure in 2004 was principally for development at San Jose and Arcata. In 2005, capital expenditure was principally for development at Selene and Arcata. In the six months to 30 June 2006, the Hochschild Mining Groups capital expenditure was US$16.7 million and related primarily to the development of San Jose. The Hochschild Mining Groups budgeted capital expenditure for the six months ending 31 December 2006 and for 2007 is US$52.7 million and US$79.1 million, respectively. These funds are expected to come from operating cash ows and the proceeds of the Global Offer and are expected to be used primarily to continue the development of San Jose and Pallancata. These amounts differ from the budgeted capital expenditure set forth in Part XV: Technical Report because the amounts in the Technical Report cover planned expenditure only at the existing mines and not at the Hochschild Mining Groups development projects. Disclosures about market risk The following information should be read in conjunction with Part IX: IFRS Historical Financial Information. The Hochschild Mining Group is exposed to change in commodity prices, foreign exchange rates and interest rates through its commercial and nancial operations. Additionally, members of the Hochschild Mining Group are engaged in hedging activities. Commodity price risk The Hochschild Mining Group is exposed to the effect of uctuations in commodity prices. The principal exposures are to the prices of silver and gold, which are the products produced by the Group and which are quoted in US dollars on international markets. Price variations and market cycles have historically inuenced the nancial results of the Hochschild Mining Group and the Directors expect they will continue to do so. See Factors Affecting Results of OperationsCommodity Prices above. As of 30 September 2006, the Hochschild Mining Group had a number of forward sales contracts with Standard Bank and Citibank in relation to the gold rened from its dore which it has entered into as part of the security package for the Hochschild Mining Groups US$70 million loan facility (see Liquidity and Capital ResourcesCredit Facilities), the last of which will expire in June 2007. 126
PRA1 9.2.3 PRA1 10.5
Standard Bank ******************************************** Citibank ************************************************** Citibank ************************************************** Total****************************************************** Citibank **************************************************
As at 30 September 2006 the Hochschild Mining Group also had a limited number of other forward sale and option arrangements in relation to the silver produced from its dore which are due to expire in December 2006.
Counterparty Outstanding hedge (oz) Exercise Plan Contract Min Max Start End
Min/Max Min/Max
7.45 8.40
8.43 10.60
Jul-06 Jul-06
Dec-06 Dec-06
Going forward, the Hochschild Mining Group does not intend to hedge its silver and gold production unless it is required to do so as part of any project nancing arrangements. It intends to equity nance its projects unless, in the context of a joint venture, the joint venture partner requires project nance to be put in place. Foreign currency exchange rate risk The Hochschild Mining Groups products are commodities that typically are priced by reference to prices in US dollars and the Company presents its results in US dollars. However, the Hochschild Mining Group incurs a signicant portion of its costs in Nuevos Soles and in the future anticipates that it may also have signicant costs denominated in Argentine Pesos and Mexican Pesos. The Hochschild Mining Group typically borrows in US dollars. For accounting purposes, expenses incurred in currencies other than the US dollar are converted into US dollars at the exchange rate prevailing on the date of the transaction. Because a signicant portion of the Hochschild Mining Groups expenses are incurred in currencies other than the US dollar, the Hochschild Mining Groups expenses may from time to time increase or decrease relative to its revenues as a result of the uctuations of the relevant exchange rates. This could affect the results of operations that the Hochschild Mining Group reports in future periods. See Factors Affecting Results of OperationsExchange Rates above. The Hochschild Mining Group does not hedge its exposure to foreign currency risk. Interest rate risk The Hochschild Mining Group is exposed to interest rate risk principally in relation to its outstanding bank loans. In particular, it is exposed to changes in the LIBOR interest rate of US dollar-denominated debt, as substantially all of its debt both (i) is denominated in US dollars and (ii) has a variable LIBOR rate. Critical accounting policies and estimates The Hochschild Mining Groups signicant accounting policies are more fully described in note 2 to the IFRS Historical Financial Information of the Hochschild Mining Group included in Part IX. Some of the Hochschild Mining Groups accounting policies require the application of signicant judgment and estimates by management that can affect the amounts reported in the nancial statements. By their nature, these judgments are subject to a degree of uncertainty and are based on the Hochschild Mining Groups historical experience, terms of existing contracts, managements view on trends in the silver and gold mining industry, information from outside sources and other assumptions that the Hochschild Mining Group considers to be reasonable 127
PRA1 9.2.3 PRA1 9.2.3
Recent developments
On 10 July 2006, Compania Minera Coriorco (a Hochschild Mining Group company recently renamed Pallancata Holding S.A.C.) (Coriorco) succeeded to the rights of Ludlow Corporation in 130
PRA3 3.2
Current Debt Secured(2)(3) ************************************************************************************** Unguaranteed/unsecured ************************************************************************* Total current debt ******************************************************************************** Non-current debt Secured(2) **************************************************************************************** Unguaranteed/unsecured ************************************************************************* Total non-current debt *************************************************************************** Total indebtedness
(1)
*****************************************************************************
The following table shows the capitalisation of the Hochschild Mining Group as at 30 June 2006 extracted without material adjustment from the nancial information set out in Section B: IFRS Historical Financial Information of Part IX: IFRS Historical Financial Information.
As at 30 June 2006 US$000
Shareholders equity (excluding retained earnings) Share capital *************************************************************************************** Share premium ************************************************************************************* Other reserves************************************************************************************** Total capitalisation(4) ******************************************************************************** Notes:
(1) The Hochschild Mining Group does not hold any external debt which is subject to guarantees provided by third parties. (2) The Hochschild Mining Group on 13 August 2004 borrowed an aggregate principal amount of US$70 million from a syndicate of various nancial institutions. The interest payable on the unpaid principal amount of the loan is a rate per annum equal to LIBOR + 3.7 per cent. The syndicated loan contains certain nancial covenants. The syndicated loan is secured by: ) An accounts pledge with Banco de Credito del Peru as Administrative Agent, Collateral Agent and Cash Management Bank, under which security has been granted over the collection account held by Compana Minera Ares with Banco de Credito del Peru. ) A hedge collateral agreement with Standard Bank London Limited and N. M. Rothschild & Sons Limited under which Compana Minera Ares established a segregated cash account. The parties have agreed that such cash account will hold an initial amount of US$5,000,000 plus any proceeds of any collateral property. ) A mining mortgage with Banco de Credito del Peru (As Agent for the Lenders) over Compana Minera Ares mining concessions, buildings, facilities and other xed assets as security for full payment of $87,500,000.00 as capital plus interest. ) A mining mortgage with Banco de Credito del Peru (as Agent for the Lenders) over Compana Minera Ares processing plant as security for full payment of $87,500,000 as capital plus interest. ) A global and oating pledge agreement with Banco de Credito del Peru (as Agent for the Lenders) over all of the minerals during the extraction or production stages at Compana Minera Ares concessions as security for full payment of $87,500,000 as capital, plus interest. ) A share pledge agreement with Banco de Credito del Peru (as Agent for the Lenders) over the shares in Compana Minera Ares as security for full payment of $87,500,000 as capital plus interest. (3) On 26 September 2005, Compana Minera Arcata S.A. entered into a foreign currency credit facility with Banco Interamericano de Finanzas in an amount of US$2.4 million. The credit facility is repayable in nine quarterly instalments at an interest rate of 8.75 per cent. Under the terms of the Credit Facility, Compana Minera Arcata S.A. has granted Banco Interamericano de Finanzas a pledge over its assets to the value of US$3,388,585.11. See paragraph 12.2.3 of Part XIV: Additional Information. (4) There has been no material change in the capitalisation of the Company from 30 June 2006 to 2 November 2006 save for the allotment and issue to Pelham Investment Corporation and Navajo Overseas Corporation of, in aggregate,
132
The following table shows the net indebtedness in the short term and in the medium-long term of the Hochschild Mining Group as at 31 August 2006 extracted without material adjustment from the unaudited management accounts of the Company.
As at 31 August 2006 Unaudited US$000
PRA1 3.1
Cash ******************************************************************************************** Liquidity***************************************************************************************** Current bank debt ******************************************************************************* Current portion of non-current debt ************************************************************** Other current nancial debt ********************************************************************** Current Financial Indebtedness******************************************************************** Net Current Financial Indebtedness **************************************************************
(1)
8,624 8,624 34,914 35,937 70,851 62,227 869 23,676 24,545 86,772
Non-current bank loans ************************************************************************** Other non-current loans ************************************************************************** Non-Current Financial Indetedness **************************************************************** Net Financial Indebtedness(2) ********************************************************************** Notes: (1) Total current nancial debt less liquidity. (2) Total non-current nancial indebtedness less excess of total liquidity over total current nancial debt.
133
Dear Sirs Hochschild Mining plc We report on the audited nancial information set out in Section B: IFRS Historical Financial Information. We do not report on the 30 June 2005 unaudited nancial information. This nancial information has been prepared for inclusion in the prospectus dated 3 November 2006 of Hochschild Mining plc on the basis of the accounting policies set out in Note 2. This report is required by Annex I item 20.1 of the PD Regulation and is given for the purpose of complying with that paragraph and for no other purpose. Save for any responsibility arising under Prospectus Rule 5.5.3R(2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with item 23.1 of Annex I to the PD Regulation, consenting to its inclusion in the prospectus. Responsibilities The Directors of Hochschild Mining plc are responsible for preparing the nancial information on the basis of preparation set out in Note 2. It is our responsibility to form an opinion as to whether the nancial information gives a true and fair view, for the purposes of the prospectus, and to report our opinion to you. Basis of opinion We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the nancial information. It also included an assessment of signicant estimates and judgments made by those responsible for the preparation of the nancial information and whether the accounting policies are appropriate to the entitys circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufcient evidence to give reasonable assurance that the nancial information is free from material misstatement whether caused by fraud or other irregularity or error. Our work has not been carried out in accordance with auditing standards generally accepted in the United States of America and accordingly should not be relied upon as if it had been carried out in accordance with those standards. 134
135
Continuing operations Revenue ****************************************** Cost of sales ************************************** Gross prot *************************************** Administrative expenses *************************** Exploration expenses ****************************** Gain on sale of zinc project ************************ Selling expenses *********************************** Other income ************************************* Other expenses************************************ Prot from continuing operations before net nance costs and income tax **************************** Finance income *********************************** Finance costs ************************************** Foreign exchange gain/(loss) *********************** Prot from continuing operations before income tax Income tax expense ******************************* Prot for the year/period from continuing operations ************************************** Discontinued operations (Loss)/ prot for the year/period from discontinued operations ************************************** Prot for the year/period ************************** Attributable to: Equity shareholders of the Company**************** Minority interest **********************************
5 6 7 8 9 10 12 12
93,771 (41,514) 52,257 (16,472) (11,822) (1,794) 5,457 (2,936) 24,690 326 (4,977) 579 20,618 (9,108) 11,510
159,052 (82,292) 76,760 (22,997) (23,063) (3,880) 7,081 (7,395) 26,506 1,296 (6,702) 299 21,399 (11,453) 9,946
151,319 (73,592) 77,727 (24,371) (28,057) 14,558 (3,161) 13,016 (2,821) 46,891 4,144 (10,105) (552) 40,378 (9,673) 30,705
65,779 (30,805) 34,974 (10,829) (18,657) 14,558 (1,338) 3,199 (1,280) 20,627 1,555 (4,463) 1,085 18,804 (5,966) 12,838
92,286 (33,705) 58,581 (15,814) (7,654) (1,366) 10,495 (4,636) 39,606 2,843 (5,121) (27) 37,301 (14,733) 22,568
13 13
14
29
136
ASSETS Non-current assets Property, plant and equipment********************************* Intangible assets ********************************************** Available-for-sale nancial assets ******************************* Deferred income tax assets ************************************ Trade and other receivables************************************ Derivative nancial instruments ******************************** Current assets Inventories**************************************************** Trade and other receivables************************************ Derivative nancial instruments ******************************** Other nancial assets at fair value through prot and loss ******* Cash and cash equivalents ************************************* Assets classied as held for sale ******************************** Total assets *************************************************** EQUITY AND LIABILITIES Capital and reserves attributable to Parent Share capital************************************************** Other reserves ************************************************ Retained earnings ********************************************* Minority interest ********************************************** Total equity*************************************************** Non-current liabilities Trade and other payables ************************************** Derivative nancial instruments ******************************** Borrowings *************************************************** Provisions***************************************************** Deferred income tax liabilities ********************************* Current liabilities Trade and other payables ************************************** Borrowings *************************************************** Provisions***************************************************** Income tax payable ******************************************* Liabilities directly associated with assets classied as held for sale Total liabilities ************************************************ Total equity and liabilities *************************************
15 16 17 27 18 20
55,481 2,091 16,126 2,794 26,991 377 103,860 11,514 49,956 1,487 15,072 5,633 83,662 7,005 194,527
59,403 2,091 26,267 10,990 6,050 1,902 106,703 10,499 81,106 7,047 19,835 2,467 120,954 3,844 231,501
67,155 2,321 4,135 14,880 5,982 94,473 14,002 81,347 11,524 19,324 6,043 132,240 3,003 229,716
19 18 20 21 22 29
9,166 277 (9,692) (249) 2,482 26 23 20 24 25 27 2,233 2,065 49 36,304 50,219 6,509 95,146 23 24 27,076 40,418 209 67,703 29 162,849 165,082
9,187 6,588 (15,910) (135) (1,833) (1,968) 3,135 56,899 41,426 3,154 104,614 31,048 52,953 1,170 85,171 6,710 196,495 194,527
9,187 11,806 28,383 49,376 (2,533) 46,843 3,161 31,089 36,939 4,134 75,323 34,567 69,793 4,975 109,335 184,658 231,501
9,187 1,696 (561) 10,322 (3,841) 6,481 3,450 30,315 33,183 3,097 70,045 91,032 54,383 7,775 153,190 223,235 229,716
137
Cash ows from operating activities Cash generated from operations ******************* Interest received ********************************** Interest paid ************************************** Payment of mine closure costs ********************* Tax paid ****************************************** Net cash generated from operating activities ******* Cash ows from investing activities Purchase of property, plant and equipment ********* Proceeds from sale of property, plant and equipment************************************** Acquisitions of available-for-sale nancial assets **** Acquisition of shares from Colorada **************** Purchase of other nancial assets at fair value through prot and loss ************************** Proceeds from other nancial assets at fair value through prot and loss ************************** Proceeds from sale of zinc project ****************** Proceeds from sale of Corianta ********************* Proceeds from sale of Caylloma ******************** Proceeds from sale of xed assets of Sipan********** Dividends received ******************************** Net cash used in investing activities**************** Cash ow from nancing activities Proceeds of borrowings**************************** Repayment from borrowings*********************** Dividends paid ************************************ Capital contribution ******************************* Purchase of shares from minority shareholder ******* Capital contribution from minority shareholder ***** Repayment of capital****************************** Cash ows generated from (used in) nancing activities**************************************** Net (decrease)/increase in cash and cash equivalents during the year/period ************************** Cash and cash equivalents at beginning of year/period ************************************* Cash and cash equivalents at end of year/period****
31
25,290 53 (3,131) (1,063) (13,319) 7,830 (18,820) 891 (39,017) 27,080 (29,866) 77,750 (49,151) (4,156) (4,927) 1,762 21,278 (758) 5,000
25,318 112 (5,322) (1,804) (14,878) 3,426 (12,253) 2,040 (392) (6,652) 3,834 (13,423) 127,875 (94,745) (20,710) 21 (1,053) 11,388 1,391 4,242 5,633
37,350 345 (8,434) (5,228) (12,602) 11,431 (18,896) 239 (3,107) (21,537) 17,566 15,558 806 3,050 182 (6,139) 118,103 (127,073) (50) (2,667) 3,229 (8,458) (3,166) 5,633 2,467
16,323 (2,375) (4,393) (8,507) 1,048 (8,112) (3,490) (15,232) 11,456 15,558 806 100 1,086 53,376 (59,336) (1,879) 2,454 (5,385) (3,251) 5,633 2,382
49,901 4,067 (3,210) (2,518) (15,176) 33,064 (16,652) 236 (1,300) (14) (5,867) 6,081 4,500 841 (12,175) 61,997 (77,266) (1,353) (20) (671) (17,313) 3,576 2,467 6,043
9 9 29
26
22
4,242
138
Equity share capital (including additional capital) Unrealised gain/(loss) on available-for-sale nancial assets Cumulative translation adjustment Retained earnings Minority interest Total Other reserves
Total Equity
17
26
17
139
26 17 26
Balance at 1 January 2003*********************************************** Fair value gains on available-for-sale nancial assets ********************** Translation adjustment for the year ************************************** Net income recognised directly in equity ********************************* Prot for the year ****************************************************** Total recognised income for 2003 **************************************** Purchase of shares from minority shareholders**************************** Capital contribution from minority interest ******************************* Minority interests share of contribution to Santa Cruz ******************** Dividends ************************************************************** Dividends expired******************************************************* Balance at 31 December 2003 ******************************************* Fair value gains on available-for-sale nancial assets ********************** Translation adjustment for the year ************************************** Net income recognised directly in equity ********************************* Prot for the year ****************************************************** Total recognised income for 2004 **************************************** Purchase of shares from minority shareholders**************************** Capital contribution***************************************************** Dividends paid********************************************************** Balance at 31 December 2004 ******************************************* Fair value gains on available-for-sale nancial assets ********************** Translation adjustment for the year ************************************** Net income recognised directly in equity ********************************* Prot for the year ****************************************************** Total recognised income for 2005 **************************************** Purchase of shares from minority shareholders**************************** Capital contribution of minority interest *********************************
(1,461) 1,692 1,692 1,692 231 6,542 6,542 6,542 6,773 4,492 4,492 4,492
(1,461) 1,692 46 1,738 1,738 277 6,542 (231) 6,311 6,311 6,588 4,492 726 5,218 5,218
(14,308) 11,900 11,900 (3,106) (4,200) 22 (9,692) 13,500 13,500 (996) (18,722) (15,910) 46,737 46,737 (2,444)
3,384 312 312 (1,761) (1,449) (1,821) 1,762 601 5 2,482 27 27 (4,285) (4,258) (57) (1,833) 147 147 (3,853) (3,706) (223) 3,229
(3,219) 1,692 358 2,050 10,139 12,189 (4,927) 1,762 601 (4,200) 27 2,233 6,542 (204) 6,338 9,215 15,553 (1,053) 21 (18,722) (1,968) 4,492 873 5,365 42,884 48,249 (2,667) 3,229
Equity share capital (including additional capital) Unrealised gain/(loss) on available-for-sale nancial assets Cumulative translation adjustment Retained earnings Minority interest Total Other reserves
Total Equity
Balance at 31 December 2005 ******************************************* Fair value gains on available -for- sale nancial assets ********************* Translation adjustment for the period ************************************ Net income recognised directly in equity ********************************* Prot for the period **************************************************** Sale of available -for- sale nancial assets ******************************** Total recognised income for the six-month period ended 30 June 2006 ***** Dividends paid********************************************************** Capital contribution from minority interest ******************************* Repayment of capital *************************************************** Balance at 30 June 2006************************************************* 17 9,187 9,187 11,265 13,023 13,023 (22,844) 1,444 1,444 541 (289) (289) (289) 252 11,806 13,023 (289) 12,734 (22,844) (10,110) 1,696 28,383 24,198 24,198 (53,142) (561)
46,843 13,023 87 13,110 22,568 (22,844) 12,834 (53,440) 915 (671) 6,481
140
Balance at 31 December 2004 ******************************************* Fair value gains on available-for-sale nancial assets (unaudited) ********** Translation adjustment for the period (unaudited) ************************ Net income recognised directly in equity (unaudited)********************** Prot for the period (unaudited) **************************************** Total recognised income for June 2005 (unaudited) *********************** Purchase of shares from minority shareholders (unaudited) **************** Capital contribution from minority interest (unaudited) ******************* Balance at 30 June 2005 (unaudited) ************************************* 9,187 9,187 6,773 3,794 3,794 3,794 10,567
Lorenzon Limited ***** Larchmont Corporation ******** Garrison Corporation Ardsley Corporation ** Ludlow Corporation ** Port Chester Ltd. ***** San Jose International Ltd. *************** Compana Minera Sipan S.A.C. ******** Compana Minera Ares S.A.C. ************** Compana Minera Arcata S.A. ******** Mauricio Hochschild & Ca. Ltda. S.A.C. (MHC) ************* Compana Minera Corianta S.A. ******* Minera Colorada S.A.C. ************** Empresa de Transmision Electrica Callalli S.A.C. ******* Asociacion Sumac Tarpuy (**) ********* Compana Minera Coriorco S.A. ******* MH Argentina S.A. *** Minera MH Chile Ltda. ************** Minera Hochschild, Mexico S.A. de C.V.
Holding company Holding Holding Holding Holding Holding company company company company company
Cayman Islands Cayman Cayman Cayman Cayman Cayman Islands Islands Islands Islands Islands
100 100 100 100 100 100 (*) 100 100 82.5 100 100 (*) 100 (*) 100 100 (*) 100
100 100 100 100 100 100 (*) 100 100 86.5 100 100 (*) 100 (*) 100 100 100 100
100 100 100 100 100 100 (*) 100 100 96.8 100 (*) 100 (*) 100 100 100 100
100 100 100 100 100 100 (*) 100 100 96.8 100 (*) 100 (*) 100 100 100 100
100 100 100 100 100 100 51 100 100 96.8 30 100 100 100 100 100
Dormant Production of gold and silver Production of gold and silver Production of gold and silver Services Exploration ofce Exploration ofce Power transmission Not-for-prot Dormant (until June 2006) Exploration Ofce Exploration Ofce Exploration Ofce
Cayman Islands Peru Peru Peru Peru Peru Peru Peru Peru Peru Argentina Chile Mexico
141
MH Nevada, Inc. (renamed Hochschild Mining (US) Inc.)**** Minera Santa Cruz S.A. *************** Note: (*) Not incorporated
USA Argentina
(*) 51
100 51
100 51
100 51
100 51
(**) Sumac Tarpuy is an unincorporated entity which receives donations from Compania Minera Ares S.A.C., and donates this money to charitable activities at the direction of Compania Minera Ares S.A.C. As a result, the Group consolidates this entity.
2 SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation On 2 November 2006 Hochschild Mining plc entered into an agreement to acquire Lorenzon Corporation, Larchmont Corporation, Garrison Corporation, Ardsley Corporation, Ludlow Corporation and Port Chester Ltd. (together referred to as the Cayman Holding Companies). Accordingly the nancial information, which has been prepared specically for the purpose of the prospectus, is prepared on a basis that combines the results and assets and liabilities of the Company, Cayman Holding Companies and the companies which they in aggregate control for each of the three years to 31 December 2003, 2004, 2005 and six months to 30 June 2006 and as at those dates. Comparative statements representing the six months to 30 June 2005 have also been included, except that the comparative balance sheet is represented by the balance sheet at 31 December 2005. Internal transactions within the Group have been eliminated on combination. The combined nancial information is prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union (EU) except in respect of the following matters: ) The combined nancial information does not comply with IAS 27 Consolidated and Separate Financial Statements because, as explained above, prior to 2 November 2006 the Company did not control the Cayman Holding Companies and consequently the Company is not permitted by IAS 27 to present consolidated nancial information. The nancial information has therefore been prepared on a combined basis by applying the principles underlying the consolidation procedures of IAS 27; ) As the nancial information has been prepared on a combined basis the Company is unable to measure earnings per share. Accordingly, the requirement of IAS 33 Earnings per Share to disclose earnings per share has not been complied with; and ) The combined nancial information does not constitute a set of general purpose nancial statements under paragraph 3 of IAS 1 and consequently the Company does not make an explicit and unreserved statement of compliance with IFRS as contemplated by paragraph 14 of IAS 1. A company is only permitted to apply the rst-time adoption rules of IFRS 1 in its rst set of nancial statements where such an unreserved statement of compliance has been made. Although such a statement has not been made here the combined nancial information has been prepared as if the date of transition to IFRS is 1 January 2003, the beginning of the rst period presented, and the requirements of IFRS 1 have been applied as of that date. The basis of preparation and accounting policies used in preparing the combined nancial information for the years ended 31 December 2003, 2004 and 2005 and for the six-month periods ended 30 June 2005 and 2006 are set out below. These accounting policies have been consistently applied to all the periods presented unless otherwise stated. 142
(vii) IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, effective as from 1 January 2005; (viii) IAS 39 Financial Instruments: Recognition and Measurement and IAS 32, Financial Instruments: Disclosure and Presentation, effective as from 1 January 2006; (ix) (x) (xi) IFRS 6 Exploration for and Evaluation of Mineral Resources, effective as from 1 January 2006; Amendments to IAS 39 Financial Instruments: Recognition and Measurement, The Fair Value Option, effective as from 1 January 2006; IFRIC 4 Determining whether an Arrangement contains a Lease, effective as from 1 January 2006;
(xii) IFRIC 9 Reassessment of Embedded Derivatives, effective as from 1 June 2006; and (xiii) Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IFRS 6 Exploration for and Evaluation of Mineral Resources, effective as from 1 January 2006. 143
Buildings *********************************************************************************************** Plant and equipment ************************************************************************************ Furniture, xtures and ttings *************************************************************************** Vehicles ************************************************************************************************
5 1 5 2
to to to to
10 10 10 10
Borrowing costs are not capitalised and are expensed. Mineral properties and mine development costs Payments for mineral properties are expensed during the exploration phase of a project and capitalised during their development phase when incurred. Costs associated with developments are capitalised. Mine development costs are, upon commencement of production, depreciated using the unit of production method based on the estimated economically recoverable reserves and resources to which they relate. Construction in progress Assets in the course of construction are capitalised as a separate component of property, plant and equipment. On completion, the cost of construction is transferred to the appropriate category. Construction in progress is not depreciated. Subsequent expenditures Expenditures incurred to replace a component of an item of property, plant and equipment is capitalised separately with the carrying amount of the component being written-off. Other subsequent expenditure is capitalised if future economic benets will arise from the expenditure. All other expenditure including repairs and maintenance expenditures are recognised in the income statement as incurred. (g) Determination of ore reserves The Group estimates its ore reserves and mineral resources based on information compiled by internal competent persons. Reports to support these estimates are prepared each year. For the purposes of the Global Offer, an independent competent person has veried the reasonableness of these reports as at 30 June 2006. Reserves and resources are used in the units of production calculation for depreciation as well as the determination of the timing of mine closure cost and impairment analysis. 146
United Kingdom********************************************** 80,561 Mexico******************************************************* 10,137 USA ********************************************************* Canada ****************************************************** 8 Peru ********************************************************* 3,474 Japan ******************************************************** 2 Germany ***************************************************** (411) 93,771
The negative gures result from adjustments to revenue as a consequence of differences between the amount of gold and silver included in a nal invoice and in the provisional invoice issued in the previous year. (b) Prot for the year The Group has no inter-segment transactions. Prot for year/period is based on country of operation as follows:
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Peru*********************************************************** 15,548 Cayman Islands ************************************************ (1,647) Argentina ***************************************************** (2,832) Mexico ******************************************************** (930) Chile ********************************************************** USA *********************************************************** 10,139
(c) Total segment assets Total segment assets, which exclude income tax assets, are allocated based on where the assets are located:
As of 31 December 2003 2004 2005 US$(000) As of 30 June 2006
Peru *************************************************************** 125,498 Cayman Islands ***************************************************** 30,013 Argentina ********************************************************** 5,363 Mexico ************************************************************* 374 Chile *************************************************************** USA**************************************************************** Total segment assets ************************************************ 161,248 Deferred income tax assets ****************************************** 1,079 Other income tax assets ********************************************* 2,755 Total assets ********************************************************* 165,082
104,518 80,390 26,028 2,209 243 221 213,609 14,880 1,227 229,716
152
Peru******************************************************************* 18,572 Argentina ************************************************************* 228 Mexico **************************************************************** 20 Chile ****************************************************************** USA ******************************************************************* 18,820
(e) Total segment liabilities Total segment liabilities, which exclude income tax liabilities, are allocated based on where the liabilities are located:
As of 31 December 2003 2004 2005 US$(000) As of 30 June 2006
Peru *************************************************************** 139,371 Cayman Islands ***************************************************** 15,542 Argentina ********************************************************** 1,211 Mexico ************************************************************* 7 Chile *************************************************************** USA**************************************************************** Total segment liabilities ********************************************* 156,131 Deferred income tax liabilities *************************************** 6,509 Income tax payable ************************************************* 209 Total liabilities ****************************************************** 162,849
(f) Depreciation Depreciation is allocated based on where the assets are located:
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Peru ************************************************************ 13,968 Argentina ******************************************************* 32 Mexico ********************************************************** Chile ************************************************************ USA************************************************************* 14,000
153
Peru ********************************************************
2,181 2,181
4 ACQUISITIONS On 30 June 2006, the Group acquired a 30 per cent., controlling interest, in Minera Colorada S.A.C. (Colorada), an exploration company, from Cementos Pacasmayo S.A.A. (Pacasmayo) (a related party) for US$13,500 in cash, plus US$226,600 paid in July 2006. Colorada is an entity which was incorporated in August 2005, to explore and develop the concessions of Pampa Colorada I and Salaverry I to IV in Peru. After the Groups acquisition, the shareholding in Colorada was split 30 per cent./20 per cent./50 per cent. between the Group, Pacasmayo and Compania Minera Killacolqui. Net assets of Colorada at the date of acquisition were as follows:
Book value Revaluation adjustments US$(000) Fair value
Other assets ************************************************************************** Exploration expenditure *************************************************************** Total net assets acquired ************************************************************** Minority interest ********************************************************************** Goodwill arising on acquisition ******************************************************** Discharged by: Cash ********************************************************************************* Deferred consideration ****************************************************************
36 244 280
(244)(a) (244)
(a) The exploration expenditure has been assigned a fair value of nil, due to the early stage of exploration.
Colorada also owns an exploration licence. Due to the early stage of exploration, a reliable fair value of this licence is unable to be estimated, and in accordance with IFRS 3 it has been assigned a fair value of nil. 5 REVENUE
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Gold (from dore bars)***************************************** 67,941 Silver (from dore bars) **************************************** 12,048 Concentrate ************************************************** 10,170 Services ****************************************************** 3,612 93,771
154
2,249 7,921
Total concentrate *********************************************** 10,170 The total volumes of gold and silver sold, are as follows: Total in thousands of ounces: Gold *********************************************************** Silver ********************************************************** 200 4,603
246 11,978
231 10,366
110 4,363
103 4,543
Mining costs Contractors ***************************************************** 10,702 Energy ********************************************************* 3,137 Transportation services ****************************************** 1,773 Maintenance**************************************************** 1,253 Rentals ********************************************************* 780 Assays ********************************************************** 114 Materials ******************************************************* 8,567 Depreciation **************************************************** 11,902 Personnel expenses********************************************** 6,485 Minerals treatment ********************************************* 883 Insurance ******************************************************* 330 Mining royalty (note 35) ***************************************** Workers prot sharing ****************************************** 808 Personnel transportation **************************************** 330 Communications ************************************************ 73 Freight ********************************************************* 517 Meals and food at mine site ************************************* 246 Security********************************************************* 340 Reallocation to administrative expenses*************************** (892) Reallocation to property, plant and equipment ******************* (565) Change in products in process and nished goods ***************** (8,243) Provision for slow moving and obsolescence of supplies *********** 12 Other ********************************************************** 2,962 41,514
18,187 4,251 2,041 669 1,054 261 14,909 20,671 6,681 926 441 874 1,134 339 80 815 475 408 (2,203) (806) 6,514 734 3,837 82,292
19,426 4,491 2,151 539 765 302 12,817 14,605 8,096 744 495 1,184 1,388 409 100 943 776 416 (1,141) (2,015) 1,512 63 5,526 73,592
9,497 2,144 1,084 241 241 149 6,475 5,748 3,871 352 223 472 442 192 51 484 133 263 (610) (937) (2,736) 3,026 30,805
9,529 2,535 1,088 257 296 142 6,009 6,875 4,331 346 307 1,034 1,380 241 421 477 206 (347) (1,192) (2,958) 2,728 33,705
155
Personnel expenses ********************************************* Workers prot sharing ***************************************** Sundry administrative services *********************************** Consulting fees ************************************************* Depreciation *************************************************** Supplies ******************************************************** Freight ********************************************************* Ofce rentals *************************************************** Security ******************************************************** Energy ********************************************************* Termination benets ******************************************** Indirect taxes *************************************************** Technology and systems development **************************** Donations ****************************************************** Other **********************************************************
7,129 1,885 1,357 491 1,923 85 53 279 47 908 84 599 130 1,502 16,472
9,304 2,645 1,006 893 2,236 139 252 397 292 45 1,596 495 449 820 2,428 22,997
11,147 3,238 1,577 1,464 2,001 163 226 1,114 180 15 406 986 54 101 1,699 24,371
4,914 1,032 424 287 1,061 52 498 91 17 357 179 204 1,713 10,829
5,193 3,221 865 308 1,190 204 528 114 403 736 477 2,575 15,814
8 EXPLORATION EXPENSES
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Mine site exploration(1) Arcata ********************************************************** Ares ************************************************************ Selene ********************************************************** Caylloma ******************************************************** Prospects(2) Peru ************************************************************ Argentina ******************************************************* Generative(3) Peru ************************************************************ Argentina ******************************************************* Mexico ********************************************************** Chile ************************************************************ USA************************************************************* Personnel and other(4) ******************************************** Mining rights(5) **************************************************
4,051 1,310 604 566 6,531 547 191 738 224 264 368 856 2,943 754 11,822
2,369 2,222 1,532 1,574 7,697 1,317 4,391 5,708 264 1,540 1,460 317 50 3,631 4,374 1,653 23,063
1,335 1,587 1,066 3,988 1,391 9,964 11,355 268 633 3,078 1,164 344 5,487 6,294 933 28,057
592 768 737 2,097 526 9,195 9,721 92 320 2,497 419 3,328 2,585 926 18,657
1,100 1,118 77 2,295 134 440 574 432 393 930 341 2,096 1,905 784 7,654
Notes: (1) Mine site exploration is performed with the purpose of proving mineral reserves, establishing inferred and indicated resources and identifying potential minerals within an existing mine site, with the goal of maintaining or extending the mines life. (2) Prospects expenses are related to detailed geological evaluations to characterise and interpret the three-dimensional continuity of the geometry, quality and quantity of the ore within a prospect, with the goal of justifying further evaluation. Geological evidence and interpretations can move the project into a more advanced phase of evaluation with reserve estimation and economic pre-feasibility by the Project. (3) Generative expenditure is very early stage exploration expenditure, incurred in connection with identifying and developing exploration targets with an inferred resource or potential to develop a mining operation. (4) Expenses relating to personnel involved with exploration including salaries, indirect taxes and travelling costs.
156
The following table sets forth liabilities (generally payables) incurred in exploration activities of the Group companies engaged only in exploration. Liabilities related to exploration activities incurred by Group operating companies are not included since it is not possible to separate the liabilities related to exploration activities of these companies from their operating liabilities.
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June 2006
2,349
92
142
11,418
17,420
13,692
2,750
9 GAIN ON SALE OF ZINC PROJECT AND CORIANTA In April 2005, the Group sold its Bongara zinc project, to Pacasmayo for US$15,558,000. This postfeasibility project was carried at US$1,000,000. Prior to the feasibility study, the Group had incurred US$1,900,000 of mine property costs and other expenditures during the exploration period that had been charged to the income statement as incurred. In connection with this transaction, the Group also disposed of its subsidiary, Compana Minera Corianta S.A. (Corianta) to Pacasmayo for US$806,000, realising a gain of US$254,000. The assets held by Corianta, other than the Bongara zinc project, were tax losses and VAT credits. 10 SELLING EXPENSES
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Transportation of dore and concentrates and maritime freight ********* 1,250 Sales commissions *************************************************** 74 Personnel expenses************************************************** 32 Warehouse services************************************************** 28 Other ************************************************************** 410 1,794
157
Salaries and wages********************************************** 11,417 Semi-annual salary compensation ******************************** 2,394 Other legal contributions**************************************** 1,794 Post-employment benets *************************************** 915 Vacations ****************************************************** 783 Other ********************************************************** 169 17,472
Cost of sales**************************************************** Administrative expenses***************************************** Exploration expenses******************************************** Selling expenses ************************************************ Discontinued operations **************************************** Other ********************************************************** Average number of employees **********************************
158
Other income: Income from mine concession(1) ************************************* Cancellation of service agreement(2) ********************************* Rentals************************************************************ Gain on provisional pricing adjustment(3) **************************** Decrease in provision for mine closure(4) ***************************** Gain on sale of xed assets***************************************** Gain on sale of other assets **************************************** Gain on sale of Corianta ******************************************* Gain on spin-off of Sipan(5) ***************************************** Gain on maintenance of equipment services ************************* Other ************************************************************* Other expenses: Allowance SEAL/Electroperu (note 33 b) ***************************** Impairment of Sipan assets held for sale **************************** Increase in provision for mine closure(4) ***************************** Loss on sale of xed assets and assets classied as held for sale******* Loss on sale of other assets***************************************** Loss on sale of investments(6) *************************************** Loss on sale of MHC (subsidiary)(7) ********************************** Loss on maintenance of equipment services ************************* Write-off of xed assets******************************************** Other *************************************************************
2,148 412 1,624 139 1,134 5,457 (1,199) (28) (184) (1,525) (2,936)
499 1,278 2,579 510 187 784 182 1,062 7,081 (760) (2,181) (1,170) (26) (923) (2,335) (7,395)
77 9,916 725 254 2,044 13,016 (920) (197) (5) (356) (1,343) (2,821)
30 1,920 331 254 664 3,199 (698) (113) (65) (404) (1,280)
36 8,527 1,024 172 736 10,495 (58) (65) (2,249) (991) (14) (1,259) (4,636)
Notes: (1) On 6 March 2000 the Group sold Huaron, a mining company, to Pan American Silver. Part of the sales consideration included a royalty stream to be paid to the Group on each metric ton of ore recovered from Huaron mine in excess of 4.3 million metric tons. During 2003, Pan American Silver paid the Group $2,148,000 as nal settlement of any future obligation arising as a result of this royalty agreement. (2) Mauricio Hochschild & Cia Ltda (MHC) had an agreement with Cementos Pacasmayo, a related company, to provide administrative services beginning in July 2003. This agreement was cancelled in 2004, resulting in Cementos Pacasmayo paying MHC a cancellation fee of $499,000. (3) Sales of concentrates are provisionally priced at the time the sale is recorded. The price is then adjusted after an agreed period of time (usually linked to the length of time it takes the smelter to rene and sell the concentrate), with the Group either paying or receiving the difference between the provisional price and the nal price. This price exposure is considered to be an embedded derivative in accordance with IAS 39 Financial Instruments: Recognition and Measurement. This gain or loss that arises on the mark to market of this embedded derivative is recorded in Other Income or Other Expenses. (4) The increase in the provision for mine closure is recognised in Other Expenses where the corresponding mine closure asset has been fully depreciated in prior years or where the mine has not yet reached the feasibility stage. Decreases in mine closure provisions are recorded in Other Income where the disturbance is not expected to create a future economic benet (normally this will occur when the mine to which the provision relates has fully depleted its resources, but the closure and rehabilitation costs are yet to be incurred, and there is a reduction in the estimate of the total mine closure cost). (5) On 2 November 2004, certain assets and liabilities of Compana Minera Sipan S.A.C. (Sipan) with a carrying value were sold to Inmobiliaria CNP (Inmobiliaria) (a related party). As consideration, the Group received shares in Inmobiliaria with a value of US$242,000, realising a gain of US$784,000. The book value of the individual assets and liabilities disposed of are as follows:
US$000
Property, Plant and Equipment (net book value)************************************************************ Loans payable ******************************************************************************************** Deferred tax liability************************************************************************************** Book value of net liabilities disposed **********************************************************************
(6) During the six months ended 30 June 2006 the Group disposed of 16,585,047 shares in Inversiones Pacasmayo (refer to note 17) for US$6,350,000 to Greystone Corporation (a related party). These shares were carried at US$21,135,000
159
****************************************************
Less: Unrealised fair value gain on assets recorded in equity************************************************ Other assets********************************************************************************************* Other liabilities(b) **************************************************************************************** Net book value of assets and liabilities disposed **********************************************************
(a) The Available for sale nancial assets disposed of represented a portion of the Groups 13.9% investment in Inversiones Pacasmayo (refer to note 17). (b) Does not include the US$2,801,000 loan payable by MHC to Ardsley Corporation as this loan eliminated on combination and therefore the disposal of this loan does not impact the liabilities of the combined balance sheet of the Group.
Finance income: Interest on loans to related parties ******************************** Dividends received************************************************ Gain from changes in the fair value of nancial instruments ******** Other ************************************************************ Finance costs: Interest on bank loans and long-term debt ************************* Write-off of amortised borrowing costs upon renancing of loan facility ********************************************************* Interest on loans from related parties ****************************** Loss from changes in the fair value of nancial instruments ********* Unwind of discount on provision for mine closure (note 25) ********* Other ************************************************************
328 587 381 1,296 (2,614) (1,950) (754) (156) (894) (334) (6,702)
2,418 182 959 585 4,144 (8,167) (235) (165) (984) (554) (10,105)
1,094 182 11 268 1,555 (3,447) (212) (51) (528) (225) (4,463)
1,250 326 979 288 2,843 (3,867) (9) (297) (499) (449) (5,121)
Continuing operations: Current*********************************************************** Deferred income tax relating to origination and reversal of timing differences (note 27) ******************************************** Deferred income tax relating to change in tax rate (note 27) ******** Withholding taxes ************************************************
160
Income before tax *********************************************** 20,618 Tax calculated at domestic tax rates applicable to prots in the respective countries ******************************************** Expenses not deductible for tax purposes ************************* Non-taxable income ********************************************* Recognition of previously unrecognised deferred tax assets********* Deferred tax assets generated in the period not recognised ******** Payments of mine closure expenses ******************************* Deferred tax on unremitted earnings ***************************** Other *********************************************************** Tax charge ****************************************************** 6,688 774 (50) (441) 2,615 (319) (108) (775) 8,384
40,378 9,281 4,447 (1,477) (5,101) 2,017 (1,568) 621 649 8,869
37,301 10,958 1,726 (75) (312) 1,559 (755) (508) 194 12,787
Santa Cruz is under a special investment regime that allows for a double deduction in calculating its corporate income tax liability, in respect of all costs relating to prospecting, exploration and metallurgical analysis, pilot plants and other expenses incurred for feasibility studies of projects. In this regard, total investment for this regime amounts approximately to US$2,111,000, US$7,595,000, US$23,866,000 as of 31 December 2003, 2004 and 2005, respectively and US$17,386,000 and US$23,866,000 as of 30 June 2005 and 2006, respectively. Only the tax benet of a single deduction has been recognised in deferred taxation in the combined historical nancial statements. The benet of the additional deduction will be realised as and when claimed in future periods once production has commenced.
161
Vehicles US$(000)
Total
Year ended 31 December 2003 Cost At 1 January 2003(1) ***************** Additions *************************** Change in discount rate ************* Disposals**************************** Asset write-off ********************** Foreign exchange ******************* Transfers **************************** At 31 December 2003 **************** Accumulated depreciation At 1 January 2003 ******************* Depreciation for the year ************ Disposals**************************** Foreign exchange ******************* At 31 December 2003 **************** Net book amount at 31 December 2003 **************** Year ended 31 December 2004 Cost At 1 January 2004 ******************* Additions *************************** Change in discount rate ************* Disposals**************************** Asset write-off ********************** Foreign exchange ******************* Assets disposed as a result of spin-off Impairment of assets(2) *************** Reclassied to assets classied as held for sale *************************** Transfers **************************** At 31 December 2004 **************** Accumulated depreciation At 1 January 2004 ******************* Depreciation for the year ************ Disposals**************************** Foreign exchange ******************* Reclassied to assets classied as held for sale *************************** Assets disposed as a result of spin-off At 31 December 2004 **************** Net book amount at 31 December 2004 ****************
19,121 175 (71) 3,862 23,087 473 2,286 (3) 2,756 20,331
34,325 2,001 (612) (184) 72 6,322 41,924 1,893 5,936 (92) 3 7,740 34,184
1,967 115,775 9,352 18,820 1,540 (193) (1,029) (184) 366 (10,224) 902 135,288 902 37,276 14,000 (110) 3 51,169 84,119
23,087 522 (5,375) (1,145) (1,911) 993 16,171 2,756 2,607 (258) (239) 4,866 11,305
41,924 1,846 (1,288) (923) 1 (978) (5,310) 2,072 37,344 7,740 7,439 (811) 5 (379) 13,994 23,350
1,689 33 (895) (33) (96) 49 747 453 185 (378) (2) 258 489
902 135,288 5,887 12,253 (663) (921) (3,104) (923) (155) (5,375) (25) (2,181) (13,258) (3,114) 2,729 121,882 2,729 51,169 22,907 (1,189) (132) (6,115) (239) 66,401 55,481
162
Vehicles US$(000)
Total
Year ended 31 December 2005 Cost At 1 January 2005 ******************* Additions *************************** Change in discount rate ************* Disposals**************************** Foreign exchange ******************* Transfers and other movements ****** At 31 December 2005 **************** Accumulated depreciation At 1 January 2005 ******************* Depreciation for the year ************ Disposals**************************** Foreign exchange ******************* At 31 December 2005 **************** Net book amount at 31 December 2005 **************** Six months ended 30 June 2006 Cost At 1 January 2006 ******************* Additions *************************** Change in discount rate ************* Disposals**************************** Transfers **************************** Foreign exchange ******************* At 30 June 2006 ********************* Accumulated depreciation At 1 January 2006 ******************* Depreciation for the period ********** Disposals**************************** Foreign exchange ******************* At 30 June 2006 ********************* Net book amount at 30 June 2006****
37,344 220 (568) (34) 5,332 42,294 13,994 5,641 (357) (1) 19,277 23,017
2,729 121,882 11,132 22,532 (688) (56) (1,630) (45) (7,201) 6,604 142,051 6,604 66,401 16,606 (358) (1) 82,648 59,403
17,798 799 (176) 4,694 85 23,200 6,560 1,141 (82) 33 7,652 15,548
42,294 538 (232) 1,149 4 43,753 19,277 2,513 (119) (5) 21,666 22,087
6,604 142,051 5,397 17,344 (713) (645) (1,152) (5,969) (2) 159 5,385 157,689 5,385 82,648 8,065 (247) 68 90,534 67,155
As described in note 24, certain assets are pledged as part of the guarantee for the syndicated loan.
Notes: (1) For the purpose of the transition to IFRS, the Group appointed Consultores y Asesores 2020 S.A.C., a company holding a licence to conduct valuation of assets, to carry out an independent appraisal of certain property, plant and equipment as of 1 January 2003 to determine their deemed cost (including accumulated depreciation) at that date in accordance with IFRS 1. (2) Corresponds to the write down to the fair value of assets of Sipan classied in 2004 as held for sale in accordance with IFRS 5.
At 1 January 2003 ************************************************************************************** Minority interests share of capital contribution to Santa Cruz(2) ********************************************
(1)
Balance at 31 December 2003, 2004 and 2005 ************************************************************* Additions(3) ********************************************************************************************** Balance at 30 June 2006 *********************************************************************************
(1) The opening balance is attributable to goodwill that arose on the acquisition of Minera Santa Cruz S.A. (Santa Cruz), the holding company for the San Jose project in 2001.
163
Beginning balance********************************************************* Additions ***************************************************************** Fair value change********************************************************** Foreign exchange ********************************************************* Disposal ****************************************************************** Ending balance************************************************************
Equity securitieslisted South American companies************************** 9,192 Equity securitieslisted Canadian companies ******************************** Total********************************************************************** 9,192
4,135 4,135
Number of shares held at 1 January 2003 and 2004 *************** Additions ******************************************************* Number of shares held at 31 December 2004 ********************* Additions *******************************************************
18,019,117 18,019,117
Number of shares held at 31 December 2005 ********************* 18,019,117 Additions ******************************************************* 2,225,071 Disposals ******************************************************* (20,244,188) Number of shares held at 30 June 2006 **************************
Listed South American investments included non-actively traded investments in Inversiones Pacasmayo (IPSA) which represent a 9.9 per cent interest in IPSA in 2003 and 2004 and 13.9 per cent in 2005. 20,244,188 of these shares were sold in 2006 for US$6.4 million to Greystone Corporation (a related party), with the balance being sold as part of the disposal of MHC (refer to notes 12(6) and (7)). In 2004, the amount of US$265,000 corresponds to 1,990,800 shares of Rio Fortuna Exploration Corp.. In 2005, the Group received shares and warrants to purchase shares in Fortuna Silver Mine, Inc. as part of the payment for the sale of Caylloma (a mining unit of Compania Minera Arcata) to Fortuna.
164
US$(000)
Trade receivables *********************** Loans to related parties (note 31) ******* Receivables from SEAL/Electroperu ****** Prepaid expenses and VAT(1) ************* Advances to suppliers******************* Loans to employees(2) ******************* Assigned funds(3) *********************** Income tax refunds due(4) *************** Other********************************** Provision for impairment of receivables **
1,294 18,630 1,063 3,712 1,440 11 1,046 1,336 28,532 (390) 28,142
11,597 27,784 5,736 2,808 591 1,106 725 50,347 (391) 49,956
13,134 54,383 3,718 6,949 464 1,058 1,740 81,446 (340) 81,106
8,926 59,571 2,153 4,641 575 1,227 4,594 81,687 (340) 81,347
The fair values of trade and other receivables approximate to book value.
Notes: (1) Value added tax (VAT)Included in prepaid expenses and VAT above, value added taxes paid in the development of the San Jose Project that will be recovered through the future sales of Minera Santa Cruz, once it begins operation. VAT has been classied as a long-term receivable and is measured at present value using a discount rate of 12 percent. (2) The effective interest rates on non-current receivables were as follows:
As of 30 June 2006
7.1%
6.6%
7.5%
8.0%
(3) Assigned funds are time deposits that guarantee short-term sales commitment to certain customers. The deposits are held for greater than 12 months and are not accessible to the Group. The effective interest rates were between 1 percent and 2 percent during 2003, 2004, 2005 and the six-months ended 30 June 2006. (4) Corresponds to an over-payment of tax by Compania Minera Sipan in 2000. Due to an ongoing dispute with the authorities, this amount has not yet been refunded (refer to Note 33(c)). The Directors believe that this amount is recoverable.
19 INVENTORIES At the date of the balance sheet, this item comprised the following:
As of 31 December 2003 2004 US$(000) 2005 As of 30 June 2006
Finished goods ************************************************************* 10,647 Products in process ********************************************************* 3,064 Raw materials************************************************************** 344 Supplies and spare parts **************************************************** 4,523 Provision for obsolescence ************************************************** 18,578 (20) 18,558
As disclosed in note 24, certain inventories are pledged as part of the guarantee for the syndicated loan. 165
Assets Interest rate swap(1) *********************************************************** Warrants on Fortuna Silver Mine Inc. shares(2) *********************************** Warrants on Rio Fortuna Exploration Corp. shares(3)****************************** Purchased put option(4) ******************************************************** Embedded derivative(5) ********************************************************* Total************************************************************************** Less non-current portion: Interest rate swap(1) ********************************************************* Purchased put option(4) ****************************************************** Warrants on Fortuna Silver Mine Inc. shares(2) *********************************** Non-current portion *********************************************************** Current portion *************************************************************** Liabilities Interest rate swap(1) *********************************************************** Total************************************************************************** Less noncurrent portion: Interest rate swap *********************************************************** Current portion *************************************************************** Notes:
(1) Interest rate swaps are classied as trading derivatives with fair value movements recognised in Finance costs /income. The notional principal amounts of two the outstanding interest rate swap contracts at 31 December 2003, 2004, 2005 and 30 June 2006, were US$42.5 million, US$28 million, US$12 million, and US$4 million, respectively. The interest rate swaps were entered into to hedge the oating interest rate exposure of long-term loans but did not meet the hedge accounting criteria under IAS 39. These swap contracts expired on 15 March 2004 and 20 July 2006. (2) At 30 June 2006, this item represented 2,475,355 (2005: 2,475,355; 2004 and 2003: NIL) warrants over the same number of shares in Fortuna Silver Mine Inc., which are exercisable on 27 June 2007, at a price of CAN$0.345 per share. (3) At 30 June 2006, this represented 331,800 (2005: 995,400; 2004 and 2003: NIL) warrants over the same number of shares in Rio Fortuna Exploration Corp., which are exercisable on 4 August 2006, at a price of CAN$0.25 per share. The reduction in the number of warrants during 2006 was the result of a 1 for 3 share consolidation by Rio Fortuna Exploration Corp. on 1 January 2006. (4) In 2005, Compana Minera Ares purchased a put option contract with Citibank N.A. as from 29 August 2006 for 11 sale transactions of 1,636 ounces of gold each for a price of US$332.00 per ounce. The Company paid a total premium amounting to US$161,000 for this contract. This contracts expiration date is 27 June 2007. (5) This amount represents the fair value of the embedded derivatives contained in concentrate sales (refer to Note 12(3)).
Bonds and structured assets ******************************************** Equity securities ******************************************************* Total *****************************************************************
These nancial assets are fair value at prevailing market price as at the end of each year/period. 166
Cash in hand ****************************************************************** Current demand deposit accounts(1) ********************************************* Time deposits(2) **************************************************************** Cash and cash equivalents considered for the cash ow statement**************** Notes: (1) Relates to bank accounts which are freely available and do not bear interest.
(2) The effective interest rates were 1.05 per cent, 2.4 per cent, 3.7 per cent and 4.4 per cent in 2003, 2004, 2005 and the six months ended 30 June 2006. These deposits have an average maturity period of seven days.
Trade payables ************ Taxes and contributions **** Workers prot sharing and payroll ****************** Accrued expenses********** Interest payable *********** Mine royalty ************** Dividends payable(a)******** Deferred consideration on acquisition of Santa Cruz Advanced from customers ** Other *********************
3,450 3,450
9,783 1,930 6,205 2,849 273 372 60,803 7,249 1,568 91,032
Trade payables are mainly for the acquisition of materials, supplies and contractors services. These payables, do not accrue interest and no guarantees have been granted. The fair value of trade and other payables approximate their book values.
(a) Dividends are payable to Dona Ltd., a related party (refer to Note 31).
24 BORROWINGS
As of 31 December 2003 Non-current Current 2004 Non-current Current US$(000) 2005 Non-current Current As of 30 June 2006 Non-current Current
Bank loans Secured ******************* Unsecured **************** Other loans Secured ******************* Unsecured **************** Amount due to Minority shareholders ************ Amounts due to related parties (Note 31) ********
167
Between 1 and 2 years ***************************************************** Between 2 and 5 years ***************************************************** Over 5 years ***************************************************************
30,315 30,315
(e) The carrying amount of short-term borrowings approximates their fair value. The carrying amount and fair value of the non-current borrowings are as follows:
Carrying Amount As of 31 December 2003 2004 2005 As of 30 June 2006 US$(000) Fair Values As of 31 December 2003 2004 2005 As of 30 June 2006
Bank loans Secured (oating rates) ************ 33,010 Other loans Secured (oating rates) ************ 1,038 Amounts due to minority interest and related parties (xed rates) ** 2,256 36,304
25 PROVISION FOR MINE CLOSURE COST The provision represents the discounted values of the estimated cost to decommission and rehabilitation the mines at the date of depletion of each of the deposits. The present value of the provision has been calculated using an annual discount rate of 1.78 percent, 2.20 percent and 2.76 percent per year as of 31 December 2003, 2004 and 2005, respectively and 2.51 and 3.75 percent as of 30 June 2005 and 2006, respectively. Uncertainties in estimating these costs include potential changes in regulatory requirements, decommissioning, dismantling, and reclamation alternatives and the levels of discount and ination rates.
As of 31 December 2003 2004 2005 US$(000) As of 30 June 2006
Beginning balance ******************************************************** Increase to existing provision ********************************************** Accretion ***************************************************************** Change in discount rate *************************************************** Reclassied to liabilities directly associated with assets classied as held for sale ******************************************************************** Payments *****************************************************************
26 EQUITY (a) Equity share capital At 31 December 2003, 2004, 2005 and 30 June 2006 equity share capital represents the sum of the capital accounts of the Cayman Island entities rather than the share capital of the Company as the Company has not yet been incorporated.
169
13,591,371 4,927
2,701,801 1,053
6,869,033 2,667
5,656 20
27 DEFERRED INCOME TAX The movement in the deferred income tax liabilities and assets are as follows:
As of 31 December 2003 2004 2005 US$(000) As of 30 June 2006
Beginning of the year/period *********************************************** 6,487 Income statement credit**************************************************** (1,097) Change in tax rate ********************************************************* 40 Spin-off of Sipan (see Note 12(5)) ******************************************* Use of (gain)/loss from Caylloma (see Note 30) ******************************* Exchange difference ******************************************************* Other ********************************************************************* End of the year/period ***************************************************** 5,430
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to the same scal authority. The amounts after offset are as follows:
As of 31 December 2003 2004 2005 US$(000) As of 30 June 2006
Deferred income tax assets ************************************************** 1,079 Deferred income tax liabilities *********************************************** (6,509) (5,430)
The movement in deferred income tax assets and liabilities during the year considering the nature of the temporary differences is as follows:
Differences in cost of PP&E Differences in depreciation rates Mine development and other US$(000)
Other
Total
Deferred income tax liabilities: At 1 January 2003 *********************************** Income statement (credit) charge ********************* Change in tax rate ********************************** At 31 December 2003******************************** Income statement (credit) charge ********************* Spin-off of Sipan ************************************ At 31 December 2004******************************** Income statement (credit) charge ********************* At 31 December 2005******************************** Income statement (credit) charge ********************* At 30 June 2006 *************************************
28,935 1,128 171 30,234 5,694 (1,540) 34,388 (2,500) 31,888 (1,779) 30,109
170
Other
Total
Deferred income tax assets: At 1 January 2003******************************* Income statement credit (charge) **************** Change in tax rate ****************************** At 31 December 2003 *************************** Income statement credit (charge) **************** Gain from discontinued operations *************** At 31 December 2004 *************************** Income statement credit (charge) **************** Use of loss carry forward ************************ At 31 December 2005 *************************** Income statement credit (charge) **************** Exchange difference***************************** At 30 June 2006 ********************************
8,150 1,178 4 9,332 1,992 11,324 5,078 16,402 5,723 (19) 22,106
1,594 (820) 774 2,092 314 3,180 1,781 (2,788) 2,173 1,099 (18) 3,254
4,055 966 69 5,090 1,221 6,311 1,602 7,913 370 (54) 8,229
22,448 2,225 131 24,804 8,910 314 34,028 7,504 (2,788) 38,744 3,384 (236) 41,892
Recognised:**************************************************************** Expire in one year********************************************************** Expire in two years ********************************************************* Expire in three years ******************************************************* Expire in four years ******************************************************** Expire after four years****************************************************** Unrecognised: ************************************************************* Expire in one year********************************************************** Expire in two years ********************************************************* Expire in three years ******************************************************* Expire in four years ******************************************************** Expire after four years****************************************************** Total tax losses (recognised and unrecognised)
6 54 453 5,654 3,130 9,297 882 427 7,625 5,114 9,164 23,212 32,509
Mine development and other ************************************************ Provision for mine closure *************************************************** Impairment of assets ********************************************************
9,229 9,229
8,295 8,295
Unrecognised deferred tax on retained earnings The Group has provided for a deferred tax liability in respect of taxes that will be payable when the Groups distributable retained earnings are distributed as dividends. Retained earnings that have arisen as a result of the adoption of IFRS are not considered to be distributable locally, and as a result, the Group has not recognised deferred tax liabilities in respect of these amounts.
171
(16,083)
(25,451)
(29,683)
(10,440)
28 DIVIDENDS PAID AND PROPOSED The dividends declared and paid during the years ended 31 December 2003, 2004 and 2005 and for the period ended 30 June 2006 are as follows:
Amount US$(000)
Year ended 31 December 2003 Total dividends paid or provided for during the year***************************************************** Total dividends declared after year end and not provided for ******************************************** Year ended 31 December 2004 Total dividends paid or provided for during the year***************************************************** Total dividends declared after year end and not provided for ******************************************** Year ended 31 December 2005 Total dividends paid or provided for during the year***************************************************** Total dividends declared after year end and not provided for ******************************************** Period ended 30 June 2006 Total dividends paid or provided for during the period ************************************************** Total dividends declared after period end and not provided for ******************************************
29 DISCONTINUED OPERATIONS AND ASSETS CLASSIFIED AS HELD FOR SALE Discontinued operations The assets and liabilities related to Caylloma mining unit (part of Compana Minera Arcata) have been presented as held for sale following the approval of the Companys management and shareholders in 2004 to sell Caylloma. This unit was sold in 2005 to Fortuna Silver Mine Inc. (Fortuna), realising a gain of US$15,739,000. The consideration received was as follows:
US$000
Cash ************************************************************************************************** Deferred consideration********************************************************************************* Derivative nancial asset ******************************************************************************* Available for-sale-nancial assets *********************************************************************** Other ************************************************************************************************* Total consideration ************************************************************************************
The derivative nancial assets and available for sale nancial assets acquired represent 2,475,355 warrants over Fortuna shares, and 2,472,365 shares in Fortuna respectively.
172
PRA1
2006
20.7.1
Revenues ********************************************************* Expenses ********************************************************* Pre-tax loss ******************************************************* Tax expense ****************************************************** Gain on sale of assets and liabilities ******************************** Tax on gain on sale of assets and liabilities ************************* (Loss)/prot after tax from discontinued operations *****************
Six-month period ended 30 June Year ended 31 December 2003 2004 2005 US$(000) Unaudited 2005 2006
Operating cash ows*********************************************** (1,030) Investing cash ows************************************************ (155) Financing cash ows *********************************************** Total cash ows *************************************************** (1,185)
4,500 4,500
Assets classied as held for sale In addition to the Caylloma discontinued operations, the assets and liabilities of which were classied as held for sale, in 2004 Management agreed to sell the remaining plant of Compana Minera Sipan. This asset was reclassied as held for sale in 2004, and was carried at US$3,820,000 at 31 December 2004, US$3,844,000 at 31 December 2005, and US$3,003,000 at 30 June 2006. The reduction in carrying value between 31 December 2005 and 30 June 2006 was due to the sale of certain items at carrying value during the six months ended 30 June 2006. The Company expects that these assets will be disposed within the next six to twelve months. The analysis of amounts classied as held for sale, including the Caylloma mine and the assets of Sipan are outlined below:
Six-month period ended 30 June 2006
Disposal group held for sale: Property, plant and equipment ********************************************* Assets held for sale: Property, plant and equipment ********************************************* Liabilities directly associated with disposal group held for sale Provisions *****************************************************************
3,844 3,844
3,003 3,003
173
PRA1 19 98 74 8 180 343 2 10 581 491 90 1,517 8,766 8,766 12,812 898 650 5,107 1,986 3,278 928 25,659 36,122 8,766 22,995 4,361 36,122 27 57 84 26 6 1 33 8,716 8,716 12,804 898 6,586 160 928 21,376 30,209 8,716 21,483 10 30,209 6 267 273 3 3 60,803 60,803 13,761 898 2,686 230 17,575 78,654 60,803 17,851 78,654
Trade Cementos Pacasmayo S.A.A. ****** Cementos Selva S.A. ************** Inmobiliaria CNP S.A.C. *********** Others *************************** Other Cementos Pacasmayo S.A.A. ****** Farragut Holding Inc. ************* Dona Ltd. *********************** Inmobiliaria CNP S.A.C. *********** Compana Minera Pativilca S.A.C. ** Inversiones Pacasmayo S.A. ******* Harrison Corporation ************* Others *************************** Dividends payable Dona Ltd. (Note 23) ************** Loans Dona Ltd.(1) ********************** Harrison Corporation(1) ************ Greystone Corporation************ Empresa de Transmision Guadalupe S.A. **************** Compana Minera Pativilca S.A.C. Farragut Holding Inc.(2) *********** Cementos Pacasmayo S.A.A. ****** Transimex Inc. ******************* Mauricio Hochschild Cia. Ltda. **** Other**************************** Total **************************** Comprised of: Dividends payable to Dona******** Current related party balances **** Non-current related party balances Total
30 30 131 97 228 8,115 9,960 2,695 137 20,907 21,165 18,630 2,535 21,165
27 27 259 468 525 7 1,259 8,112 9,960 28,202 46,274 47,560 27,784 19,776 47,560
7 7 2,873 300 31 3,204 8,110 9,960 33,102 51,172 54,383 54,383 54,383
6,802 9,960 87 16,849 7,408 32,333 200 2,781 42,722 59,571 59,571 59,571
1,495 42 69 1,606 375 2 8 203 588 10,784 10,754 1,136 898 4,148 1,986 928 1,660 10,756 23,704 10,754 10,694 2,256 23,704
174
US$(000)
Empresa de Transmision Guadalupe S.A. **************** Compana Minera Pativilca S.A.C. *********************** Farragut Holding Inc.(c) ********************************* Cementos Pacasmayo S.A.A. ****************************
6.6%
8.5%
8.5% 8.5%
8.5%
All other accounts are, or were, non-interest bearing. No security has been granted or guarantees given by the Group in respect of these related party balances. Principal transactions between afliates are as follows:
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Income Interest on loans to Farragut Holding ********************************** Rent received ********************************************************* 350 Services provided ***************************************************** 3,440 Proceeds from sale Sale of shares of Inversiones Pacasmayo to Greystone Corporation ******* Sale of shares held in MHC to Greystone Corporation ******************* Sale of Inmobiliaria CNP shares to Cementos Pacasmayo ***************** Sale of zinc project (note 9) ******************************************* Sale of shares of Corianta to Cementos Pacasmayo (note 9) ************** Expenses Interest expenses****************************************************** 466 Acquisition cost Purchase of Arcata shares from Invernor******************************** Purchase of Inversiones Pacasmayo shares from Invernor*****************
(1) Transaction with Harrison Corporation and Dona Limited These loans do not bear interest and have no maturity date. (2) Transaction with Farragut Holding Inc. Corresponds to a loan provided by Compana Minera Ares to Farragut Holding Inc. with original maturity in 2009 which is repayable in ve instalments starting in 2005. This loan bore an annual interest of LIBOR plus 4.0 per cent. up to June 2006, when the benet was transferred from Compana Minera Ares to Ludlow. This amount was repaid subsequent to the balance sheet date (refer to Note 37(e)).
175
Salaries and bonuses *************************************************** 2,360 Total compensation paid to key management personnel ****************** 2,360
2,809 2,809
4,172 4,172
1,575 1,575
1,784 1,784
(c) Sale of shares of Inversiones Pacasmayo S.A. (IPSA) On June 15, 2006, the Group sold 16,585,047 shares of IPSA for US$6.4 million to a related party generating a loss of US$14.7 million against the fair value of such investment. In addition in June 2006, the shares of IPSA held by subsidiary MHC were sold at book value through the sale of MHC to a related party. 31 NOTES TO THE COMBINED CASH FLOW STATEMENT
Year ended 31 December 2003 2004 2005 US$(000) Six-month period ended 30 June Unaudited 2005 2006
Reconciliation of prot for the year/period to net cash generated from operating activities Prot for the year/period**************************************** 10,139 Adjustments to reconcile group operating prot to net cash inows from operating activities: Depreciation**************************************************** 14,000 (Gain)/loss on provisional pricing adjustment ********************* (1,624) Gain on sale of zinc project ************************************* Loss/(gain) on sale/disposal of property, plant and equipment and assets classied as held for sale ******************************** 28 Write-off of property, plant and equipment ********************** 184 Impairment of property, plant and equipment ******************** Loss on sale of available-for-sale nancial assets ****************** (Gain)/Loss on sale of subsidiaries ******************************** (Gain)/Loss from other nancial assets at fair value through prot or loss ******************************************************* 25 Deferred income tax ******************************************** (1,057) Increase (decrease) in provision for mine closure ****************** 1,199 Unwind from discount of provision for mine closure ************** 1,251 Gain from sale of Caylloma************************************** Interest expense ************************************************ 3,270 Income tax expense ********************************************* 9,553 Exchange difference from xed assets **************************** (363) Others ********************************************************* 358 Increase (decrease) of cash ows from operations due to changes in assets and liabilities: Trade and other receivables ************************************* (2,880) Derivative nancial instruments********************************** 1,799 Inventories ***************************************************** (8,406) Trade and other payables *************************************** (2,186) Cash generated from operations********************************* 25,290
9,215
42,884
22,233
22,568
22,907 (2,579) 26 923 2,181 (342) (3,216) 660 894 5,318 13,513 23 (217)
16,606 (9,916) (14,558) 197 (254) (792) (10,004) (725) 984 (15,739) 8,402 22,465 44 851
6,809 (1,920) (14,558) 113 (254) 51 (4,478) (272) 528 (12,179) 2,207 12,995 248
8,065 8,527 (172) 2,249 991 297 (5,189) (1,024) 499 3,867 18,427 (91) 496
176
US$(000)
Provision for mine closure - property, plant and equipment************** 1,540 Unpaid purchase of property, plant and equipment ********************* Unrealised gain on available-for-sale nancial assets ******************** 1,692 Uncollected proceeds from sale of MHC ******************************** Uncollected proceeds from sale of available-for-sale nancial assets ****** Realised gain from sale of available-for-sale nancial assets************** Uncollected proceeds from sale of Caylloma **************************** Acquisition on available-for-sale nancial assets ************************* Assets classied as held for sale **************************************** Provision for mine closureliability ************************************ 1,540 Dividends expired ***************************************************** 27 Unpaid dividends ***************************************************** Liabilities directly associated with assets classied as held for sale ******** Capitalisation of debt ************************************************* Non-cash contribution from minority interest *************************** 601
32 COMMITMENTS (a) Gold and silver futures contracts A summary of the sales commitments with xed prices open follows: Gold
Quantity As of 31 December Organisation 2003 (ounces) 2004 (ounces) 2005 (ounces) As of 30 June 2006 (ounces) Type of contract Period Quotation (US$/oz) From to
N.M. Rothschild ** N.M. Rothschild ** Standard Bank *** N.M. Rothschild ** Standard Bank *** Standard Bank *** Standard Bank *** Standard Bank *** Standard Bank *** Standard Bank *** Citibank ********* Citibank ********* Total ************
21,420 21,420 21,600 31,875 40,000 23,522 12,000 4,200 18,000 35,000 36,850 36,600 302,487
5,950 5,950 6,000 7,500 10,000 5,870 7,500 35,000 36,850 36,600 157,220
Min/Max Min/Max Min/Max Flat Forward Call Call Flat Forward Flat Forward Flat Forward Flat Forward Flat Forward Flat Forward
330;385 335;385 340;385 346.13 311.00 300.00 387.00 393.75 401.55 411.75 416.65 419.20
January January January April April September July July July July August January
2003 2003 2003 2003 2003 2003 2004 2004 2005 2006 2006 2007
June June June July April April June June June December June June
2006 2006 2006 2006 2006 2006 2005 2005 2006 2006 2007 2007
177
Standard Bank ****** 229,333 Standard Bank ****** 204,000 Rothschild *** 192,312 Standard Bank ****** 2,000,000 Rothschild *** 2,000,000 International International International Standard Bank ****** Total ******** 4,625,645
Min/Max Flat Forward Flat Forward Flat Forward Flat Forward Min/Max Min/Max Min/Max Min/Max
January 2003 June 2003 June 2003 January January January January July 2004 2004 2006 2006 2006
December 2003 June 2004 June 2004 December December June June December 2005 2005 2006 2006 2006
July 2006
December 2006
The contracts and commitments mentioned above are not fair valued in the books as they were entered into, and continue to be held for, the purpose of the delivery of a non-nancial item in accordance with the Groups expected sales requirements. In accordance with IAS 39, these contracts are not required to be fair valued. (b) Mining rights purchase options During the ordinary course of business, the Group enters into agreements to carry out exploration under concessions held by third parties. Under the terms of some of the agreements, the Group has the option to acquire the concession or invest in the entity holding the concession. In order to exercise the option the Group must satisfy certain nancial and other obligations over the agreement term. The options lapse in the event the Group does not meet the nancial requirements. At any point in time the Group may cancel the agreements without penalty. The Group continually reviews its requirements under the agreements and determines on an annual basis whether to proceed with the nancial commitment. The commitments at the balance sheet date are limited to the minimum nancial requirements for the subsequent twelve months, shown as follows:
As of 31 December 2003 US$(000) 2004 US$(000) 2005 US$(000) As of 30 June 2006 US$(000)
Commitment for the subsequent twelve months **************************** Later than one year*******************************************************
1,390
1,166
1,717
11,112 34,044
(c) Pallancata Project On 30 June 2006, Compana Minera Ares S.A.C., a subsidiary of Ludlow Corporation entered into an agreement with Minera Oro Vega S.A.C. (Minorva), a subsidiary indirectly owned by International Minerals Corporations (IMC), to form an entity in order to develop the Pallancata mining concession with Ludlow owning 60 per cent and Minorva 40 per cent. Ludlow committed to contribute US$6 million and Minorva committed to contribute US$4 million for the development of the project. 178
US$(000)
Not later than one year ***************************************************** Later than one year and not later than ve years*****************************
731 510
632 280
633 266
877 1,076
1,448 1,448
276 276
33 CONTINGENCIES As of 30 June 2006, the Group has the following contingencies: (a) Tax assessment Minera Arcata received a tax assessment of US$700,000 from the Peruvian Tax Authority relating to VAT scal credit and exports for the period from January to December 2003 the authorities consider such sales as local sales, instead of export sales, which are subject to VAT. This assessment is currently under appeal. Management, having consulted legal counsel, considers that there are grounds to believe that the outcome of these proceedings will be favourable to Minera Arcata, that an export transaction has occurred with overseas customer, as the goods left the country to be used or consumed abroad, as established under the applicable laws and regulations for goods to be eligible to use the export tax relief. 180
PRA2 2, 3, 5, 6
Hochschild Settlement of Mining related party Group balances (Note 1) (Note 2) ASSETS Non-current assets Property, plant and equipment********* Intangible assets ***** Available-for-sale nancial assets***** Deferred income tax assets ************* Trade and other receivables*********
(59,571)
95
Current assets Inventories ********** Trade and other receivables********* Derivative nancial instruments ******** Other nancial assets at fair value through prot and loss *************** Cash and cash equivalents ******** Assets classied as held for sale ******* Total assets ********** EQUITY AND LIABILITIES Equity share capital ** Share premium ****** Other reserves ******* Retained earnings**** Equity attributable to the shareholders of the parent********* Minority shareholders Total equity *********
95 95
95
210,230 (210,230)
73,824 402,937
(146,668) 146,668
(20,000)
95 95
476,761 476,761
(20,000) (20,000)
186
20,000 20,000
95
476,761
20,000
Notes: 1 The consolidated balance sheet of the Hochschild Mining Group as at 30 June 2006 has been extracted without material adjustment from Section B: IFRS Historical Financial Information of Part IX: IFRS Historical Financial Information. 2 The payment to settle certain related party balances prior to Admission paid from other nancial assets at fair value through prot and loss.
(US$000)
PRA2 4
Related party accounts receivable************************************************************************ Related party accounts payable************************************************************************** Dividend previously declared and unpaid***************************************************************** Outstanding related party balance paid ******************************************************************
3 The allotment and issue to Pelham Investments of 49,999 ordinary shares in the Company at a nominal value of 1 each in accordance with paragraph 2.3 Part XIV: Additional Information (49,999 (US$95,438)) and the subsequent split of the Companys 50,000 issued shares into 100,000 shares of nominal value of 0.50 each. 4 The allotment and issue in aggregate to Pelham Investment Corporation and Navajo Overseas Corporation of 229,900,000 ordinary shares in the Company at nominal value of 0.50 (114,950,000 (US$219,416,560)) pursuant to the share exchange agreement in accordance with paragraph 2.5 Part XIV: Additional Information. The adjustment includes a consolidating entry necessary to eliminate the share capital in relation to the combined companies under the pooling of interest method accounting (US$9,187,000).
(US$000)
Allotment and issue of shares to Pelham Investment Corporation and Navajo Overseas Corporation ********* Elimination of share capital of combined companies ******************************************************
5 Net estimated proceeds of the Global Offer, non-executive director share subscription and employee offer.
(US$000)
Global Offer proceeds ********************************************************************************** Non-executive director share subscription and employee offer proceeds ************************************ Offer expenses ***************************************************************************************** Net estimated proceeds of the Global Offer, non-executive director share subscription and employee offer***
Global Offer gross proceeds of US$516 million are based on 77,250,000 Ordinary Shares being issued by the Company under the Global Offer each at an offer price of 3.50 based on a nominal value of 0.50 (38,625,000 (US$73,727,400)) and premium of 3.00 (231,750,000 (US$442,364,400)) to its nominal value extracted without material adjustment from paragraph 19.2 of Part XIV: Additional Information. Non-executive director share subscription and employee offer proceeds of US$669,000 are based on 100,226 Ordinary Shares being issued by the Company under both the non-executive director share subscription and employee offer each at an offer price of 3.50 based on a nominal value of 0.50 (50,100 (US$97,000)), and a premium of 3.00 (300,000 (US$572,000)) to its nominal value. Offer expenses are the estimated fees
187
Nominal value of 307,350,226 shares in issue at 0.25p each (76,837,557) ********************************** Distributable reserves created from reduction in share capital (76,837,557) ********************************
7 Declaration of a US$20 million dividend as disclosed in note 37 of Part IX: IFRS Historical Financial Information. The dividend is to be partially settled as part of the net settlement of outstanding related party balances referred to in paragraph (e), note 37 of Part IX: IFRS Historical Financial Information with the balance to be paid after Admission. These related party balances differ from those disclosed in note 2 above, which are stated as at 30 June 2006, owing to the movement in such balances after 30 June 2006. 8 No account has been taken of any trading or other transactions since 30 June 2006.
Impact on earnings The Directors believe that, had the Global Offer occurred at the beginning of the last nancial period, the combined income statement would have been impacted. Assuming that a portion of the net offer proceeds are applied to reduce the borrowings of the Hochschild Mining Group, the impact would be to reduce nance costs associated with bank loans. Additional nance income would also be generated from interest earned on increased cash deposits arising from any unutilised net offer proceeds. A reduction in nance costs and additional nance income would result in an increased taxation charge. This statement should not be taken to mean that the earnings per share of the Hochschild Mining Group will necessarily match or exceed the historical reported earnings per share of the Hochschild Mining Group and no forecast is intended or implied.
188
Dear Sirs Hochschild Mining plc (the Company) We report on the pro forma nancial information (the Pro Forma Financial Information) set out in Part X: Unaudited pro forma Financial Information of the Prospectus dated 3 November 2006, which has been prepared on the basis described in the notes to the Proforma balance sheet, for illustrative purposes only, to provide information about how the transaction might have affected the nancial information presented on the basis of the accounting policies to be adopted by the Company in preparing the nancial statements for the period ended 30 June 2006. This report is required by Annex I item 20.2 of the Prospectus Regulation and is given for the purpose of complying with that item and for no other purpose. Save for any responsibility arising under Prospectus Rule 5.5.3R(2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with item 23.1 of Annex I to the PD Regulation), consenting to its inclusion in the prospectus. Responsibilities It is the responsibility of the directors of the Company to prepare the Pro Forma Financial Information in accordance with Annex I item 20.2 of the PD Regulation. It is our responsibility to form an opinion, as required by Annex II item 7 of the Prospectus Regulation, as to the proper compilation of the Pro Forma Financial Information and to report that opinion to you. In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any nancial information used in the compilation of the Pro Forma Financial Information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue. Basis of opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying nancial information, consisted primarily of comparing the unadjusted nancial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Financial Information with the directors of the Company. We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro Forma 189
190
) )
196
PRA3 5.1.6
PRA3 5.2.1
PRA3 4.1
PRA3 5.1.9
204
211
PRA1 5.1.4
PRA3 4.2
PRA1 5.1.4
(ii)
(iii)
(iv)
(v)
2.7 The authorised, issued and fully paid share capital of the Company as at 2 November 2006, being the last practicable date prior to publication of this document, is as follows:
Authorised Class of shares Number Amount Number Issued Amount
250,000,000
307,350,226
153,675,113
2.8 Save as disclosed in this paragraph 2: 2.8.1 there has been no change in the amount of the issued share or loan capital of the Company and no material change in the amount of the issued share or loan capital of any other member of the Hochschild Mining Group (other than intra-group issues by whollyowned subsidiaries) within three years of the date of this document; and 214
PRA1 21.1.7
PRA1 21.1.4
(ii)
Where the sanctions in (i) above apply in relation to any shares, they shall cease to have effect and any dividends withheld under (ii) shall become payable if the shares are transferred by means of an excepted transfer but only in respect of the shares transferred or at the end of the period of seven days (or such shorter period as the Board may determine) following receipt by the Company of the information required by the notice and the Board being fully satised that such information is full and complete. (d) Dividends Subject to the provisions of the Companies Act and of the Articles, the Company may by ordinary resolution declare dividends to be paid to members according to their respective rights and interests in the prots of the Company. However, no dividend shall exceed the amount recommended by the Board. Subject to the provisions of the Companies Act, the Board may declare and pay such interim dividends as appear to the Board to be justied by the prots of the Company available for distribution. If at any time the share capital of the Company is divided into different classes, the Board may pay such interim dividends on shares which rank after shares conferring preferential rights with regard to dividend as well as on shares conferring preferential rights, unless at the time of payment any preferential dividend is in arrears. Provided that the Board acts in good faith, it shall not incur any liability to the holders of shares conferring preferential rights for any loss that they may suffer by the lawful payment of any interim dividend on any shares ranking after those with preferential rights. Except as otherwise provided by the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid but no amount 216
PRA3 4.5
(iii)
The Board may also, with the prior authority of an ordinary resolution of the Company and subject to such conditions as the Board may determine, offer to holders of ordinary shares the right to elect to receive ordinary shares, credited as fully paid, instead of the whole (or some part, to be determined by the Board) of any dividend specied by the ordinary resolution. Unless the Board otherwise determines, the payment of any dividend or other money that would otherwise be payable in respect of shares will be withheld, and the Company shall have no obligation to pay interest on it, if such shares represent at least 0.25 per cent. of the nominal value of the issued share capital of their class and the holder, or any other person appearing to be interested in those shares, has been issued with a notice under section 212 of the Act and has failed to supply the information required by such notice within 14 days. Furthermore such a holder shall not be entitled to elect to receive shares instead of a dividend. All dividends, interest or other sum payable and unclaimed for 12 months after having become payable may be invested or otherwise used by the Board for the benet of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends unclaimed for a period of 12 years after having been declared or become due for payment shall (if the Board so resolves) be forfeited and shall cease to remain owing by the Company. (e) Division of assets on a winding-up If the Company is wound up the liquidator may, with the sanction of a extraordinary resolution of the Company and any other sanction required by law, divide among the members in specie the whole or any part of the assets of the Company and may, for that purpose, value any assets and determine how the division shall be carried out as between the members or different classes of members. Any such division may be otherwise than in accordance with the existing rights of the members, but if any division is resolved otherwise than in accordance with such rights, the members shall have the same right of dissent and consequential rights as if such resolution were a special resolution passed pursuant to section 110 of the Insolvency Act 1986. The liquidator may, with the like sanction, vest the whole or any part of the assets in trustees on such trusts for the benet of the members as he with the like sanction shall determine, but no member shall be compelled to accept any assets on which there is a liability. 217
PRA3 4.5
Unless the Board otherwise determines, a transfer of shares will not be registered if the transferor or any other person appearing to be interested in the transferors shares has been issued with a notice under section 212 of the Act, has failed to supply the information required by such notice within 14 days and the shares in respect of which such notice has been served represent at least 0.25 per cent. of their class, unless the member is not himself in default as regards supplying the information required and proves to the satisfaction of the Board that no person in default as regards supplying such information is interested in any of the shares the subject of the transfer, or 218
219
(iv)
Subject to the provisions of the Companies Act and to any rights for the time being attached to any shares, the Company may by special resolution reduce its share capital or any capital redemption reserve or share premium account in any way. (l) Allotment of shares Subject to the provisions of the Companies Act and to any relevant authority of the Company in general meeting required by the Companies Act, unissued shares at the date of adoption of the Articles and any shares thereafter created shall be at the disposal of the Board, which may allot (with or without conferring rights of renunciation), grant options over, offer or otherwise deal with or dispose of them or rights to subscribe for or convert any security into shares to such persons (including the Directors themselves), at such times and generally on such terms and conditions as the Board may decide, provided that no share shall be issued at a discount. Subject to the provisions of the Companies Act and to any special rights for the time being attached to any existing shares, any share may be issued which is, or at the option of the Company or of the holder of such share is liable, to be redeemed on such terms and in such manner as the Articles may provide. (m) Power to attach rights Subject to the provisions of the Companies Act and to any special rights for the time being attached to any existing shares, any shares may be allotted or issued with or have attached to them such preferred, deferred or other special rights or restrictions whether in regard to dividends, voting, transfer, returned capital or otherwise, as the Company may from time to time by ordinary resolution determine or, if no such resolution has been passed or, so far as the resolution does not make specic provision, as the Board shall determine. (n) Remuneration of Directors The Directors (other than alternate Directors) shall be entitled to receive by way of fees for their services as Directors such sum as the Board may from time to time determine (not exceeding 3,000,000) per annum, or such other sum as the Company in general meeting by ordinary resolution shall from time to time determine). Such sum (unless otherwise directed by the resolution of the Company by which it is voted) shall be divided among the Directors in such proportions and in such manner as the Board may determine or, in default of such determination, equally (except that in such event any Director holding ofce for less than the whole of the relevant period in respect of which the fees are paid shall only rank in such division in proportion 220
PRA1 21.2.2
(iii)
(iv)
and no such ofce, employment, contract, arrangement, transaction or proposal shall be avoided on the grounds of any such interest or benet. (q) Interested Director not to vote or count for quorum Save as provided in this paragraph (q), a Director shall not vote on, or be counted in the quorum in relation to, any resolution of the Board or of a committee of the Board concerning any 221
(ii)
(iii)
(iv)
(v)
(vi)
A Director shall not vote or be counted in the quorum on any resolution of the Board or committee of the Board concerning his own appointment (including xing or varying the terms of his appointment or its termination) as the holder of any ofce or place of prot with the Company or any company in which the Company is interested. Where proposals are under consideration concerning the appointment (including xing or varying the terms of appointment or its termination) of two or more Directors to ofces or places of prot with the Company or any company in which the Company is interested, such proposals may be divided and a separate resolution considered in relation to each Director. In such case each of the Directors concerned (if not otherwise debarred from voting under the Articles) shall be entitled to vote (and be counted in the quorum) in respect of each resolution except that concerning his own appointment. If any question arises at any meeting as to the materiality of a Directors interest (other than the Chairmans interest) or as to the entitlement of any Director (other than the Chairman) to vote or be counted in a quorum, and such question is not resolved by his voluntarily agreeing to abstain from voting or being counted in the quorum, such question shall be referred to the Chairman of the meeting. The Chairmans ruling in relation to the Director concerned shall be nal and conclusive except in a case where the nature or extent of the interest of the Director concerned (so far as it is known to him) has not been fairly disclosed to the Board. If any question arises at any meeting as to the materiality of the Chairmans interest or as to the entitlement of the Chairman to vote or be counted in a quorum, and such question is not resolved by his voluntarily agreeing to abstain from voting or being counted in the quorum, such question shall be decided by resolution of the Directors or committee members present at the meeting (excluding the Chairman), whose majority vote shall be nal and conclusive. 222
The notice shall specify the day, time and place of the meeting and, in the case of general business, the general nature of that business to be transacted and shall specify whether the meeting is an annual general meeting or an extraordinary general meeting, if the meeting is 223
PRA1 5.1.4
225
Director
Eduardo Hochschild(2) ****************************** Roberto Danino(3) ********************************** Alberto Beeck(4) ************************************ Sir Malcolm Field ********************************** Jorge Born Jr. ************************************* Nigel Moore *************************************** Dionisio Romero *********************************** Note: (1) Assuming no exercise of the Over-allotment Option.
226,550,000 3,450,000 0 0 0 0 0
98.5 1.5 0 0 0 0 0
(2) Ordinary Shares held through Pelham Investment Corporation (3) Ordinary Shares held through Navajo Overseas Corporation (4) For details of Alberto Beecks interests in the Company, see paragraph 3 of Part III: Management, corporate governance and the Major Shareholder
5.4 The table below sets out certain interests of Senior Management (and of persons connected with them) in the share capital of the Company as they are expected to be immediately prior to, and following, Admission:
Immediately prior to Admission Number of Ordinary Shares owned As a percentage of issued ordinary share capital Immediately following Admission Number of Ordinary Shares owned As a percentage of issued ordinary share capital
Senior Management
Miguel Aramburu ********************************** Jorge Benavides *********************************** Ignacio Rosado ************************************ Eduardo Loret de Mola***************************** Ricardo Arrarte ************************************ Gonzalo Freyre ************************************
0 0 0 0 0 0
0 0 0 0 0 0
5.5 The interests of the Directors together represent 100 per cent. of the issued share capital of the Company as at the date of this document and are expected to represent approximately 74.8 per cent. of the issued share capital of the Company immediately following Admission, assuming no exercise of the Over-allotment Option. 5.6 Save as set out in this paragraph 5, and in Part IX: IFRS Historical Financial Information, none of the Directors has any interests in the share or loan capital of the Company or any of its subsidiaries. 5.7 Save as set out in Note 30 to the combined nancial information contained in Section B of Part IX: IFRS Historical Information no Director has or has had any interest in any transaction which is or was unusual in its nature or conditions or is or was signicant to the business of the Hochschild Mining Group and which was effected by the Company in the current or immediately preceding nancial year or which was effected during an earlier nancial year and remains in any respect outstanding or unperformed. 5.8 There are no outstanding loans granted by any member of the Hochschild Mining Group to any Director, nor has any guarantee been provided by any member of the Hochschild Mining Group for their benet.
PRA3 3.3
PRA1 15.1
226
PRA1 14.1
Director Eduardo Hochschild ***************** Cementos Pacasmayo S.A.A. Inversiones Pacasmayo S.A. Banco de Credito del Peru Pacico Peruano Suiza Ca de Seguros y Reaseguros Sociedad de Comercio Exterior del Peru (Comex Peru) TECSUP Sociedad Nacional de Minera y Petroleo Asia Pacic Economic Cooperation Business Advisory Council-Peru (Consejo Consultivo Empresarial del Foro de Cooperacion Economica Asia Pacco- ABAC Peru) El Patronato de la Plata del Peru Consejo Empresarial de America Latina Fundacion Pedro y Angelica de Osma Instituto Peruano de Economa Cementos Selva S.A. Compana Minera Corianta S.A.C. Mauricio Hochschild & Ca Ltda. S.A.C. Grupo Hochschild S.A.C. Patronato de la UNI Conferencia Ep`scopal Peruana Universidad de Ciencias Aplicadas Gold Fields Peru Educational Testing Service Open Society Institute Youth Orchestra of the Americas Harvard Alumni International Association Asociacion Cultural Filarmonia International Lawyers for Africa Wilmer Cutler & Pickering International Center for Settlement of Investment Disputes World Bank Mountain Institute Proinversion Cementos Pacasmayo S.A.A. Cementos Pacasmayo S.A.A. Georgetown University Latin American Board Mauricio Hochschild & Ca Ltda. S.A.C. Grupo Hochschild S.A.C. BMI Insurance YPO (Young Presidents Organization) Latin American Board YPO North East Region Aricom plc Odgers Ray & Berndston Linden Homes Tubes Lines Limited WH Smith plc Civil Aviation Authority Scottish and Newcastle plc MEPC Evolution Beeson Gregory The Stationery ofce Bunge Limited Mutual Investment Limited Bomagra S.A. Caldenes S.A. Brasif (Brazil Duty Free) Lauder Institute of the Wharton School, University of Pennsylvania Latin American Board of the Wharton School, University of Pennsylvania Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y N N N N N N Y Y Y Y N N N Y Y Y N N N N N N N Y Y Y Y Y Y Y
227
Latin American Board, Georgetown University, Washington D.C. Born-Bunge Foundation for Brain Research, Antwerp Dufry A.G. Nigel Moore************************ TEG Environmental plc The Vitec Group plc Ascent Resources plc IntelligentComms Limited Ernst & Young Vanco Energy Company Credicorp Ltd. Banco de Credito del Peru Banco de Credito de Bolivia Cementos Pacasmayo S.A.A. TECSUP Atlantic Security Bank Pacco Peruano Suiza Ca de Seguros y Reaseguros Santa Patricia S.A. Aero Transporte S.A.
Y Y N Y Y Y Y N N Y Y Y Y Y Y Y Y Y
Senior Management Miguel Aramburu******************* Jorge Benavides ******************** Ignacio Rosado ********************* Eduardo Loret de Mola************** Ricardo Arrarte ********************* Gonzalo Freyre ********************* Altavista S.A.C. N/A N/A Grupo Minera Huampar Compana Minera Caudalosa Compana Minera Acobamba Minera Santa Cruz S.A. Compana Minera Ares S.A.C. N N/A N/A N Y N Y N PRA1 14.2
5.10 Alberto Beeck and Eduardo Hochschild are Chairman and Vice Chairman, respectively, of Cementos Pacasmayo S.A.A., and each has a directors service contract with this company. 5.11 Save as set out above, none of the Directors, the Senior Management or the Company Secretary has any business interests, or performs any activities, outside the Hochschild Mining Group which are signicant with respect to the Hochschild Mining Group. 5.12 At the date of this document, none of the Directors or Senior Management has at any time within the last ve years: (i) (ii) had any convictions in relation to fraudulent offences; been declared bankrupt or been the subject of any individual voluntary arrangement, or been associated with any bankruptcy, receivership or liquidation in his capacity as director or senior manager; been the subject of any ofcial public incrimination and/or sanctions by statutory or regulatory authorities (including designated professional bodies); been disqualied by a court from acting as a director or member of the administrative, management or supervisory bodies of any company or from acting in the management or conduct of the affairs of any company; been a partner or senior manager in a partnership which, while he was a partner or within 12 months of his ceasing to be a partner, was put into compulsory liquidation or administration or which entered into any partnership voluntary arrangement; owned any assets which have been subject to a receivership or been a partner in a partnership subject to a receivership where he was a partner at a time or within the 12 months preceding such event; or 228
PRA1 14.1
(iii) (iv)
(v)
(vi)
(ii)
(iii)
6 Interests of major shareholders Other than the interests of the Directors and members of the Senior Management disclosed in paragraph 5 (and assuming no exercise of the Over-allotment Option), in so far as the Directors are aware, no persons will immediately prior to and following Admission be interested in 3 per cent. or more of the Companys issued share capital. None of the Companys major shareholders have or will have different voting rights attached to the shares they hold in the Company. 7 Directors and Senior Managements Service Agreements, Remuneration and Other Matters 7.1 The terms of the Directors service contracts are summarised below:
Date of Contract Aggregate Current Salary
PRA1 18.2
Name
Notice Period
Executive Directors Eduardo Hochschild *************************************** Roberto Danino ****************************************** Alberto Beeck ********************************************
229
Non-Executive Directors Sir Malcolm Field ***************************************** Jorge Born Jr. ********************************************
16 October 2006
16 October 2006
Nigel Moore**********************************************
16 October 2006
16 October 2006
3 months notice to be given by Non-Executive Director 3 months notice to be given by Non-Executive Director 3 months notice to be given by Non-Executive Director 3 months notice to be given by Non-Executive Director
100,000
100,000
120,000
100,000
7.2 Service Agreement with Eduardo Hochschild On 16 October 2006 the Company entered into a service agreement with Eduardo Hochschild. The agreement provides for Mr. Hochschild to act as Executive Chairman at a salary of $160,000 (approximately 84,000) per annum. The agreement has no xed term but can be terminated by either party on 12 months notice in writing. The agreement also contains provisions for payment of salary alone in lieu of notice. There are no other benets payable under the agreement upon termination of employment. Mr. Hochschild has also entered into a service agreement with Compana Minera Ares on 16 October 2006. The agreement provides for Mr. Hochschild to act as Executive Chairman at a salary of $640,000 (approximately 335,000) per annum together with a payment of $160,000 (approximately 84,000) per annum in lieu of pension (Pension Supplement). The agreement has no xed term. The agreement can be terminated by Mr. Hochschild on 12 months notice in writing. The agreement contains provisions for payment of salary and Pension Supplement alone in lieu of notice. If the agreement is terminated by Compania Minera Ares without cause, Mr. Hochschild is entitled, under Peruvian law, to a payment equivalent to one and a half times Mr. Hochschilds monthly salary and Pension Supplement for each year of service (up to a maximum of 12 months worth of salary and Pension Supplement). 7.3 Service Agreement with Roberto Danino On 16 October 2006 the Company entered into a service agreement with Roberto Danino. The agreement provides for Mr. Danino to act as Deputy Chairman and Executive Director at a salary of $160,000 (approximately 84,000) per annum. The agreement has no xed term but can be terminated by either party on 12 months notice in writing. The agreement also contains provisions for payment of salary alone in lieu of notice. There are no other benets payable under the agreement upon termination of employment. Mr. Danino has also entered into a service agreement with Compana Minera Ares on 16 October 2006. The agreement provides for Mr. Danino to act as Deputy Chairman and Executive Director at a salary of $640,000 (approximately 335,000) per annum together with a payment of $160,000 (approximately 84,000) per annum in lieu of pension (Pension Supplement). The agreement has no xed term. The agreement can be terminated by Mr. Danino on 12 months notice in writing. The agreement contains provisions for payment of salary and Pension Supplement alone in lieu of notice. If the agreement is terminated by Compania Minera Ares without cause, Mr. Danino is entitled, under Peruvian law to a payment equivalent to one and a half times Mr. Daninos monthly salary and Pension Supplement for each year of service (up to a maximum of 12 months worth of salary and Pension Supplement). 230
PRA1 16.2
PRA1 15.1
Eduardo Hochschild ***************** Roberto Danino ******************** Alberto Beeck ********************** Miguel Aramburu******************* Jorge Benavides ******************** Ignacio Rosado ********************* Eduardo Loret de Mola************** Ricardo Arrarte ********************* Gonzalo Freyre ********************* Note:
Executive Director Executive Director Executive Director General Manager, Mining Division General Manager, Exploration and Geology Division Chief Financial Ofcer Manager, International Operations Manager, Peruvian Operations Manager, Argentinian Operator,
(1) The directors of Compana Minera Ares, which in 2005 included Miguel Aramburu, Ignacio Rosado, Eduardo Loret de Mola and Ricardo Arrarte, were allocated as part of their remuneration a directors fee calculated by reference to the prots of that company. Although these directors fees are included in the remuneration of the relevant senior managers listed above, the after-tax amounts were donated to persons connected to Compana Minera Ares or its afliates. This includes TECSUP, the non-prot, technical university founded by the Group in 1984 (see Part 1: Information on Hochschild Mining Other Programmes).
8 Executive Long Term Incentive Plan The Company has not yet adopted an executive long term incentive plan. It is intended, however, that the Company will, following Admission, seek advice on the form of long term incentive plan that is most suitable for the Company with a view to adopting a plan or plans, subject to shareholder approval (if required). 9 Pensions The Hochschild Mining Group does not currently operate any pension schemes for the employees of the Group for its employees and has no present intention of introducing such schemes. Details of the Groups statutory contributions to pension accounts for its employees in Peru, Mexico and Argentina are set out in Part VII: Operating and Financial Review. 10 Working Capital In the opinion of the Company, taking account of the net proceeds of the Global Offer, the working capital available to the Group is sufcient for the Groups present requirements, that is, for the next 12 months following the date of this document. 11 Underwriting Agreement On 3 November 2006, the Company and the Managers entered into the Underwriting Agreement pursuant to which the Managers (other than JPMSL) have agreed to procure subscribers for, or failing which the Underwriters will acquire themselves, at the Offer Price, the Ordinary Shares to be made available under the Global Offer. The Underwriting Agreement contains, amongst others, the following further provisions: 11.1 the Company has appointed JPMorgan Cazenove Limited and Goldman Sachs as Joint Sponsors in connection with the Admission of the Ordinary Shares to the Ofcial List. The Company has appointed JPMorgan Cazenove Limited and Goldman Sachs as Joint Global Co-ordinators in connection with the Global Offer and has appointed JPMorgan Cazenove Limited and Goldman Sachs as Joint Bookrunners to the Global Offer; 11.2 the Over-allotment Shareholders have granted to JPMorgan Cazenove Limited, as Stabilising Manager, the Over-allotment Option pursuant to which the Stabilising 232
PRA3 5.4.3, 5.4.4 PRA3 3.1
(ii)
(iv)
(v)
(vi)
12.2.2 Promissory Note (a) On 4 October 2006, the Hochschild Mining Group (through Lorenzon Limited) entered into a promissory note (the Promissory Note) whereby the Hochschild Group has agreed to pay to Banco de Credito del Peru (the Bank) an amount of US$20 million in satisfaction of the loan of the same amount made by the Bank to the Group. (b) Interest on the amounts covered by the Promissory Note is 120 day LIBOR plus 2.5 per cent. If the Hochschild Mining Group fails to pay the principal amount and interest on the maturity date of the Promissory Note, the Group must pay a fee equal to two per cent. of the amount of any payment due and unpaid. 236
(ii)
(h) The joint venture agreement may be terminated by International Minerals and Minorva if the mine completion is delayed for more than eighteen months after the target mine completion date (which is 12 months from the date upon which all construction, environmental, operating and other licences and permits for the construction of the mine have been obtained). Upon written notice of termination by either International Minerals or Minorva, 238
(d) The second and nal instalment (US$4,500,000 plus VAT) is payable on the rst of the following events: (i) the date on which the six month contractual term expires (i.e. 31 December 2006); or (ii) 15 days from the date on which MHM concludes to its full satisfaction the studies and tests which form part of its due diligence process. (e) Both instalments are to be paid in the following proportions: MHM will pay 70 per cent. of the price and Exmin will pay 30 per cent. The rst instalment is to be paid by means of bank transfers. The second instalment is to be paid in cash or equivalent monetary instrument by MHM and in cash, monetary instrument equivalent or shares in Exmin Resources Inc. by Exmin. Should either Purchaser not pay its share of the consideration within three days of the due date, the other has the right to purchase all of the mine and corresponding rights. (f) Once Minera Moris receives written notice (Purchase Notice) from the Purchasers that the conditions precedent have all been met, it will transfer the assets to the Purchasers or to the company designated by the Purchasers for such purpose (in which MHM and Exmin will participate 70/30, respectively, or such other proportions as may be agreed between them). Such transfer must be made within 15 days of the date on which the Purchase Notice is received. The joint obligation to full these terms of the contract will subsist even in the event that only one Purchaser presents the Purchase Notice and the other presents a written communication of its wish not to participate in the acquisition. However, should the conditions precedent not be fullled within the required time, the Purchasers will be under no obligation to acquire the assets. The conditions precedent include the following: (i) that Minera Moris has complied with the obligations and schedule set out in clause 4 of the contract under which Minera Moris is to apply most of the rst instalment (amounting to US$1,500,000 plus VAT) that it receives from the Purchasers against its debts; 241
(iii)
If any of the above conditions are not met, the Purchasers will be under no obligation to acquire the assets. (g) The contract was signed and notarised on 30 June 2006 and the contract will remain valid for six months from this date unless the parties agree in writing to extend this deadline. 12.3.5 San Jose (a) On 15 March 2001, Mauricio Hochschild & Cia Ltda. (MHC), Minera Andes Inc. (MAI) and Minera Andes S.A. (MASA) entered into a joint venture agreement whereby MAI, through its wholly owned subsidiary MASA, agreed to transfer rights to explore, applications for exploitation concessions, any resulting exploitation concessions, together with any relating easements, rights of way, permits and lings, in relation to certain areas of interest (the Rights) located in the Deseado Massif of the Province of Santa Cruz, Argentina (the Property) held by MASA to a newly incorporated Argentinian company, Minera Santa Cruz S.A. (Newco) in exchange for US$1 million. Lorenzon Limited (Lorenzon) (a Hochschild Mining Group company) was joined as a party to the joint venture agreement and was designated as the recipient of MHCs entitlement to shares in the Newco pursuant to the Third Amendment (as dened below). (b) Under the joint venture agreement, MHC was granted exclusive rights to explore and perform mining exploration, development and mining in the Property for a period of three years from the date of the agreement (the Option Period) together with an irrevocable right to acquire 51 per cent. of the issued and outstanding share capital of Newco (the Option). The Option was exercised by MHC on 6 May 2003 (the Vesting Date). (c) MAI had an option within the 120 day period after the Vesting Date to elect to reduce its ownership of the Newco from 49 per cent. to 35 per cent. and a further option to reduce its ownership down to 15 per cent. This further option was removed pursuant to the Third Amendment to the joint venture agreement (see (g) below). (d) MAI has the right to receive from MHC US$200,000 on signing the joint venture agreement and the same sum every six months thereafter, under the terms of the Third Amendment, until the Newco has received a positive feasibility study concluding that a mine is technically feasible and economically warranted and a decision has been made by the board of the Newco to construct a mine on the Property. As of 23 September 2005, MHC had made seven payments of US$200,000, totalling US$1,400,000, to MAI. The payment to MAI by MHC on 23 September 2005 was the last payment made as the board of directors of Newco decided at a meeting on 27 December 2005 to proceed with the construction of the mine. (e) The board of Newco is composed of three directors. MHC is entitled to appoint two directors to the board of Newco whilst MAI may appoint one director. In the event of a disagreement over a course of action requiring the unanimous consent of the board, MHC has the right to buy out the minority shareholders stake. (f) Shares in Newco may be transferred by either shareholder to any of their afliates provided that such afliate provides a written undertaking to be bound by the terms of the joint venture agreement. Either shareholder may also transfer all (or, with the prior consent of the 242
PRA1 19
PRA1 20.8
Compana Minera Ares S.A.C.******************************************* Compana Minera Arcata S.A. ****************************************** Minera Suyamarca S.A.C. *********************************************** Minera Hochschild Mexico S.A. de C.V. ********************************* MH Argentina S.A. **************************************************** Minera Santa Cruz S.A. ************************************************ Minera MH Chile Ltda *************************************************
16 Property, plant and equipment The Hochschild Mining Groups material existing tangible xed assets, other than its mines, licence and contract terms which are summarised in Tables 2-1 to 2-3 (inclusive) and Tables 2-13 to 2-26 (inclusive) of the Technical Report in Part XV are set out below. 248
Peru
Peru
Peru
Peru
Peru Peru
Peru
Peru
Peru
Peru
Peru
Carretera MataraniMollendo, km 0.10, Zona Industrial, Islay, Arequipa Fundo Salto- Arcata Mine Fundo YurahuiArcata Mine Fundo ChumilleArcata Mine Fundo UmascochaArcata Mine Fundo Saracocha Huisca- Arcata Mine Fundo Comunidad Campesina Orcopampa- Ares Mine Fundo Comunidad Campesina PallancataPallancata Mine Av. Parra N 247, district, province and department of Arequipa Pasaje el Carmen N 180, Urb. El Vivero de Monterrico, Santiago de Surco, province and department of Lima. Av. Parra No 226, Arequipa Fundo Comunidad Campesina Orcopampa- Ares Mine Fundo Comunidad Campesina Pampamarca- Selene Mine Fundo Comunidad Campesina Pampamarca- Selene Mine Fundo Comunidad Campesina IscahuacaSelene Mine Fundo Comunidad Campesina IscahuacaSelene Mine Fundo Comunidad Campesina CollanaSan Martn Project
Freehold
Compana Minera Ares S.A.C Compana Minera Ares S.A.C Compana Minera Ares S.A.C Compana Minera Ares S.A.C Compana Minera Ares S.A.C Compana Minera Oro Vega S.A.C
2 October 2024
Freehold
22 April 2005
Freehold
Leasehold
31 December 2008
Freehold Leasehold
2 October 2024
Leasehold
7 November 2025
Leasehold
2 July 2028
Leasehold
13 May 2028
One-off payment made of S/.100,000.00 One-off payment made of S/.27,375.00 One-off payment made of S/.5,000.00 and S/.1,000 for each additional drilling during the term of the contract One-off payment made of S/.159,189.00
Leasehold
20 December 2028
Leasehold
10 January 2008
Peru
Leasehold
15 February 2026
249
Argentina Rural Estate La Carmencita, Section 1, Colonia Leandro N. Alem, Province of Santa Cruz Argentina Rural Estate Estancia San Jose, VII Department Lago Buenos Aires, Colonia Leandro N. Alem, Province of Santa Cruz Argentina Avenida Sargento Cabral No. 124, Barrio 13 de Diciembre, City of Comodoro Rivadavia, Province of Chubut Argentina Mariano Moreno 756, Province of Santa Cruz Mexico Surface land of 200 hectares of rural land known as Hacienda Santa Mara Mexico Surface land of 200 hectares of rural land known as La Cienguita
Freehold
Freehold
Leasehold
31 December 2011
Leasehold
1 March 2007
Leasehold
Leasehold
16 February 2015
US$2,000 per month until 16 February 2007 to increase every subsequent year based on ination in the United States
17 Signicant change There has been no signicant change in the nancial or trading position of the Hochschild Mining Group since 30 June 2006, the date to which the nancial information for the Hochschild Mining Group in Section B of Part IX: IFRS Historical Financial Information was prepared. 18 Consents 18.1 Ernst & Young LLP has given and has not withdrawn its written consent to the inclusion in this Prospectus of its reports and references to it in the form and context in which they appear and has authorised the contents of its reports for the purposes of paragraph 5.5.3R(2)(f) of the Prospectus Rules and item 23.1 of Annex I of the Commission Regulation (EC) 809/2004. 18.2 IMC Group Consulting Limited has given and has not withdrawn its written consent to the inclusion in this Prospectus of its report and references to it in the form and context in which they appear and has authorised the contents of its reports for the purposes of paragraph 5.5.3R(2)(f) of the Prospectus Rules and item 23.1 of Annex I of the Commission Regulation (EC) 809/2004. 19 Miscellaneous 19.1 The expenses of, and incidental to, the Global Offer and Admission payable by the Company, including the London Stock Exchange fee, professional fees and the costs of preparation, printing and distribution of this document, are estimated to amount to approximately 21 million (approximately US$40 million) (including VAT). 19.2 Each Ordinary Share will be offered at a premium of 300 pence to its nominal value. 250
PRA3 8.1 PRA1 2.1 PRA1 23.1 PRA3 10.3 PRA1 20.9
251
Mineral Experts Report for the silver, gold, zinc and lead assets held by Hochschild. 1 Introduction 1.1 Purpose of report This report has been prepared by IMC Group Consulting Ltd (IMC) for inclusion in the prospectus (the Prospectus) to be published by Hochschild (the Company) in connection with a global offer of ordinary shares in the Company and the proposed admission of the ordinary shares of the Company to the Ofcial List maintained by the Financial Services Authority (FSA) and the admission of such shares to trading on London Stock Exchange plcs market for listed securities (the Global Offer). IMC was instructed by the Directors of the Company to prepare a Mineral Experts Report (MER) for the gold, silver copper, zinc and lead assets of the Company. This report, which summarises the ndings of IMCs review, has been prepared in order to satisfy the requirements of a Mineral Experts Report as set out in the Prospectus Directive in conjunction with the recommendations of the CESR and with the pre 1 July 2005 requirements of Chapter 19 of the Listing Rules of the UKLA. IMC has reviewed the practice and estimation methods undertaken by the Company and are of the opinion that they are in compliance with the Prospectus Directive in conjunction with the 252
254
Table of contents
1 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.3.1 2.3.2 2.3.3 2.4 2.4.1 2.4.2 2.4.3 2.5 2.5.1 2.5.2 2.5.3 2.5.4 2.6 2.6.1 2.6.2 2.6.3 2.6.4 2.7 2.7.1 2.7.2 2.7.3 2.8 2.8.1 2.8.2 2.8.3 2.9 2.9.1 2.9.2 2.9.3 2.10 2.11 2.12 2.12.1 2.12.2 2.12.3 2.12.4 2.13 3 3.1 3.2 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.2.7 3.2.8 3.3 3.3.1 3.3.2 Introduction *************************************************************** Purpose of report ********************************************************** Capability and independence *********************************************** Scope of work / materiality / limitations and exclusions ********************** Inherent mining risk******************************************************** Glossary of terms ********************************************************** Overview ****************************************************************** General******************************************************************** Description of assets ******************************************************* Summary of geology ******************************************************* Peru*********************************************************************** Argentina ***************************************************************** Mexico ******************************************************************** Summary of reserves and resources ***************************************** Reserves and resources estimation methods ********************************* Reserve replacement strategy *********************************************** Reserves and resources statement******************************************* Mines and facilities********************************************************* Facilities ******************************************************************* Management ************************************************************** Health and safety ********************************************************** Infrastructure ************************************************************** Projects******************************************************************** Short term projects********************************************************* 2.6.1.1 New sites *********************************************************** Medium term projects. ***************************************************** Long term projects ********************************************************* Environmental issues and management************************************** Legislation***************************************************************** Status ********************************************************************* Provision for rehabilitation ************************************************* Statutory authorisations **************************************************** Peru*********************************************************************** Argentina ***************************************************************** Mexico ******************************************************************** Costs ********************************************************************** Operating costs ************************************************************ Cash costs ***************************************************************** Capital costs *************************************************************** Risks and synergies ******************************************************** Sales and marketing******************************************************** Valuation of reserves ******************************************************* Lives of mines in valuation ************************************************* Methodology and assumptions ********************************************* Valuation results *********************************************************** Sensitivity analysis ********************************************************* Conclusions **************************************************************** Peru*********************************************************************** Maps and plans ************************************************************ Arcata ********************************************************************* Geological characteristics *************************************************** Reserves and resource statement******************************************** Losses and dilution********************************************************* Cut-off grade ************************************************************** Verication **************************************************************** Mines and projects ********************************************************* Process plant ************************************************************** Tailings disposal************************************************************ Ares *********************************************************************** Geological characteristics *************************************************** Reserves and resource statement******************************************** 255 252 252 253 253 254 254 259 259 260 260 261 261 261 261 261 264 265 267 267 269 270 276 277 277 277 278 278 279 279 280 280 281 281 286 289 290 290 290 291 291 291 291 291 291 293 293 294 295 295 295 295 297 297 297 298 298 298 299 300 300 301
3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.3.8 3.4 3.4.1 3.4.2 3.4.3 3.4.4 3.4.5 3.4.6 3.4.7 3.4.8 3.5 3.5.1 3.5.2 3.5.3 3.5.4 3.5.5 3.5.6 3.5.7 3.5.8 3.6 4 4.1 4.2 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 5 5.1 5.2 5.2.1 5.2.2 5.3 5.3.1 6 6.1 6.1.1 6.1.2 6.1.3 6.1.4 6.2 6.2.1 6.2.2 6.3 6.3.1 6.3.2 7 8
Losses and dilution********************************************************* Cut-off grade ************************************************************** Verication **************************************************************** Mines and projects ********************************************************* Process plant ************************************************************** Tailings disposal************************************************************ Selene********************************************************************* Geological characteristics *************************************************** Reserves and resource statement******************************************** Losses and dilution********************************************************* Cut-off grade ************************************************************** Verication **************************************************************** Mines and projects ********************************************************* Process plant ************************************************************** Tailings disposal************************************************************ Pallancata ***************************************************************** Geological characteristics *************************************************** Reserves and resource statement******************************************** Losses and dilution********************************************************* Cut-off grade ************************************************************** Verication **************************************************************** Mines and projects ********************************************************* Process plant ************************************************************** Tailings disposal************************************************************ Long term prospects ******************************************************* Argentina ***************************************************************** Maps and plans ************************************************************ San Jose project************************************************************ Geological characteristics *************************************************** Reserves and resource statement******************************************** Mines and projects ********************************************************* Process plant ************************************************************** Tailings disposal************************************************************ Long term prospects ******************************************************* Mexico ******************************************************************** Maps and plans ************************************************************ Medium term projects ****************************************************** Moris mine (Mina Maria) *************************************************** San Felipe exploration project ********************************************** Long term prospects ******************************************************* San Luis del Cordero ******************************************************* Further Disclosure on Mineral Potential************************************** Peru*********************************************************************** Arcata mining district ****************************************************** Ares mining district ******************************************************** Selene mining district ****************************************************** Pallancata ***************************************************************** Argentina ***************************************************************** San Jose ******************************************************************* Sierra de las Minas ********************************************************* Mexico ******************************************************************** Moris prospects ************************************************************ Mexico San Felipe ********************************************************** Special factors ************************************************************* Conclusions ****************************************************************
301 301 301 302 302 303 303 303 304 304 304 305 305 305 306 306 306 306 306 307 307 307 307 307 307 308 308 308 308 309 309 310 310 311 311 311 312 312 313 314 314 314 315 315 316 316 317 317 317 318 318 318 319 320 321
256
List of tables
Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table 2-1 2-2 2-3 2-4 2-5 2-6 2-7 2-8 2-9 2-10 2-11 2-12 2-13 2-14 2-15 2-16 2-17 2-18 2-19 2-20 2-21 2-22 2-23 2-24 2-25 2-26 2-27 2-28 List of assetsPeru**************************************************** List of assetsArgentina ********************************************** List of assetsMexico ************************************************* ReservesHistorical replacement *************************************** Metal Reserves at 30 June 2006 **************************************** Metal Resources at 30 June 2006 *************************************** Metal MiningHistoric Production ************************************* ConcentrateHistoric Production ************************************** Concentrate and DoreHistoric Composition *************************** MetalHistoric Production ******************************************** Lost Time Injury Frequency Rate**************************************** Causes of Incidents **************************************************** Mineral Rights ConcessionsArcata, Peru******************************* Licences or Permits to OperateArcata, Peru *************************** Mineral Rights ConcessionsAres, Peru********************************* Licences or Permits to OperateAres, Peru ***************************** Mineral Rights ConcessionsSelene, Peru******************************* Licences or Permits to OperateSelene, Peru *************************** Mineral Rights ConcessionsPallancata, Peru *************************** Licences or Permits to OperatePallancata, Peru ************************ Mineral Rights ConcessionsSan Martin, Peru ************************** Licences or Permits to OperateSan Martin, Peru *********************** Mineral Rights ConcessionsSan Jose ********************************** Licences or Permits to OperateSan Jose ******************************* Mineral Rights ConcessionsMoris (Mina Maria) ************************ Licences or Permits to OperateMoris (Mina Maria)********************* Net Cash Cost per oz of Silver Equivalent ******************************* Summary of Valuation of Proved and Probable ReservesBased on Operating Results ***************************************************** Summary of Valuation of ReservesBased on Operating Results ********* Summary of Valuation of Proved and Probable ReservesBased on Post Tax Results *********************************************************** Summary of Valuation of ReservesBased on Post Tax Results *********** Sensitivity Analysis of Reserve Valuation ******************************** 260 260 260 265 266 267 268 268 268 269 272 274 282 283 283 284 285 285 286 286 286 286 287 288 289 290 290 293 293 293 293 294
List of plates
Plate Plate Plate Plate Plate Plate 1 2 3 4 5 6 Country Exploration Ofces Peru Exploration Projects Argentina / Chile Exploration Projects Mexico Exploration Projects Arcata mine: Surface map with location of principal veins and prospects Arcata mine: Longitudinal Prole of Mariana and Mariana Sigmoid veins and map of principal geological features. Ares mine: Surface map with location of veins and prospects and principal geological features Ares mine: Longitudinal Prole of the Victoria Vein System, including the main Victoria Vein and sub-parallel branches- the Ramal Sur, Lula and Ramal Victoria veins Selene mine: Surface map with principal geological features. Selene mine: Longitudinal Prole of Explorador Vein and map of principal vein outcrops. Pallancata Project: Surface map with principal geological features. Pallancata Project: Longitudinal Prole of Pallancata Vein and map of vein outcrops. San Jose Project: Surface map with location of veins and prospects and principal geological features San Jose Project: Longitudinal Prole of the Huevos Verdes Vein San Jose Project: Longitudinal Prole of the Frea Vein Moris Project: Surface map with principal geological features. Moris Project: Longitudinal Prole of the El Creston Vein and map at the 900m level.
Plate 7 Plate 8 Plate 9 Plate 10 Plate 11 Plate 12 Plate 13 Plate Plate Plate Plate 14 15 16 17
257
Annexes
Annex A Annex B Annex C Qualications of Consultants Scope of Work / Limitations and Exclusions / Materiality Maps, Plans and Drawings
258
2 Overview 2.1 General The Company holds interests in mining and mineral assets principally in Peru, Argentina and Mexico and has a small exploration ofce in Chile. The main operating units comprise Arcata, Ares and Selene mines. Pallancata, a joint venture (JV) in which the Company holds 60 per cent. and management rights, is planned to commence production of ore in 2007 to augment and subsequently replace the Selene production. The Company processes all the ore and has a tolling agreement with the JV partner, International Mineral Corporation (IMC), a company listed on the Toronto Stock Exchange, to treat their 40 per cent. of the ore. San Jose in Argentina, a JV under construction in which the Company holds 51 per cent. and all management rights with Minera Andes, a company listed on the Toronto Stock Exchange, is due to commence production of concentrate in 2007. The Moris mine (Mina Maria) in Mexico, in which the Company holds 70 per cent. and all management rights with Exmin of Mexico, is currently mothballed but the Company is planning to restart operations in July 2007, subject to new mine plan approval. The Company holds numerous exploration prospects and the more advanced are mentioned in this report. The Companys Peruvian silver and gold reserves lie at between 4,600 m and 5,000 m above mean sea level (amsl) in four discrete areas of epithermal vein mineralisation in the Puquio-Caylloma Belt geological succession and are or will be exploited by the underground cut and ll method of mining. The ores of Arcata and Selene feed on-site concentrators producing a saleable silver concentrate containing a signicant quantity of gold. Pallancata will feed the expanded Selene concentrator in the short term and become the prime feed by 2009. Ares ore supplies an on-site cyanide leaching plant feeding solution to a Merrill Crowe plant to produce a dore comprising gold and silver. Selene concentrate is expected to be rened into dore at Ares from October 2006 onwards. Access to the operations is by mixed surfaced and graded roads from Lima (approximately 800 km), the sea port of Matarani (approximately 700 km), Arequipa (approximately 300 km) or Cuzco (approximately 400 km). Air services are available at Cuzco and Arequipa to Lima. Power is supplied from the national grid and all of the operations have more than adequate generation facilities on site to maintain essential services. All of the operations have access to ample water for their purposes. Concentrate is exported through Matarani to Penoles in Mexico and dore is sold to Johnson Matthey at mine gate. The Company holds rights in Peru to the San Martin prospect between Arcata and Selene as well as a number of other targets either on the existing properties or as new targets in the Puquio Caylloma Belt. The Company owns Sipan mine which closed in 2004 and is currently restoring the site and has sold the Caylloma which was owned until 2005. The San Jose silver and gold project in Argentina lies in epithermal vein mineralisation of the Deseado Massif in Patagonia. The project is designed as an underground cut and ll mine with the ore feeding a concentrator producing a saleable silver concentrate containing a signicant quantity of gold. Access is from Comodoro Rivadavia by 230 km of mixed surfaced and graded road. Concentrate will be exported via the port of Comodoro Rivadavia. Air services are available at Comodoro Rivadavia to Buenos Aires. Sufcient power generation is to be installed to run the operation and permission has been obtained to draw sufcient water to produce at the proposed levels of production. The Company holds rights in Argentina to the Sierra de las Minas exploration prospect. The Moris mine in Mexico has recently been purchased and the Company is in the process of assembling a business plan and ensuring that any outstanding permissions are in place with a view to re-opening the operation in July 2007, subject to new mine plan approval. The Company also holds 70 per cent. of the rights to the exploration projects in the Moris Region in the vicinity of the Moris Mine (Mina Maria) with Exmin of Mexico. 259
In Mexico the Company holds rights to earn in 70 per cent. of the San Felipe exploration prospect previously drilled by Boliden and to the San Luis del Cordero exploration prospect. 2.2 Description of assets IMC reviewed the assets listed in Table 2-1 to Table 2-3, all of which are wholly owned or partially owned by the Company as identied in the Tables and located as shown by Plates 1 to 4 in Annex C. Table 2-1 List of assetsPeru
Date of Commencement of Operation
PRA1 8.1
Asset
Status
Type
Product/Output
Ownership
Mining Arcata ************************* Ares *************************** Selene ************************* Sipan ************************** Caylloma*********************** Processing Arcata ************************* Ares *************************** Selene ************************* Sipan ************************** Caylloma*********************** Advanced Project Pallancata**********************
Operating Operating Operating Closed 2004 Sold 2005 Operating Operating Operating Closed 2004 Sold 2005 Advanced Project
Underground Underground Underground Open Pit Underground Concentrator Leach Process Concentrator Leach Process Concentrator
Silver, gold Gold, silver Silver, gold Gold, silver Silver, gold Silver/gold concentrate Gold/silver dore Silver/gold concentrate Silver/gold dore Silver, gold Silver, gold ore to Selene
Underground mine
PRA1 8.1
Asset
Status
Type
Product/Output
Ownership
Underground mine
Gold, silver
Planned 2007
51%
Concentrator
Gold/silver concentrate
Planned 2007
51%
PRA1 8.1
Asset
Status
Type
Product/Output
Ownership
Project Moris (Mina Maria) ***************** Processing Moris (Mina Maria) *****************
Surface mine
Gold, silver
2007*
70%
Gold/silver dore
2007*
70%
2.3 Summary of geology The operations of the Company and its development prospects are focussed primarily on epithermal vein deposits with precious metal mineralisation. 260
2.3.1 Peru All of the current operations and development prospects in Peru are located in the jurisdiction of Ayacucho, Apurimac and Arequipa in southern Peru in the Puquio-Caylloma Belt of Cenozoic volcanic deposits and associated intrusions. The basement of this area comprises folded sedimentary strata of Jurassic to Cretaceous age on which lies an unconformable sequence of lower to mid-Tertiary age volcanic ows and volcano-clastic sediments. The target mineralisation is hosted in the Tertiary volcanics although the surface manifestation of major veins and related structures may be obscured by thick andesitic lavas and ignimbritic tuffs representing the most recent volcanic episodes. A number of important epithermal vein deposits are known in this belt bearing identiable High (HS), Intermediate (IS) and Low (LS) sulphidation gold and silver mineralisation. It has been suggested that there was an early phase of epithermal LS and IS mineralisation followed by a much younger high sulphidation event. Characteristically the veins are of widths in the range 0.80 m to 4.00 m and show evidence of successive phases of quartzsulphide mineralisation. The pattern and frequency of veins is interpreted as related to tensional or strike-slip fault patterns and on the regional scale the orientation appears related to the presence of rhyolitic dome intrusions. This relationship provides an interpretative model for targeting new prospective areas. Mineralisation is normally clearly zoned both vertically and laterally reecting both that vein development and higher grades are developed preferentially in competent host strata with dilational fractures and also that, typically of LS events, the mineral composition displays zoning with respect to the crustal level. Mineralized zones with economic values can be seen to be constrained within lateral and upper and lower level boundaries providing an effective model for identifying economic potential laterally and in depth from less mineralized points of intersection. The majority of veins currently under operation and within the resource base can be considered silver-rich but silver: gold ratios may locally be very variable as exhibited in the Victoria vein system of the Ares mine. 2.3.2 Argentina The San Jose deposit in Argentina displays geological and mineralogical characteristics very similar to that of the Peruvian deposits although the volcanic host sequence is of Jurassic age. The mineralisation is of LS type with quartz-sulphide veins with economic gold and silver values. The potential in the Sierra de las Minas Prospect is also hosted in quartz-sulphide veins but is somewhat different in that the veins are hosted in the metamorphosed basement and the mineralisation appears to have been of higher sulphidation with signicant copper. An oxidized prole has been proved and supergene enrichment controls high gold values with rather variable copper content. 2.3.3 Mexico The Mexican prospects under investigation also include LS quartz-sulphide epithermal veins with gold and silver values in the Moris project (Mina Maria) where the surface mining has taken place as well as other active prospects in the Moris region. The other active prospects in Mexico at San Felipe and San Luis del Cordero contain polymetallic mineralisation primarily controlled in linear vein structures with extensive silicication linked to major granitic intrusions. The San Felipe Project hosts predominantly zinc/lead with minor copper mineralisation while San Luis del Cordero is a predominantly silver and copper orebody with prospects for extensive carbonate replacement polymetallic skarn deposits. 2.4 Summary of reserves and resources 2.4.1 Reserves and resources estimation methods The Company has over 40 years experience in the exploration, evaluation and extraction of precious metals epithermal vein deposits in Peru. This experience provides a solid skills base for interpretation of the exploration data/potential in the Puquio-Caylloma volcanic belt which is additionally regularly reviewed by international research programmes and in-house seminars by 261
internationally recognised geologists. This corporate experience is now being extended to comparable mineralisation environments in Argentina and Mexico. The Company undertakes exploration and development independently using its own resources and also has a policy of participation and acquisition of interests with joint-venture partners. Additional resource denition at the operations is by some surface and, particularly, underground drilling programmes with down-hole logging allied to blocking out the resources with underground development to upgrade to a reserve. IMC has observed drill rigs in operation and is satised that these procedures are in accordance with accepted international practice. Standard practice is that core is cut vertically using a circular saw, one half-core despatched for analysis and the other retained in the core store. It is standard practice to obtain channel samples underground using pneumatic picks in both developments and stopes for analysis. IMC is satised that these procedures are in accordance with accepted international practice. Assay laboratories are sited at each of the three operational mine units in Peru. The laboratory at Selene mine is operated under contract by the international specialists Societe Generale de Surveillance (SGS), while those at Arcata and Ares are operated directly by the Company staff. Fully documented Quality Assurance and Quality Control (QA/QC) procedures apply at each laboratory with respect to sample handling, analytical methods and quality assurance and control. Two sample streams are received by the laboratories. One from the process plants consisting of mill feed, tailings and concentrate samples. The other from the mine Geology Department, comprising mine channel samples and core samples. The samples are prepared and analysed according to set procedures in accordance with industry standard practice. Silver and gold analyses are performed by re assay unless otherwise specically requested. All laboratories have an Atomic Absorption spectophotometry facility calibrated for silver gold, arsenic, copper, iron, zinc and lead with a sample turn around time of 4 hours. Formal procedures for quality control are in place for re-sampling, duplicates, re-assays, blanks, standard reference samples and independent laboratory checks. IMC has visited the mine-site laboratories and considers that the procedures and their implementation are in accordance with recognised industry standards. Similar principles are applied at exploration project sites for analyses of core samples. Preparation and validation of the raw data for resource estimation are managed within a Geographical Information System (GIS) system and comprise three main datasets: the drill core and channel sampling databases, the topographic database and geological map information held within ArcView. The Company uses MineSight (MedSystem) mine planning software to estimate ore grades in each vein within a block model. The MineSight block models for each vein and mine are updated on a monthly basis with new sample and topographic data acquired during the month. Assay, survey, collar location, and vein geometry data les were examined by IMC for a representative selection of veins from the various properties and data appeared clean in that no gross errors were identied, and no statistical artifacts found that could be attributed to data errors. IMC considers that the current approach to the computation of the ore density is correct and appropriate with respect to the variation recognised in the various mines. Through regular reconciliation of reserves depletion and production and processing there is continual review of density values, supported also by regular test-work. The Companys general policy is to compute single composites over the vein thickness, so that each drillhole intersection with a vein is represented by one composite. This results in composites of varying length and, because the angles of intersection of drill holes and veins vary, there is no simple relationship between composite length and vein thickness. This approach could bias the kriging and IDP modelling but, with no simple relationship between vein thickness and metal grade, IMC considers this approach appropriate and has not biased any results. All of the silver and gold assays are subject to a grade cutting (or capping) procedure by which very high values are reduced to a xed maximum value before generation of composites. This is standard practice in the industry and is commonly made because of the presence of isolated 262
rogue values or an extreme-value population of assays. Grade cutting rules are dened individually for each vein in all of the Peru and Argentina properties and includes some very aggressive grade cutting. There is little or no statistical justication for this arbitrary procedure and, IMC believes, has the result of generating conservative reserve and resource estimates. MineSight calculates composites and models not only grade values but also lithology, alteration and vein width from the integrated dataset of drillhole core and mine channel samples. The system performs a standard suite of check statistics to determine the characteristics of the variation of metal grades as the basis for determining parameters for the subsequent stage of estimating grade values within the block model. As a general rule the vein models comprise blocks of 5 m x 5 m x 5 m but may be 10 m x 10 m x 5 m depending on the extension or width of the vein. The preferred estimation method is by linear block kriging, which has been used for those major veins on which there are sufcient intersections to carry out the necessary variography. Inverse power of distance (IPD) weighted moving averages have been used for all other veins. Historically an IPD 5th power estimation has been used for all of the minor veins on the Peru properties but following an earlier consultancy review this has been revised to use IPD squared in the present quoted resource estimates. IMC has reviewed the resource modelling procedure and has performed check modelling, using a different software package, on a selected number of veins. IMC is of the opinion that the procedure employed by the Company is appropriate and provides a valid and reliable statement of the resource base. The Company uses the resource block model as a fundamental planning tool to calculate a value each month for the mineral content of each block in each model. The calculation of ore value is based on the multiplication of the metal values in each block by the corresponding Point Value (incorporating gold and silver prices, head grade, plant recovery and commercial recovery) denes a value for the block. The Company also denes cut-off values applied to the values of each block in each model every month. Both a break-even operating cut-off ore value (excluding xed corporate and nancing costs) and a higher economic target cut-off value (including all xed and variable costs) are dened. Applying these cut-offs categorises each block as economic being of value above the target economic cut-off, marginal if above the break-even cut-off or submarginal below the break-even cut-off. For the purposes of stating resources and reserves, the break-even operating cut-off ore value at the date of stating the reserves and resources, is considered appropriate as the basis for dening a cut-off value for commercially viable ore. The corresponding quoted reference prices for silver and gold have been established as US$7.50/oz for silver and US$450/oz for gold. On the basis of single metal equivalence values, the cut-off grades established for Arcata and Selene mines are 167 g/t silver equivalent and 174 g/t silver equivalent respectively. The cut-off grade for the Ares mine, a gold/silver producer, is expressed as 3.2 g/t gold equivalent. IMC considers that the Company policy to establish cut-off grades is appropriate and essentially conservative. IMC has reviewed the process of reserve panel denition and checked areas of panels on each of three veins (Selene Explorador vein; Arcata Mariana vein; Ares Victoria vein) against spreadsheets of block categories and volume calculation. IMC considers this methodology appropriate for the derivation and denition of reserves from the resource block model. The design of the reserves panels assumes the potential total extraction of all mineral within the panel and reduces assumptions related to losses in operations. IMC completed an independent validation of the resource modelling by the Company. The Company have used ordinary linear block kriging for those major veins on which there are sufcient intersections to carry out the necessary variography, and an IPD weighted moving averages for other veins. IPD 5th power estimation has been used for all of the minor veins on the Peru properties: i.e. excluding Selene Explorador vein, Ares Victoria vein, and Arcata Ramal 2 and Mariana veins. IMC believe this is a rational selection. Check modelling has been carried out by IMC using the Datamine mining software system for Arcata (Mariana, Alta veins), Ares (Victoria, Ramal Sur 096, and Lula veins), Selene (Explorador and Ramal Betty veins), Pallancata (Pallancata 2 vein) and San Jose (Huevos Verdes vein). This Datamine modelling has used the databases of drill 263
hole and channel sample composites and the wire-frame vein models representing the full (premining) geological resource in each case and the models obtained have been compared with those supplied by the Company. A range of different modelling methods have been used including IPD 5th and 2nd powers, and kriging with ranges of 60 m and 120 m. A comparison of 5th power IPD models for all veins with the models generated by the Company using the Minesight software yields comparable results and validates the Companys modelling approach. IMC conrms that all the Company resources and reserves are quoted and are consistent with the Australasian JORC classication standard. 2.4.2 Reserve replacement strategy The characteristics of epithermal vein deposits for precious metal mining dictate a three-tier strategy for exploration and deposit evaluation. The relatively small resource base available in individual veins requires an active strategy for 1. expansion of the resource base; 2. the replenishment of the resource base and 3. the upgrading of this resource base to a reserves base. This is reected in a strategy for regional scale exploration and identication of new target areas for resource denition. In parallel, a local scale strategy is directed to the location of new resources available to existing mine infrastructure in conjunction with which mine development and underground drilling are focused to upgrade existing resources to reserves. The regional strategy currently comprises exploration and deposit evaluation at the San Martin prospect located between the current Selene and Arcata mine operations and also at the Pallancata prospect some 14 km from the Selene mine. These prospects have been the subject of earlier investigation, including drilling and extensive surface channel sampling. Currently, contract diamond core drilling rigs are deployed at each site under the management of the Companys geological staff to complete deep drilling of inclined cored drillholes of lengths in the range 300 m to 600 m from surface. Other targets in Peru have been identied for the longer term. The local strategy at each of the Peruvian mining operations has a policy to investigate new prospects within the concession area of and adjacent to the mines and has currently deployed four contracted diamond core drilling rigs for deep surface drilling at the mines. It should be noted that the role of long surface drillholes is to determine future prospects at a level of denition seldom greater than that of Inferred Resources. The mine strategy of resource and reserve denition is correspondingly primarily dependent upon mine developments planned specically to upgrade the resource and reserve base, in conjunction with an extensive programme of underground drilling. The reliance on underground development to provide data on vein continuity and grade at a level of condence appropriate for reserves and resource denition dictates that the formal resource base and reserve base will be limited by the extent to which underground developments are prepared in advance of operations. It is a common feature of similar mining operations on precious metal epithermal vein deposits that the resource and reserve base reects only a limited number of years of future operation although there may be extensive data on which to infer a long productive life of mine. IMC recognises that for this type of mining operation a most important characteristic is the demonstrable capacity and track record of the mining company to maintain consistent replacement of reserves and resources in step with annual production and resource depletion. The Company has a proven track-record and has sustained the resource and reserve base at each of the current operating mines in step with production, in the case of Arcata over many years, and in the case of the newer mines, since production commenced. Table 2-4 shows the historical replacement of reserves by the Company. It must be noted that a Peruvian system of classication of reserves was used until 1999 and JORC thereafter. This has resulted in differing statements of reserves under the two systems. Arcata mines proved and probable reserve base at each year end has varied between 1.2 years and 4.8 years of production since 1990. Ares mines reserve base at each year end has been consistently between 2.5 years and 3.9 years of production since the rst year of full production in 1999. There has, on average, across the periods shown in Table 2-4, been 264
a replacement of 37 per cent. of the total reserves base by new reserves annually at all of the Companys operations. It is the opinion of IMC that, through the maintenance of the current reserves replacement strategy, this performance is sustainable in the long term. Table 2-4 ReservesHistorical replacement
Reserves Silver t g/t koz g/t Gold koz t g/t Production Silver koz g/t Gold koz LOM
ARCATA 1990 ***************** 1,503,780 1991 ***************** 1,252,030 1992 ***************** 1,159,150 1993 ***************** 1,211,600 1994 ***************** 1,312,210 1995 ***************** 1,477,500 1996 ***************** 1,340,830 1997 ***************** 1,028,190 1998 ***************** 817,030 1999 ***************** 546,000 2000 ***************** 681,550 2001 ***************** 447,851 2002 ***************** 539,474 2003 ***************** 315,166 2004 ***************** 440,402 2005 ***************** 768,716 June 2006 ************ 929,999 ARES 1998 ***************** 1,098,042 1999 ***************** 655,743 2000 ***************** 838,290 2001 ***************** 831,333 2002 ***************** 960,765 2003 ***************** 1,031,540 2004 ***************** 761,619 2005 ***************** 828,399 June 2006 ************ 834,820 SELENE 2003 ***************** 722,633 2004 ***************** 903,837 2005 ***************** 829,681 June 2006 ************ 799,331
576 563 569 522 541 552 560 553 567 423 429 398 531 715 492 545 462 207 214 264 324 302 318 301 307 327 384 398 408 377
27,865 22,649 21,212 20,331 22,819 26,211 24,148 18,281 14,903 7,431 9,405 5,732 9,218 7,245 6,968 13,482 13,796 7,308 4,512 7,115 8,660 9,340 10,548 7,363 8,182 8,777 8,926 11,566 10,877 9,689
1.50 1.85 1.87 1.64 1.81 1.88 2.00 2.10 2.14 1.26 1.30 1.35 1.45 1.432 1.21 1.54 1.26 24.19 23.21 24.47 22.71 21.52 22.32 19.92 14.43 12.24 4.35 3.53 3.07 2.56
72.52 74.47 69.69 63.88 76.36 89.31 86.22 69.42 56.21 22.12 28.49 19.44 25.21 14.43 17.11 37.96 37.77 853.98 489.33 659.51 606.99 664.62 740.26 487.81 384.20 328.52 101.03 102.72 81.92 65.79
310,709 262,415 260,020 259,036 326,304 356,734 357,212 373,984 375,448 380,468 371,098 358,859 236,292 236,108 290,603 282,199 135,526 129,216 240,866 272,668 282,176 271,489 276,653 272,986 281,095 141,529 44,061 253,605 288,919 178,044
564 617 638 581 622 646 676 687 679 671 518 488 432 506 615 539 542 228 355 310 261 287 336 346 352 332 348 385 399 379
5,637 5,209 5,331 4,836 6,522 7,406 7,760 8,257 8,190 8,212 6,179 5,627 3,280 3,841 5,746 4,890 2,362 947 2,751 2,716 2,369 2,506 2,989 3,037 3,181 1,511 493 3,137 3,707 2,169
2.03 2.36 2.34 1.99 2.35 2.86 2.70 2.68 2.85 3.21 2.57 2.54 2.26 1.29 1.14 1.19 1.35 22.99 26.21 24.60 20.69 22.70 21.78 22.98 22.80 19.01 3.78 3.78 3.43 2.93
20.28 19.91 19.56 16.57 24.65 32.80 31.01 32.22 34.40 39.27 30.66 29.31 17.17 9.79 10.65 10.80 5.88 95.51 202.97 215.66 187.70 198.14 193.72 201.69 206.05 86.50 5.35 30.82 31.86 16.77
4.8 4.8 4.5 4.7 4.0 4.1 3.8 2.7 2.2 1.4 1.8 1.2 2.3 1.3 1.5 2.7 3.4 8.5 2.7 3.1 2.9 3.6 3.8 2.6 2.9 2.9 14.8 3.3 2.6 2.1
2.4.3 Reserves and Resources Statement The Hochschild proved and probable reserves are and have been nearly identical to the measured and indicated resources taking into account the discounts included in the reserves for losses and dilution. This is a result of the need to block out the inferred resources with development underground in order to convert to measured and indicated resources which, with modifying factors, can be converted to reserves. Table 2-5 and Table 2-6 show the reserves and resources of the Company as at 30 June 2006. The gures quoted are those that are the property of the Company and do not include reserves or resources on the same property owned by JV partners.
265
Operation
Proved (t)
Probable (t)
Ag
Au
(average g/t)
Arcata 100% LOM = 3.4 years ********************************* Ares 100% LOM = 2.9 years ********************************* Selene 100% LOM = 2.1 years ********************************* Pallancata 60% LOM = 3.3 years ********************************* San Jose 51% LOM = 5 years*********************************** Total Mines and Projects************************************* Stockpiles *************************************** TOTAL ******************************************
Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Proved Probable Total
646,659 283,340 929,999 642,109 192,711 834,820 762,808 36,523 799,331 0 643,267 643,267 102,812 538,885 641,697 2,154,388 1,694,725 64,872 2,219,261 1,694,725 3,913,986 3,849,114 64,872
416 565 462 371 182 327 376 387 377 263 263 602 383 418 397 345 374 246 393 345 372
1.19 1.43 1.26 14.60 4.35 12.24 2.59 1.83 2.56 0.00 1.09 1.09 8.43 7.80 7.90 6.03 3.67 4.99 4.62 5.99 3.67 4.98
N.B. includes discounts for ore loss and dilution. Reserves = Resources Ore Loss + Dilution. Where reserves are attributable to JV partner, reserve gures reect the Companys ownership only. LOM stated from 30 June 2006.
266
Resource category
Measured
Indicated
Inferred
Ag
Au
(average g/t)
Arcata Measured *********************************** 675,523 Indicated *********************************** Total**************************************** Inferred************************************* Ares Measured *********************************** 667,143 Indicated *********************************** Total**************************************** Inferred************************************* Selene Measured *********************************** 773,616 Indicated *********************************** Total**************************************** Inferred************************************* Pallancata Measured *********************************** 0 Indicated *********************************** Total**************************************** Inferred************************************* San Jose Measured *********************************** 93,113 Indicated *********************************** Total**************************************** Inferred************************************* Moris (Mina Maria) Measured *********************************** 2,950,713 Indicated *********************************** Total**************************************** Inferred************************************* San Felipe ********************************** TOTAL Measured *********************************** 5,160,108 Indicated *********************************** Total**************************************** Inferred*************************************
510 704 561 580 319 170 291 227 397 406 398 279 0 289 289 376 675 434 473 374 4.0 3.7 3.96 2.2 70 182 310 217 243
1.46 1.79 1.55 1.93 15.80 5.34 13.78 5.54 2.95 2.07 1.96 1.25 0.00 1.20 1.20 1.44 9.45 8.83 9.32 8.22 1.32 1.24 1.31 1.37 *9.6% 3.60 3,55 3.59 1.08
N.B. *a combined metal content of 6.5% zinc, 2.7% lead and 0.4% copper which are not included in totals. Resources include undiscounted reserves, where reserves are attributable to JV partner, reserve gures reect the Companys ownership only, no ore loss or dilution has been included, and stockpiled ore excluded.
2.5 Mines and facilities 2.5.1 Facilities The Peru facilities comprise of three operating mines, Ares, Arcata and Selene. All are mined by a cut and ll method. The ore from each operation feeds each individual mines processing plant to produce a concentrate (Arcata and Selene crush, grind, mill and oatation) or dore (Ares crush, grind and leach) shipped to customers. The Company have plans to increase the capacity of the plant at Selene and process additional tonnage mined from Pallancata from July 2007 as well as transporting additional concentrate from Selene to Ares for the production of additional dore to the present capacity of the Area dore plant. The Company propose to process all of the Selene/ Pallancata concentrate to dore plant at a later date but this has not been included in the plans or valuation considered in this document. The Argentina facilities comprise the San Jose mine and treatment plant under construction and scheduled to commence production in 2007 with the Company holding 51 per cent. ownership and the management of the joint venture operation.
267
The Moris mine in Mexico is the subject of a joint venture agreement, dated 30 June 2006, with the Company owning 70 per cent. The Company is completing Due Diligence drilling and check sampling. Historic production gures are given in Table 2-7 and Table 2-10. The Company increased silver production by approximately 32 per cent. from 2002 (8,005 thousand ounces) to 2005 and plan to increase its attributable silver production by approximately a further 42 per cent. between 2005 and 2008 from projects under construction or about to commence construction (Section 2.6.1.1). IMC has reviewed the forecast production levels and found them to be reasonable and attainable. Table 2-7 Metal miningHistoric production
Ore Mined t 6 months ended 30 June 2006s Silver g/t 6 months ended 30 June 2006s Gold g/t 6 months ended 30 June 2006s
2003
2004
2005
2003
2004
2005
2003
2004
2005
N.B. There are minimal stockpiles at the operations. Therefore the tonnage and grade of ore milled is identical to the tonnage and grade of ore mined.
2003
2004
2005
2003
2004
2005
2003
2004
2005
Arcata ************* 8,999 11,525 10,787 Selene ************* 488 2,892 3,559 Caylloma ********** 2,777 0 0 Dore koz ********** Ares *************** 2,793 2,943 3,151 Sipan ************** 282 283 0
5,214 89.89 87.07 87.41 1,947 83.25 92.81 89.97 0 77.78 0 0 1,493 86.75 90.37 91.70 0 N/A 0 0
88.66 72.99 48.63 66.75 90.76 79.72 91.41 86.37 0 63.67 0 0 93.05 95.34 95.65 96.32 0 N/A 0 0
2003
2004
2005
2003
2004
2005
Arcata *********************************** 11.94 Selene *********************************** 27.47 Caylloma ********************************* 11.58 Ares ************************************* 93.11 Sipan ************************************
268
2003
2004
2005
2003
2004
2005
Arcata ******************************** Selene ******************************** Caylloma****************************** Dore koz****************************** Ares ********************************** Sipan ********************************* TOTAL ******************************** Silver Equivalent***********************
2.5.2 Management IMCs personnel were in regular contact and held numerous discussions with the Companys management at all levels. IMC is satised that the Companys management is capable of implementing the proposed production plans based on this contact and on direct observations of operational management. The Companys policy of making business unit managers fully accountable for their operations whilst maintaining corporate control has enabled the Company to be protable in the difcult epithermal mining environment. The Company control and plan in the Lima central ofce and have a core staff of management and technical personnel at site. These core personnel control the operational activities which are all carried out by contractors. Contracts are renegotiated as required or on an annual basis. The mine plans are evaluated monthly to ensure maximum metal recovery and protability. The Company has an extremely good track record of replacing reserves over the years both in the operations and from local projects. The Company employs a total of 3,100 personnel of which 1,936 were contractors as at 30 June 2006. Corporate staff in Lima and satellite ofces in Argentina, Mexico, Chile and the United States of America (Nevada) comprise 242. 2,858 of the total are site personnel of which 1,936 are contractors. All of the operational personnel until recently worked on a rotational basis of 20 days on and 10 days off site. The Company is currently implementing a 14 days on and 7 days off rotational sequence due to a change in legislation. Two 10.5 hours shifts are worked per day and the sites operate 24 hours per day, 365 days per year. The Company devotes signicant attention and resources to the management of community relations. A manager was appointed in Lima for this function in 2003, and appropriate stafng has been deployed at the operations. The principal objective is to ensure effective communication and good relations between the company and the surrounding communities, and it would appear that the Company has become a Peruvian role model in this regard. The budget for normal community projects in 2006 amounts to USM$1.4. There are a number of special projects in addition to this that are budgeted for separately. Sufcient staff has been allocated to effectively administer the required functions at head ofce and mine level and they enjoy the full support of senior company Management. The budget for 2006 for Safety, Health and Environment issues, at USM$3.8 excluding staff salaries, represents a signicant investment in effective Management. In developing new prospects and projects the management has a diligent and cautious approach to establishing the extent and viability of a potential resource. Once established, as Pallancata and San Jose demonstrate, the speed and standard of development of their mines into production units, in IMCs opinion, compares favourably with most other similar projects around the world. 269
The company has established a separate entity to manage the community projects. It has two arms, one is Social Programmes and the other Production Programmes. The Social Programmes include: ) Educational help which includes getting school rooms built, obtaining teachers (salaries, transport, accommodation), establishing a hostel for the schoolchildren and training children in the art of lama, alpaca and vicuna skills and agriculture. ) Social help includes warm clothing and blankets in cold times and Christmas presents. There is also a programme to increase the skills levels of the children of the community in which the mines operate. ) Medical help local residents can visit the mine doctor and he makes visits in the villages. Transport is also given for emergency cases to larger towns such as Arequipa. Projects are decided on in consultation with a community representative such as a mayor. The Company has sponsored the following projects: ) Purchase of land at near Cuzco for the establishment of an alpaca breeding centre to enhance genetic material. ) The establishment of a trout farm for the Pampamarca community. ) The establishment of a trout farm, school and slaughterhouse at Iscahuaca. ) The Selene mine has a technology centre and some 72 people from the local community have been trained and are now working for the company. ) There is a woodworking and a literacy programme. ) The mine has helped with a trout breeding programme in the middle of Lake Huisca Huisca. 2.5.3 Health and safety The Company adheres to the Peruvian National Requirement Article 50, Sub Chapter Three Annual Mining Safety and Health Program of the Mining Safety and Health Regulations, under Supreme Decree 046-2001 EM, dated July 26, 2001, to which Article 211 of the Law refers. Additionally the Company adheres to the Mining Code of Argentina (24.498 and 24.585) and to The Mining Law of 26 June 1992 with amendments of Mexico. The Companys mission statement is: ) Vision To be recognised as having the safest operations in any country in which the Company has an asset and one of the safest worldwide. To maintain the Companys commitment for permanent improvement in every aspect of operational activity. ) Target : Zero accidents in all of the Companys assets. Increased production with quality, safety and efciency and the environment. Qualication under OSHA 18001 standards. To consider the human factor as the most important under our management. To preserve and maintain a harmonious relation with the environment. The Company is implementing a risk management system (ISTEC) at corporate level in line with OSHA 18001. The procedures are being put in place to enable the Company to qualify for OSHA 18001 in 2007. Numerous safety and operating procedures are in place at the present time and are 270
) Mission :
continually being updated and augmented to enable the qualication. The details of all issues relating to health and safety can be accessed and comment made on line on the Companys internal web site. Employee and contractor occupational health is assessed prior to employment and annually thereafter. A total of eleven cases of impaired lung function (silicosis) were identied in contractor personnel between 2002 and 2006. This appears to be an isolated group as there are no records of additional silicosis cases developing subsequent to these eleven. Compensation for silicosis is paid by the state and Company policy is to redeploy affected personnel to other employment. The operations have received a number of industry awards and are considered to be amongst if not the best managed operations in Peru. Arcata mine ) 1998 ISEM : ) 1999 ISEM : ) 2000 ISTEC ) 2000 ISEM ) 2002 ISEM National Safety Award, Second prize, Underground Category. National Safety , Second prize, Underground Category. International Audit. Qualication: Third level Good. National Safety Award, Second prize, Underground Category. 6th National Safety Award, Underground Category. Reduction Safety Frequency Indexes in 2001 by 25 per cent. in comparison with previous year. JOHN T. RYAN Award, Underground Category. National Safety Award, Second prize, Underground Category. National Safety Award, Second prize, Underground Category. National Award for Eco-efciency CONAM.
) 2002 2003 ) 2004 ) 2005 ) 2005 Ares ) 1999 ) 2001 ) 2003 ) 2004 ) 2005
Implementation of the management System for Health Safety and Environment Audited by ISTEC, Excellent. International Audit, Category 4 (Very Good). National Prize for Safety in Underground Mining, First Place. National Prize for Safety in Underground Mining, Second Place, and ISO 1401 Environment Certication (Version 96). ISO 14001 Environmental Certication (Version 2004) National Prize for Cleanest Production and Eco Efciency, CONAN 2005 Category 4 (Medium and Large Companies).
Selene ) 2003 ) 2004 ) 2005 National Prize for Safety in Underground Mining, Second Place. National Prize for Safety in Underground Mining, First Place, and ISO 1401 Environment Certication (Version 96). National Prize for Safety in Underground Mining, Second Place, and ISO 1401 Environment Certication (Version 2004) National Prize for Cleanest Production and Eco Efciency, CONAN 2005 Category Medium and Large Companies. 271
The Lost Time Injury Frequency Rate (LTIFR) is one of the parameters used to monitor safety performance in any industry and is usually measured per 100,000 manshifts or one million manhours. The Company has instituted such a programme measuring per million manhours in accordance with the Law and the results are shown in Table 2-11. The increase in the LTIFR in the early part of 2006 is attributed in part by the Company to a single contractor now dismissed for poor working practices, and to increased levels of development or construction work associated with expansion projects. The Company now audits contractor safety records as a part of the selection of a contractor. Records of exploration sites are included in the nearest major operation (e.g. Selene includes Pallancata) and no records of main and subsidiary management ofces are kept. There has been one ne of US$20,000 in respect of the fatality that occurred at Arcata in 2004. Subsequently the Companys safety management system has been modied. The Company has, as of 2006, instituted more stringent auditing of accident and incident reporting with the introduction of OSHA 18001 planned for 2007. This has also contributed to the increase in the LTIFR as a result of more accurate reporting. Comparing similar underground or surface mining safety data from major mining operations world wide the Company have a marginally higher LTIFR at 6.75 than the 6.25 for the industry average. IMCs perception is that the Company is rmly committed to health and safety and expect the Company to demonstrate a sustained long term improvement. Table 2-11 Lost time injury frequency rate
Fatals LTI LTIFR Operatives
Arcata Ares Selene San Jose (Not in Operation) Composite 2004 ****************************************************** Arcata Ares Selene San Jose Composite 2005 ****************************************************** Arcata Ares Selene San Jose Composite 30 June 2006 ********************************************** Arcata Ares Selene San Jose Composite Note: LTIFR is calculated per million man hours
2003 ******************************************************
0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0
6 1 3 10 4 1 1 11 17 1 2 0 28 31 10 7 5 4 16
1.95 0.39 2.02 1.41 1.60 0.34 0.43 88.42 2.00 0.35 0.63 117.33 3.63 6.46 5.20 6.93 13.33 6.75
1,201 908 1,236 3,345 1,124 1,090 1,082 156 3,452 1,002 876 642 262 2,782 1,041 811 618 378 2,848
A record is kept of the frequency of the type of accidents and incidents (near misses) enabling the Company to focus on trends and be pro-active in its management of safety as shown in Table 2-12. This data is available to all employees on-line for a rolling period of 30 days (excerpt shown).
272
273
27-May-06 *********** 28-May-06 *********** 29-May-06 *********** 30-May-06 *********** 31-May-06 *********** 01-Jun-06 ************ 02-Jun-06 ************ 03-Jun-06 ************ 04-Jun-06 ************ 05-Jun-06 ************ 06-Jun-06 ************ 07-Jun-06 ************ 08-Jun-06 ************ 09-Jun-06 ************
1 1 1
1 1 1 1 1 1
1 1 1 1 1 1 1 1 1
274
1 1 1 1 1 1 1 1 1 1
275
2.5.4 Infrastructure Arcata mine, Peru, is supplied with power from the National Grid and can provide approximately 33 per cent. of its power requirement from standby generation capacity at the mine when required, which is adequate for essential services but not production. The purchase of additional generation capacity is under consideration by the Company which would ensure not only that essential services are maintained but also that the process plant operates with minimal interruption to production if the National Grid failed. Less than 350 m3 of water is drawn daily for potable and ofce/workshop use. The industrial and mine water is re-circulated and is sufcient for all other purpose. Eleven compressors provide air to the workings with ample standby capacity. Communications within the operation are good and a satellite link is available for external communications. A local area network (LAN) system is being expanded at the operation enabling access to the internet. The principal route for goods to Arcata (approximately 4,630 m elevation) is by mixed tarmac and good dirt road through Arequipa (about 300 km). The main incoming materials are diesel fuel, explosives, timber supports, spare parts and chemicals. Arequipa has scheduled national air services to Lima, the capital of Peru, with international air connections. Ares mine, Peru, is supplied with power from the National Grid and has 100 per cent. standby generation capacity at the mine to be self sufcient. Less than 300 m3 of water is drawn daily for potable and ofce/workshop use. The industrial and mine water is re-circulated and is sufcient for the purpose. Four compressors provide air to the workings with one on standby. Communications within the operation are good and a satellite link is available for external communications. A LAN system is being expanded at the operation enabling access to the internet. The principal route for goods to Ares (approximately 5,000 m elevation) is by mixed tarmac and good dirt road through Arequipa (about 285 km). There are good roads from Arequipa to Lima (985 km) and the port of Matarani (390 km). The main incoming materials are diesel fuel, zinc powder, sodium cyanide, hydrogen peroxide and other chemicals, cement, timber supports, spare parts and explosives. Arequipa has scheduled national air services to Lima, the capital of Peru, with international air connections. Selene mine, Peru, is supplied with power from the National Grid and this capacity is being increased to service the process plant expansion and to route power to Pallancata. Selene has 100 per cent. standby generation capacity at present at the mine and will have approximately 70 per cent. with the planned expansions (Pallancata mine and increased throughput at Selene processing plant). Approximately 500 m3 of water is drawn daily for potable and ofce/workshop use. The industrial and mine water is re-circulated and is sufcient for all other purposes. Four compressors provide air to the workings with ample standby capacity. Communications within the operation are good and a satellite link is available for external communications. A LAN system is being expanded at the operation enabling access to the internet. The principal route for most goods to Selene (approximately 4,600 m elevation) is from Lima (80 per cent.), a distance of 763 km on good surfaced roads, and a short unsurfaced section of 45 km. The remaining 20 per cent. of supplies come from Arequipa, which is 902 km from Selene, also on good quality surfaced roads. Main incoming materials are plant and equipment, diesel fuel, explosives, wooden supports and chemicals. Approximately 330 t of outgoing concentrate goes by road to the port of Matarani, a distance of 970 km. Cuzco, 390 km distant, has scheduled national air services to Lima, the capital of Peru, with international air connections. Concentrate will also be transported to Ares via a serviceable unsurfaced road over a distance of 175km to be turned into dore and then on to Johnson Matthey for rening. Pallancata mine project, Peru, has only basic infrastructural development sufcient to sustain exploration facilities at present. A capital budget has been prepared by the Company to install a new 12.5 km long 33 kV overhead transmission line from Selene and a new terminal substation at Pallancata to supply the needs of a mining operation at a cost of US$M 0.352. Adequate water is available at the site for potable and mining purposes and a treatment plant and settling ponds are planned for the efuent and silt removal before discharge. Compressed air, sufcient for the 276
purpose of mining, is planned at the site. Communications are solely by radio and satellite at present and this will be upgraded. A new road is planned, at a cost of approximately $2 million, which will reduce the distance to Selene by road to 22 km, and avoid some of the more difcult terrain. The workforce will be based at the Selene mine and transported to Pallancata to work. San Jose mine project, Argentina, proposes to install sufcient diesel generation capacity at the mine to be self sufcient. It is permitted to draw 1,560 m3 of water daily for potable and industrial use. The industrial and mine water is re-circulated and is sufcient for the purpose. Four compressors will provide air to the workings with one on standby. Communications within the operation are good and a satellite link is available. A LAN system is available at the operation enabling access to the internet. The principal route for goods to San Jose is by good dirt (35km) then tarmac road to the port of Comodoro Rivadavia (total 230 km). The nearest town is Perito Moreno (about 30km) to the west. The main incoming materials are diesel fuel, chemicals, cement, timber supports, spare parts and explosives which will extend to include zinc powder, sodium cyanide and hydrogen peroxide once the process plant is commissioned. Concentrate will be exported via the port of Comodoro Rivadavia. Comodoro Rivadavia has scheduled national air services to Buenos Aires, the capital of Argentina, with international air connections. Moris mine has adequate generation capacity at the mine to be self sufcient. Sufcient water is available from boreholes for potable, and industrial use. The industrial process water is recirculated and is sufcient for the purpose. A mobile compressor provides air to the operations as required. Communications within the operation are adequate with a land line telephone service available. A LAN system was available at the mine when last in operation. The principal route for goods to Moris (approximately 1,000 m elevation) is by good but arduous dirt road (about 60km) then tarmac road to Chihuahua (total 260 km). There are good roads from Chihuahua to all parts of Mexico via the state highway system. The main incoming materials are diesel fuel, sodium cyanide, hydrochlorate acid, sodium hydroxide and other chemicals, cement, calcium carbonate, spare parts and explosives. Dore ingots were exported via Chihuahua which has scheduled international connections to the USA and national air services to Mexico City, the capital of Mexico, with onward international air connections. 2.6 Projects 2.6.1 Short term projects The Company produced 10,551 thousand ounces of silver and 233.22 thousand ounces of gold in 2005 and expects to produce at a rate of approximately 15,000 thousand ounces of attributable silver and approximately 170 thousand ounces of attributable gold in 2008. 2.6.2 2.6.1.1 New sites ) Pallancata mine, Peru reserves of 643 kt of ore containing 5,578 thousand ounces silver and 23 thousand ounces gold. Total Capex is US$10.5 M none of which is yet committed. Construction is due to commence in August 2006 and planned for rst production 2007 at approximately 60,000 tpa containing 420 thousand ounces of silver and 1.7 thousand ounces of gold in concentrate, rising to a maximum in 2009 of approximately 590,000 tpa containing 4,500 thousand ounces of silver and 18 thousand ounces of gold in concentrate. reserves of 642 kt of ore containing 9,043 thousand ounces silver and 168 thousand ounces gold. Total Capex is US$77.1 M of which US$6.6 M is reserved for contingencies. As at 30 June 2006, US$11 million had been spent and US$6.8 million was committed. Construction is in progress and planned for rst production in July 2007 at 273,750 tpa producing an average 277
3,934 thousand ounces silver and 51.80 thousand ounces gold in concentrate each year. 2.6.3 Medium term projects. )Moris mine (Mina Maria), Mexico )San Felipe, Mexico resources of 3,354 kt of ore containing 4.0 g/silver and 1.31 g/t gold. Subject to the approval of a new mine plan, rst production is planned for July 2007 producing dore. Small operations exploited the polymetallic resources in the area until closure in 1991. Bolidens exploration programme reportedly dened inferred resources of 3,150 kt with a combined content of zinc, lead and copper sulphides at 9.6 per cent. and silver at 69.7 g/t. IMC are able to accept these gures as an inferred resource.
2.6.4 Long term projects )San Martin, Peru The site is 20 km from Arcata and is being drilled by two drill rigs that have cored 14 holes to date. Previous channel sampling, minor underground exploration and the current surface mapping have yielded a maximum grade at surface of 8,970 g/t silver and 27 g/t gold with drill intersections of 2 g/t to 8 g/t to date. The Company is undertaking mapping, channel sampling and drilling programme to conrm the inferred resources over two separate structures reported by Golden Peaks Resources Ltd of approximately 150 kt with gold grades of 8.05 g/t and 10.66 g/t. IMC have not conrmed these gures. Small operations exploited the polymetallic resources in the area from surface in the 1950s to 1960s reportedly producing at 2 per cent. to 3 per cent. copper and 600 g/t to 700 g/t silver. Three cored holes were drilled by a previous prospector into the Santa Rosa vein in 2002 intersecting 0.37 m to 2.10 m of signicant silver, copper and zinc mineralisation.
278
2.7 Environmental issues and management 2.7.1 Legislation The Company adhere to the requirements of the Laws of the country in which they operate, namely: Peru: Decreto Ley No. 17752 DS016-93-EM DS-029-94-EM RM011-96-EM/VMM RM315-96-EM/VMM DS038-98-EM DS074-2001-PCM DS-049-2001-EM Ley 28090 Regulation Asociada Voluntaria Solo Unidad Ares Ley 27314 DS042-2003-EM DS046-01-EM Annexo DS 020-2005-EM Ley 28611 1969 01/05/1993 18/06/1994 13/01/1996 19/07/1996 30/09/1998 24/06/2001 06/09/2001 14/10/2003 01/01/2004 2004 2004 25/07/2001 2005 15/10/2005
PRA1 8.2
In Peru the supreme decree (DS016-93-EM) details the legal requirements for mining and the general environmental legal code. It requires that mines operating prior to 1993 need to compile a Programa de Adecuacion y Manejo Ambiental or PAMA. Mines established after 1993 have to compile an Environmental Impact Assessment (EIA). Thus a PAMA was compiled for Arcata and EIAs for Ares and Selene. The government accredits consultants who are suitably qualied to compile EIAs /PAMAs. In order to establish a mine in Peru one needs to apply to the Ministry of Energy and Mines (MEM) for a beneciation plant title or a permit to construct a processing plant. For this title you need to have done the following: ) Obtain a water use authorization from the Dept. of Agriculture (INRENA) ) Obtain a water abstraction authorization from the Health Ministry (DIGESA) ) Have an approved Community Development Plan (DS 042-2004) from MEM ) Have an approved Environmental Impact Assessment (EIA) from MEM who have to consult with other departments particularly INRENA. ) Have a permit to use and store explosives from the Interior Ministry (DISCAMEC) Argentina: National Environmental Mining Law 24.585 In order to establish a mine in Argentina one needs to apply to the regional authority, in the case of San Jose the General Mining Department DPM, Rio Gallegos, Santa Cruz. At each stage of development, exploration, Manifestation of Discovery and exploitation a separate EIA is required. All the other statutory authorisations required are listed in Table 2-24. Mexico: Ley General de Equilibrio Ecologico y Proteccion al Ambiente (General law of Ecological Equilibrium and Environmental Protection) submitted to SEMARNAP (Secretary of the Environment, Natural Resources and Fishing) The environmental legal requirements for mining in Mexico are relatively simple. There is a requirement for baseline study (EIA) to be submitted prior to commencement of work. In the case of browneld operations management of past liabilities are excluded from the new operators responsibilities. The EIA for Moris mine has lapsed, and this will have to be reinstated prior to commencing work. The only current permits at the San Felipe prospect are those associated with drilling. 279
2.7.2 Status The Peru operations, Selene, Arcata and Ares, all demonstrate very good environmental management practices and are ISO 14001:2004 certied. The closed Sipan mine was previously , is at an advanced state of development and is certied to ISO 14001. The Argentine site, San Jose due to start production in 2007. It has a full environmental management system, is managed in line with ISO and Company requirements and is planned to be certied to ISO 14001 in 2007. The Ares and Selene mines are relatively new and the infrastructure is modern and designed to best international practice. The Arcata mine is older but the environmental aspects are well controlled. Environmental assessments and reports are generated by external companies with recognised international expertise and are of good quality. The Peruvian and Argentinian operations are operating with the necessary environmental permits and authorizations. Compliance with legislation is checked regularly and statistics on permit compliance are compiled and reviewed monthly. The permits and necessary documentation for the Pallancata deposit are well advanced and will be in the name of the joint venture partners /lease holders of the property prior to commencement. The studies and permits for the extensions required at Selene to accommodate Pallancata production are being actioned. An EIA for the Moris mine will have to be resubmitted. The status of permitting for the San Felipe prospect area is in order. All the underground mines and the closed open pit mine (Sipan) in Peru discharge water to the natural environment. The qualities currently discharged meet Peruvian law and international standards and this has been achieved by settling out the suspended solids (all mines) and by active treatment to reduce acidity (Sipan). The long term implications of the discharge of water from the workings, from tailings and rock dump seepage, which could resulting acid rock drainage, needs to be better understood by the Company. Acid drainage is currently generated at Sipan and is being treated in three active liming plants. Costs of water treatment and site management at Sipan are of the order of USM$1 per annum and are budgeted. Other sites do not currently generate acid drainage but, with the exception of San Jose in Argentina, the Acid/Base status of the operations rock strata is not well understood. The limited analyses performed so far indicates that there is potential for future acid drainage and this continually assessed as it is the most signicant residual environmental liability. Costs for treatment, if necessary, are unlikely to exceed US$M0.5 per site per annum. There has, in the past, been minor leakage of tailings to the Huisca Huisca lake below the Arcata operation. The quantity is minimal and the cost of closure is included in the Arcata closure plan. There are reportedly no environmental nes outstanding nor have there been signicant environmental nes or legal disputes in the past. A single ne, of approximately US$10,000, was imposed in 2003 for an excess of arsenic in water discharged from Arcata. The ne was rescinded as it was proved that the levels of arsenic were as a result of natural intrinsic water values. Safety management systems are being developed in accordance with the requirements of OSHAS 18001, and the intention is to obtain certication in 2007. Occupational health examinations are conducted on all employees and contractors, prior to employment, and annually thereafter. A total of 11 cases of impaired lung function (silicosis) have been identied over the last 4 years (all contractors), and where necessary these persons have been reallocated to different work areas. 2.7.3 Provision for rehabilitation The company uses the best international standards for their compilation of documents and designs and is implementing their policy of closing facilities as the life of the mines progress in order to reduce liabilities at the end of the mine life. Draft closure plans and estimates of closure costs have been generated by recognised consultants. These plans are now being revised by a single consultancy (Walsh) for formal submission to the Peruvian government on 15 August 2006 in order to comply with the new legislation requiring closure plans and the deposition of monies 280
on an annual basis to enable these closure plans to be enacted at the end of an operations life. Evaluation of the existing drafts, and of the summarised budget allocations for closure, indicates that for the most part, the work planned, and the nancial allocations for closure are in line with international best practice. However, apart from Sipan, no cost allocation has been made for the ongoing treatment of acid waters. In the absence of detailed acid /base analysis the possibility of acid generation in the future from sites other than Sipan cannot be predicted. However the practical experience to date has been that none of the sites have generated acidity, and there are no signicant levels of heavy metals entering into solution, thus future acid generation risks are considered to be low. The San Jose EIA contains a competent assessment of the ARD and proposes satisfactory control measures for the management of the risk. Total current estimates of closure costs for the Peruvian operations are a little over US$19 million, with additional amounts budgeted for ongoing maintenance for 5 to 10 years per site. The Moris mine closure estimate by the seller is US$900,000, by their calculations, Hochschild has allowed for US$1.35 M to rehabilitate it to Mexican national standards 2.8 Statutory authorisations IMC reviewed the statutory authorisations for the mines and operations and believes all contracts and permits are in place with the exceptions noted. IMC has not completed a legal due diligence of the titles. 2.8.1 Peru The law of Peru grants the right to explore or exploit minerals by means of a mining concession and mining licence. 100 hectares (ha) is the basic unit for newly claimed mineral concessions and 1,000 ha the maximum unit. The concession is irrevocable and indenite as long as its holder fulls the obligations prescribed by law to maintain them. There is no limit to the number of concessions that may be held by a company or individual. From year 2001, the concession holder must pay an annual rent of US$3.00/ha by 30 June of each year (previously since 1991 it was of US$2.00/ha). The concession holder must sustain a minimum level of annual commercial production of US$100/ha in gross sales within six years of the granting of the concession. If the concession has not been put into production within that period, then the concession holder must make an additional penalty payment of US$6.00/ha for the 7th to 11th year following the granting of the concession and of US$20.00/ha thereafter. The concession holder shall be exempted from the Penalty if the investment made during the previous year was 10 times the Penalty (i.e. US$60/ha per year for the 7th through to 11th year). The concession can be defended against possible claims by third parties, transferred or sold, leased, mortgaged and may be inherited. The mining concession requires a number of permits and licences before exploitation can commence. The prime requirements are an approved Environmental Impact Assessment (EIA) and Environmental Management Plan (EMP) without which no approvals will be given; the surface rights; an operating mine permit and an operating plant and plant capacity authorisation. A number of other permits for water use, storage and use of explosives, an administrative and a benet authorisation, fuel use and storage, electricity generation chemical use and the use of X-ray equipment are also required depending on the operation. Many of these permits and licences are granted on a permanent basis and other are renewable annually. The Company either holds, in its name or that of a subsidiary, or leases from a third party the mineral right concessions to Arcata, Ares and Selene operations and San Martin prospect as summarised in Table 2-131 to Table 2-22. Additionally, the Company has title to the mineral rights through its joint venture agreements to Pallancata. The Company owns the surface rights to Arcata and easement contracts to the surface at Ares and Selene operations, the Pallancata project and the San Martin prospect, and the Company also possess all of the necessary licences and permits to operate, construct or explore as relevant. Application has been made for
1
281
underground exploration development at Pallancata enabling this project to proceed whilst operational permits are being prepared and these are expected prior to the expiry of the exploration development. The EIA and EMP for Pallancata have been approved. Table 2-13 Mineral rights concessionsArcata, Peru
Concession name Concession code Minerals Date 1st registration Renewal
Arcata 5 **************************************************** Arcata 2000 ************************************************* Calvario 1 *************************************************** Calvario 2 *************************************************** Calvario 7 *************************************************** Calvario 11************************************************** Calvario 14************************************************** Calvario 20************************************************** Calvario 21************************************************** Calvario 22************************************************** Calvario 23************************************************** Calvario 24************************************************** Calvario 110************************************************* Calvario 4A ************************************************* Calvario 50************************************************** La Marcarena *********************************************** Marion 1**************************************************** Marion 2**************************************************** Marion 28 ************************************************** Marion 29 ************************************************** Marion 30 ************************************************** Marion 31 ************************************************** Marion 32 ************************************************** Marion 101 ************************************************* Marion 102 ************************************************* Marion 103 ************************************************* Marion 104 ************************************************* Marion 105 ************************************************* Marion 106 ************************************************* Marion 107 ************************************************* Marion 108 ************************************************* Marion 109 ************************************************* Marion 110 ************************************************* Marion 111 ************************************************* Marion 112 ************************************************* Marion 113 ************************************************* Marion 114 ************************************************* Marion 115 ************************************************* Marion 116 ************************************************* Marion 117 ************************************************* Marion 118 ************************************************* Marion 119 ************************************************* Marion 120 ************************************************* Marion 121 ************************************************* Marion 122 ************************************************* Marion 123 ************************************************* Marion 131 ************************************************* Marion 132 ************************************************* Marion 133 ************************************************* Marion 134 ************************************************* Marion 135 ************************************************* Marion 136 ************************************************* Marion 137 ************************************************* Marion 138 ************************************************* Marion 139 ************************************************* Marion 140 ************************************************* Marion 141 ************************************************* Marion T-1 ************************************************** Marion T-3 ************************************************** Marion T-4 ************************************************** Rema 1 *****************************************************
010249094 010199500 010082102 010082202 01001942X01 01002672X01 01002675X01 01002690X01 01002691X01 01002692X01 01002693X01 01002694X01 01004520X01 01001523X01 01002899X01 01000198X01 01004792X01 01004793X01 01004948X01 01004949X01 01004950X01 01004951X01 01004952X01 01005778X01 01005779X01 01005780X01 010214802 010214902 010215002 010215102 010215202 010215302 010215402 010215502 010215602 010215702 010215802 010215902 010216002 010216102 010216202 010216302 010216402 010216502 010216602 010216702 010217502 010010903 010011003 010011103 010011203 010011303 010011403 010011503 010011603 010011703 010011803 010033694 010033894 010050894 010607995
Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals
28-Apr-94 04-Oct-00 16-May-02 16-May-02 27-Mar-63 27-Feb-68 27-Feb-68 22-Mar-68 22-Mar-68 22-Mar-68 22-Mar-68 22-Mar-68 28-Aug-80 07-Mar-60 12-Sep-68 26-Apr-52 06-Apr-82 06-Apr-82 09-Sep-82 09-Sep-82 09-Feb-82 09-Sep-82 09-Sep-82 15-Apr-88 15-Apr-88 15-Apr-88 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 15-Nov-02 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 14-Jan-03 20-Jan-94 20-Jan-94 27-Jan-94 02-Jan-95
Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent*
282
Concession name
Concession code
Minerals
Renewal
Administrative Economic Unit (Concessions agrupment) ******************* Benet Concession ***************************************************** Plant Operating and Capacity Authorization ***************************** Surface Rights on Plant, Camps and other facilities ***********************
Operating Mine Certicate********************************************** Environmental Management Program/Environmental Impact Study Approval ************************************************************ Water Use Permit ****************************************************** Discharge Water Authorisation ****************************************** Explosive Use License *************************************************** Magazine Explosives Storage License ************************************ Liquid Fuel Consumers Register****************************************** Chemical Products Use Certicate *************************************** Generator of electric energy Authorisation******************************* X Ray Use Authorisation ************************************************
RL 0513-2001-RPM RD 678-65 RD 502-71EM/DGM/R.D.28/03/05 Land Owner Contract (Asientos C3 de Partidas N 4000076 y 40000132) COM 094-2006 PAMA RD 039-2003EM/DGM RA 080/081/082/083/0842002-AG-DRAA-ATDR.CM RD 1203-2005-DIGESA/SA RD 001697/2006-IN-1703-2 R.D. N 01797-2005-IN1703-2 NR 002-CDFJ-04-2004 20192779333-DICIQ RM 121-2001-EM/VME Licencia de Instalacion N 2526.B3
03-Jan-07 Permanent Permanent 09-Aug-07 31-Dec-06 19-Jul-10 Permanent 20-May-08 Permanent 23-Jun-07
Claudia 9 **************************************************** Claudia 10 *************************************************** Claudia 15 *************************************************** Claudia 19 *************************************************** Laguna 11 *************************************************** Laguna 12 *************************************************** Laguna 13 *************************************************** Laguna 14 *************************************************** Laguna 15 *************************************************** Laguna 16 *************************************************** Laguna 17 *************************************************** Laguna 18 *************************************************** Laguna 19 *************************************************** Rescate 2 **************************************************** * subject to the payment of an annual fee
010058396 010058496 010063796 010389697 01005875X01 010011092 010011192 010011292 010011392 010011492 010011592 010011692 010011792 010012094
Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals
14-Feb-96 14-Feb-96 19-Feb-96 07-Nov-97 03-Nov-88 22-Sep-92 22-Sep-92 22-Sep-92 22-Sep-92 22-Sep-92 22-Sep-92 22-Sep-92 22-Sep-92 11-Jan-94
Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent*
283
Administrative Economic Unit (Concessions agrupment)**************** RD 125-98-EM-DGM Benet Concession ************************************************** RD 049-96-EM-DGM Plant Operating and Capacity Authorisation ************************** RD 049-96-EM-DGM Surface Rights on Plant, Camps and other facilities ******************** Easement contract (Asiento B3 y B4 de Partida N 4031351) Operating Mine Certicate ****************************************** COM 072-2006 Environmental Impact Study Approval ******************************** EIA RD 277-2001-EM/DGAA Water Use Permit* ************************************************** RA 50-2000-AG-DRAA-ATDR.CM Discharge Water Authorisation* ************************************* R. 1679-2005/DIGESA/SA Explosive Use License ************************************************ R.D. N 1815-2006-IN-1703-2 Magazine Explosives Storage License ********************************* R.D. N 1777-2002-IN-1703-2 Liquid Fuel Consumers Register ************************************** N 0017-CDFJ-04-2004 Chemical Products Use Certicate ************************************ 20192779333-DICIQ Generator of electric energy Authorisation *************************** RM 333-98-EM/VME X Ray Use Authorisation ********************************************* Licencia de Instalacion N 2527.B3
Permanent Permanent Permanent 02-Oct-24 13-Dec-06 Permanent Permanent 07-Nov-06 31-Dec-06 16-Feb-07 Permanent 20-May-08 Permanent 23-Jun-07
Note: * Water use permits and discharge water authorization are permanent requiring the payment of annual fees provided there is no change in the technical requirement or increase in usage.
284
Augusta Elena Tercera**************************************** Blanca 1 ***************************************************** Blanca 2 ***************************************************** Blanca 5 ***************************************************** Blanca 6 ***************************************************** Blanca 10**************************************************** Blanca 11**************************************************** Blanca 12**************************************************** Blanca 13**************************************************** Blanca 14**************************************************** Blanca 15**************************************************** Blanca 17**************************************************** Blanca 19**************************************************** Cruz Del Sur 2 *********************************************** Marco 4 ***************************************************** Marco 3-A *************************************************** Palca Dos **************************************************** Palca Tres**************************************************** Palca Uno *************************************************** Puca Corral 54 *********************************************** Puca Corral 55 *********************************************** Puca Corral 66 *********************************************** Puca Corral 67 *********************************************** Puca Corral A ************************************************ Tumiri ******************************************************* Tumiri Cuatro ************************************************ Tumiri Dos*************************************************** Tumiri Tres ************************************************** Note: * subject to the payment of an annual fee
05003723X01 010007094 010007194 010007494 010007594 010286396 010286496 010286596 010286696 010286796 010286896 010081000 010063203 010213193 010044592 010044492A 05005813X01 05005814X01 05005812X01 05005851X01 05005852X01 05005863X01 05005864X01 010101199 05004166X01 05005809X01 05004167X01 05004168X01
Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals
23-Nov-70 11-Jan-94 11-Jan-94 11-Jan-94 11-Jan-94 17-Sep-96 17-Sep-96 17-Sep-96 17-Sep-96 17-Sep-96 17-Sep-96 02-May-00 03-Mar-03 30-Sep-93 04-Dec-92 04-Dec-92 20-Oct-83 20-Oct-83 20-Oct-83 07-Dec-83 07-Dec-83 07-Dec-83 07-Dec-83 05-Aug-99 16-Aug-76 04-Oct-83 16-Aug-76 16-Aug-76
Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent*
Administrative Economic Unit (Concessions agrupment) ******************* Benet Concession ***************************************************** Plant Operating and Capacity Authorisation****************************** Surface Right on Plant, Camps and other facilities ************************
Operating Mine Certicate********************************************** Environmental Impact Study Approval *********************************** Water Use Permit ****************************************************** Discharge Water Authorisation ****************************************** Explosive Use License *************************************************** Magazine Explosives Storage License ************************************ Liquid Fuel Consumers Register****************************************** Chemical Products Use Certicate *************************************** Generator of electric energy Authorisation******************************* X Ray Use Authorisation ************************************************
RJ 01243-2002-INACC/J RD 103-2004-MEM/DGM RD 103-2004-MEM/DGM/RD 159-2006-MEM/DGM Easement contract (Asiento D3, D4, D5 y D6 de Partidas N 11009999 y 11009998) COM 020-2006 EIA RD 010-2003-EM/DGAA/ R.D 059-2005-MEM/DGAAM R 071-072-2002-DRAAP/ATDR-AP RD 1633/2005/DIGESA/SA RD 001589/2006-IN-1703-2 R.D. N 01394-2005-IN-17032 N N 0001-CDFJ-03-2006 20192779333-DICIQ RM 337-2004-EM/DM Licencia de Instalacion N 2528.B3
28-Nov-06 Permanent Permanent 10-Oct-07 31-Dec-06 08-Jun-10 Permanent 20-May-08 Permanent 23-Jun-07
285
Au Dos Mil ************************************************** Don Nico Tres ************************************************ Iniko Tres **************************************************** Jelway******************************************************* La Tranca 2003 *********************************************** Orovega 500 ************************************************* Orovega 800 ************************************************* Pallancata 2002 ********************************************** Pallancata *************************************************** Pallancata No. 1 ********************************************* Pallancata Sur************************************************ Tusca 2002*************************************************** Tyler Two **************************************************** Virgen del Carmen 1 ***************************************** Note: * subject to the payment of an annual fee
010164602 010209202 010010304 010082704 010042303 010041903 10212404 010195002 10009751X01 10000049Y02 010366005 010151702 010342903 10010594X01
Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals
02-Sep-02 16-Nov-02 07-Jan-04 05-Apr-04 03-Mar-03 03-Mar-03 08-Jun-04 01-Oct-02 14-Oct-80 14-Oct-80 11-Nov-05 02-Sep-02 28-Oct-03 01-Aug-83
Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent* Permanent*
15-Feb-26
28-Aug-07
Cayarani 13 ************************************************** Cayarani 15 ************************************************** Chulca 123*************************************************** Marco 7 ***************************************************** Marco 8 ***************************************************** Note: * subject to the payment of an annual fee
Surface Right on Plant, Camps and other facilities ************************ Environmental Impact Study Approval *********************************** Note: * renewable on advancement of project
10-Jan-08 30-Jul-06*
2.8.2 Argentina Argentinian statute requires mineral exploration and exploitation to be licensed in three stages: exploration; manifestation and exploitation. Exploration permits on a cateo grant the rights to any mineral discoveries including those made by a third party within the boundaries. Cateos are measured in 500 ha units, or fractions thereof. No single cateo may exceed 10,000 ha (20 units), and no person may hold more than 200,000 ha (20 cateos) in a single province. The exploration area within a cateo may be contiguous or separated. The holder of a cateo must assess the mineral potential within his exploration boundary (and apply for an exploitation right) within a time period based on the size of the cateo. The exploration term is 150 days for the rst 500 ha (1 unit) 286
or fraction thereof, and an additional 50 days for each additional unit (or fraction thereof) within the cateo. After 300 days, 50 per cent. of the exploration area over 2,000 ha (4 units) within the cateo must be relinquished. At 700 days, 50 per cent. of the remaining area must be dropped. Time extensions are regularly granted. The holder of a cateo must present to the mining authority a minimum exploration work program and schedule. The cateo may be revoked if the requirements of the work program and schedule are not met. A single-time fee of ARS $400 (400 Argentina Pesos) per 500 ha (1 unit) must be paid upon application for a cateo. A cateo is developed into a Manifestation of Discovery if proved promising and an approved survey submitted and an EIA/EMP should a mining permit for exploitation be requested. The manifestations are then consolidated into one unit comprising the Mining Concession. The operator is required to either purchase or lease surface rights to access and operate. Within a year of the consolidation an investment plan must be submitted used by the authorities to determine royalty payments during the production phase. Various other operating permits, licences and registrations are required to operate. San Jose permitting is summarised in Table 2-23 and Table 2-24. Table 2-23
Concession name
Cateo ********* El Pluma 1 **** El Pluma 2 **** El Pluma 3 **** El Pluma 4 **** El Pluma E1 *** El Pluma E2 *** El Pluma E3 *** Saav NE1****** Saav NE2****** Saav NE3****** Saavedra 3 **** Saavedra 4 **** Saavedra 5 **** Saavedra 8 **** Saavedra 9 **** Saavedra 10 *** Saavedra 11 *** Saavedra 12 *** Saavedra 13 *** Saavedra 14 *** Saavedra 1a *** Saavedra 2a *** Saavedra 6b*** Saavedra 7a *** Tres A ******** Tres B********* Tres C********* Tres D ******** Tres E ********* Tres F ********* Tres Colores A Tres Colores B Tres Colores C Tres Colores D Tres Colores E Tres Colores F Tres Colores G
403.089/MSC/01 410.411/MA/99 412.277/MA/99 412.279/MA/99 412.281/MA/99 410.412/MA/99 412.278/MA/99 412.280/MA/99 400.625/MA/01 400.626/MA/01 400.627/MA/01 410.096/MA/99 410.095/MA/99 410.089/MA/99 410.092/MA/99 413.396/MA/00 413.395/MA/00 401.874/MA/01 401.875/MA/01 401.876/MA/01 401.877/MA/01 410.093/MA/99 410.091/MA/99 410.094/MA/99 410.090/MA/99 411.333/MA/99 411.334/MA/99 414.264/MA/00 414.265/MA/00 414.266/MA/00 414.267/MA/00 411.332/MA/99 411.331/MA/99 414.642/MA/00 414.640/MA/00 414.643/MA/00 414.641/MA/00 414.639/MA/00
All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All minerals All All All All All All All All All All All All All All All All All All All All All All All All minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals minerals
12-Dec-01 16-Apr-99 22-Nov-99 22-Nov-99 22-Nov-99 16-Apr-99 22-Nov-99 22-Nov-99 21-Mar-01 21-Mar-01 24-Mar-01 10-Mar-99 10-Mar-99 10-Mar-99 10-Mar-99 06-Apr-00 06-Apr-00 02-Aug-01 02-Aug-01 02-Aug-01 02-Aug-01 10-Mar-99 10-Mar-99 10-Mar-99 10-Mar-99 04-Aug-99 04-Aug-99 24-Jul-00 24-Jul-00 24-Jun-00 24-Jun-00 04-Aug-99 04-Aug-99 01-Sep-00 01-Sep-00 01-Sep-00 01-Sep-00 01-Sep-00
Exploration Manifestation of Discovery (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD) (MoD)
Expected end Nov/Dec 06. Expected end Nov/Dec 06. Expected end Nov/Dec 06. 18-Aug-06* 18-Aug-06* 09-Aug-06* 09-Aug-06* 18-Aug-06* Expected end Nov/Dec 06. Expected end Nov/Dec 06. Expected end Nov/Dec 06. Expected end Nov/Dec 06. Expected end Nov/Dec 06. Expected end Nov/Dec 06. Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec 09-Aug-06* Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec Expected end Nov/Dec 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06. 06.
287
Concession name
Concession code
Minerals
Status
Mine application
General Mining Department DPM, Rio Gallegos, Santa Cruz DPM, Rio Gallegos, Santa Cruz
Awaiting approval. Annual fees. Consolidation of mining titles into one unit. Commences after granting of individual titles. Awaiting approval. Annual royalty payments. Exploration Phase approved. Exploitation Phase approved 14-Mar-06. Registered 29th January 2002. Annual fee. Registered to commence June 2006. Annual.
National Law of Mining Investments (LIM) n 24.196 *********************************** Environmental Impact Report ***************
DPM, Rio Gallegos, Santa Cruz DPM, Rio Gallegos, Santa Cruz
Mineral Producers Certicate. Register number: 403.305/02 ************** Mineral Treatment Plant Commercial licence
DPM, Rio Gallegos, Santa Cruz Public Registry of Industry and Commerce. DPM, Rio Gallegos, Santa Cruz DPM, Rio Gallegos, Santa Cruz
Mineral Transport Guides ******************* Public Registry of Hazardous Waste Operators and Generators. Resolution N 046-SMA/06, of 2nd May 2006 ************************* Explosives Use and Storage. Registry N 980007082, of 31st May 2006. ************* Registry of Importers /Exporters**************
Environmental Department (SMA), Rio Gallegos, Santa Cruz National Arms Registry (RENAR), Buenos Aires Import/Export National Administration (ADUANA), Buenos Aires Department of Water Resources (RRHH), Rio Gallegos, Santa Cruz Department of Water Resources (RRHH), Rio Gallegos, Santa Cruz National Committee of Communications (CNC), Buenos Aires National Secretary of Energy, Buenos Aires Provincial department of Transport (DPT), Rio Gallegos, Santa Cruz Secretary of Energy, Santa Cruz
Granted 2002. 7th July 2006 for 5 years. Permit to use average of 62 m3/h during the rst ve years. Authorisation issued. Quarterly fee.
Hydrocarbon tank Certication and Storage of Hydrocarbons ************************* Transport Permits for Personnel and Goods **
288
Licence
Authority
Date/Comment
National Directorate of Mining Investors, Buenos Aires National Directorate of Mining Investors National Mining Secretary, Buenos Aires
Registered. No 422 15-May-06 granted National Tax scal stability. 15-Jun-06 granted Provincial Tax scal stability in progress Annual afdavits submitted and approved.
Fiscal Stability Certicate (CEFC) ************* LIM Stipulations on investment and environmental remediation ***************
2.8.3 Mexico Mexican mining law is based on article 27 of the Mexican Constitution, which establishes that all minerals found in Mexican territory are owned by the Mexican nation, and that private parties may exploit such minerals (except oil and nuclear fuel minerals) through a concession granted by the Federal Government. This system has been in place essentially since the Spanish colonization of Mexico, when minerals were owned by the King of Spain. Article 27 is the Mining Law of 1992, and its current enabling Regulations were issued by the President of Mexico in 1999. Concessions are initially granted for exploration for a period of six years; an exploitation concession for fty years, renewable once for an equal term, may be requested at any time before the end of the exploration concession. Exploration concessions are granted to whoever rst requests them and may only be granted to Mexican individuals and companies incorporated pursuant to Mexican law, with no foreign ownership restrictions for such companies. However, the Mining Law implies that foreigners must establish a wholly owned Mexican corporation for that purpose, or enter into joint ventures with Mexican organisations. All concessions must be registered on the Public Registry of Mining. While a mining concession gives its holder the right to carry out mining work and take ownership of any minerals, it does not automatically grant any surface access rights, which must be negotiated separately with the owner of the surface land. If no agreement can be reached with the surface owner there is a right in law to apply to the General Mining Bureau for the expropriation or temporary occupation of the land, with a consideration, payable on a one time basis for expropriation and on a yearly basis for temporary occupation. The mining concession also grants rights to any water obtained from the mine. Any other water rights must be obtained separately. The main obligations of a mining concession are the performance of assessment work, the payment of mining taxes (duties) and the compliance with environmental laws. Regulations establish minimum amounts that must be spent on exploration and/or exploitation activities. A report must be led in May of each year regarding the work done to allow the assessment of Duties. Environmental laws require the ling and approval of an environmental impact statement for all exploitation work, and for exploration work that does not fall within the threshold of a standard issued by the Federal Government for mining exploration. Environmental permitting for exploitation, where there is no local opposition, can be usually achieved in less than one year. Moris permitting is summarised in Table 2-25 and Table 2-26.
289
San Luis ********************************************************* 19-Dec-91 Ampl.San Luis *************************************************** 6-Dec-89 Ampl. 2 a San Luis *********************************************** 16-Jul-93 Ampl. 3 a San Luis *********************************************** 3-Sept-93 Ampl. 4 a San Luis *********************************************** 30-Sept-93 Ampl. 5 a San Luis *********************************************** 23-Sept-93 Cerro Amarillo*************************************************** 19-Dec-91 Cerro Amarillo Dos*********************************************** 10-Oct-95 San Fransisco **************************************************** 19-Dec-91 Rosario********************************************************** 30-Sept-98 El Cajon ********************************************************* 16-Jul-93 Rome *********************************************************** 18-Dec-96
18-Dec-41 5-Dec-39 4-Jun-52 3-Dec-51 30-Aug-50 4-Mar-52 18-Dec-41 4-Nov-52 18-Dec-41 13-Dec-54 4-Mar-52 17-Feb-53
191640 184918 216945 214841 212103 215594 194008 218291 192781 223440 215593 219221
Exploitation Exploitation Exploration Exploitation Exploitation Exploitation Exploitation Exploitation Exploitation Exploitation Exploitation Exploitation
Land Use *********************** SRN.38-97/2652 Function License **************** L.F.08-019-116-94 Operation Permit *************** Resolution 301 Environmental Impact
Power************************** 28/AUT/95 Water Rights ******************* 2CHI105434-09FMGE95 Health License ****************** 40774 Blasting ************************ 2361-Chihuahua Authorisation to Purchase Explosive Material ************ 23352 Airstrip Authorisation *********** 101.202.1168 Provisional Pilex Importation Programme**** PITEX/95-415
Permanent 16-Jun-15 Permanent Lapsed 31-Dec-00 Lapsed 31-Dec-99 Lapsed 28-Feb-00 Lapsed 2Aug-00 Permanent
New permit required after acquisition. Renewed by notice to the local authorities. Assignment required after acquisition together with a formal notice to the environmental authorities. Formal notice to the power supplier required. Assignment required after acquisition. New license or assignment required after acquisition. New permit required after acquisition. New authorisation required after acquisition. New permit required after acquisition if put into use. New permit required after acquisition if embarking on importation programme. New permit required after acquisition if embarking on exportation programme.
IMC reviewed the mineral rights, access rights, statutory authorisations and joint venture agreements for the mines and operations and believes that all rights, permits and contracts are in place with the following exceptions. San Jose has made an application for the exploitation of the reserves where approval has been granted and certication is expected in late July 2006. Most of the permits and licenses for Moris mine (Mina Maria) have now lapsed and require renewal prior to the resumption of production which, IMC understand, can be expedited within the required timescale. 2.9 Costs 2.9.1 Operating costs IMC examined the forecasts of operating costs for all operations as prepared by the management of the Company. The forecasts were compared with actual costs in previous years and, where considered appropriate, were modied following discussion with the Company. Operating costs were incorporated into the cash ows prepared by IMC for the purposes of the valuation of the Companys assets. IMC considers the production plans and budgets to be attainable. 290
2.9.2 Cash costs The historic cash operating costs per ounce of silver produced is presented on two bases for the years 2003 to 2005 and are summarised in Table 2.27. They are presented rstly with cash costs of production pro rated on a co-product basis and secondly net of income credits for by-product sales on a by-product basis. Table 2-27 Net cash cost per oz of silver equivalent
2003 (US$ per oz) 2004 (US$ per oz) 2005 (US$ per oz)
Net Cash Cost per oz of Silver Co-Product methodology ******************* Net Cash Cost per oz of Silver By-Product methodology********************
0.89 (5.32)
2.53 (2.58)
2.34 (2.67)
N.B. the net cash cost per ounce quoted has been derived from the audited IFRS accounts set forth in Part IX
Income from the sales of by-products relates principally to gold. 2.9.3 Capital costs Similarly, IMC examined the capital cost estimates prepared by management for the period of the cash ows. Where considered appropriate, additions were made to the gures following discussions with the companys management. The revised capital cost estimates were also incorporated into the cash ows. IMC considers the production plans and budgets to be attainable. 2.10 Risks and synergies Section 7.0, Special Factors, refers to aspects of the business which may materially affect IMCs valuation, i.e. Risk ) The dependence on the use of mining contractors for mining operations. The Company does, however employ a number of mining contracting companies and is not over reliant upon any single Company. Synergy ) The Company is based in a Spanish speaking country with experience of working in South and Central American countries. It is, therefore, well placed to exploit opportunities in other Spanish speaking countries within South and Central America. 2.11 Sales and marketing Hochschild is a producer of silver and gold and associated by-products and has very detailed market knowledge and expertise in these products. IMC has viewed and conrm that all of the concentrate and dore is supplied to two customers. The concentrate is supplied to the Penoles smelter in Mexico and the dore to Johnson Matthey in Salt Lake City for rening. The concentrate is sold to Penoles and the dore, after rening by Johnson Matthey, is sold to Johnson Matthey and nancial institutions. The Company has continued a policy of supplying its product to only two customers as the agreements to date have been equitable. It is reported that Hochschild is currently the fourth largest primary silver producer globally (having produced approximately 10.5 million ounces in 2005) and produces a signicant quantity of gold (approximately 233 thousand ounces in 2005). 291
2.12 Valuation of reserves 2.12.1 Lives of mines in valuation The valuation of the mining assets of Hochschild has been based on lives of mines based on the reserves, proven and probable, available to each of the mines as at the valuation date but excluding any resources potentially available to each of the mines. The normal operating strategy of Hochschild results in each of the mines only having available reserves to support a mine life of between 2 to 4 years. The Company has a proven replacement record. 2.12.2 Methodology and assumptions The valuation of the Company has been performed using the discounted cash ow valuation method on only the reserves owned by the Company. IMC performed the valuation based on the operating costs, capital expenditures and revenues projected for Hochschild. The division of the valuation to proved and probable reserves has been based on the amount of contained gold and silver production attributable to either proved or probable reserves in any one year and the total cash ow in that year pro-rated accordingly. IMC have assumed that proved reserves are worked before probable reserves. Based on these results, depreciation, taxation and working capital requirements were provided by the Company to IMC for inclusion in this valuation to prepare a post-tax valuation with the allocation of the cash ow to proved and probable reserves as noted previously. IMC has accepted the depreciation, taxation and working capital as provided and accept no responsibility as to their accuracy. The following key factors were considered in the valuation process. Operating costs The level of operating costs as scheduled in development of the Net Present Value (NPV) calculations is sufcient to both maintain current production capacity and to promote limited replacement production capacity where required and within the limit of the reserves available to the mine. Operating costs which would have been incurred in support of prolonging the mine life beyond that quoted above based purely on reserves is excluded from the valuation. Costs such as depreciation have been recalculated by the Company as if the mine were to close upon exhaustion of the reserves. This results in tax calculated on the basis of nancial results based on the mine closure dates described above. Similarly, closure costs are included from the time of closure described in section 2.7.3. Capital expenditure The level of capital expenditure as scheduled in development of the Net Present Value (NPV) calculations is sufcient to both maintain current production capacity and to promote new production capacity where required and is within the mine life based purely on reserves. Capital forecasts include expenditures for replacing major equipment on a periodic basis, as well as development capital for opening new areas for mining and installing additional processing facilities where required. Capital expenditure which would have been incurred in support of prolonging the mine life beyond that quoted above based purely on reserves is excluded from the valuation. Plant and equipment The cost of maintaining, repairing and, where necessary, replacing items or components, is included in the cash cost estimates or in the capital expenditure schedules. Except in instances where equipment is planned to be transferred to another operation, plant and equipment have not been valued separately. As the plant and equipment is an integral component in the 292
generation of the cash ows used to estimate the value of the reserves, the value of the plant and equipment is included in the reserve value. Residual value of some elements of plant and equipment is considered to be material due to the relatively short mine lives included in the valuation and has been included, where deemed appropriate, based on estimates supplied by the Company. Selling price The main products of the Company, namely silver and gold, are international commodities and are subject to both short term and cyclical variations. The valuation model is based on forecast prices of the major commodities (silver and gold) prepared by CRU. Other key parameters Other key valuation parameters used in the valuation include the following: ) The valuation is as at 30th June 2006. ) Cash ows are expressed in real terms and have been discounted according to end of year convention, ) Cash ows are forecasted the mine life based on available reserves, and ) The NPV was calculated using a real discount rate of 6.0 per cent.. 2.12.3 Valuation results Table 2-28 to Table 2-31 summarise the value of the reserves both at the operational level and at the post-tax level. Table 2-28 Summary of valuation of proved and probable reservesBased on operating results
Proved reserves (US$ millions) Probable reserves (US$ millions) Total reserves (US$ millions)
245.6
25.4
271.0
Table 2-30 Summary of valuation of proved and probable reservesBased on post tax results
Proved reserves (US$ millions) Probable reserves (US$ millions)
173.6
37.2
210.8
293
2.12.4 Sensitivity analysis The business of mining and marketing metals and minerals contains variables that are not always predictable. Potential variables include those directly associated with the mining and processing operations, such as cost and production levels, as well as those that are external to the mining and processing operations, such as market prices. While IMC concludes that the NPV of the Hochschild operations, as presented above, is realistic relative to the life of mine plans (based on reserves but not resources), a sensitivity analysis has been prepared for the following variables. Operating cost This could vary as a result of changes in component costs, such as labour or supplies, or from variances in productivity. IMC has calculated a sensitivity of plus 10 per cent. in operating cost. Production Production level can be affected by variances in productivity or market place demands. IMC has calculated a sensitivity of minus 10 per cent. in production. Capital cost Variances in capital costs could result from quantity or market prices of capital items. IMC has calculated a sensitivity of plus 10 per cent. in capital costs. Silver and gold prices IMC calculated the sensitivity impact of a minus 10 per cent. change in gold and silver prices. A summary of the effect of sensitivity of the valuation of reserves to these variables is given in Table 2-32. Table 2-32 Sensitivity analysis of reserve valuation
Operating cost (+10%) Production (-10%) Capital cost (+10%) Silver price (-10%) Gold price (-10%)
Base case
271.0 210.8
248.6 192.4
249.5 199.0
264.1 204.2
243.0 189.1
245.5 190.9
2.13 Conclusions IMC concludes from the independent technical review that: ) Managements geological and geotechnical knowledge and understanding is of a satisfactory level to support short, medium and long term planning as appropriate and operations are well managed; ) the mine plans appropriately consider geological and geotechnical factors to minimise mining hazards; 294
) all statutory rights, permits and contracts are in place with the following exceptions. San Jose has made an application for the exploitation of the reserves where approval has been granted and certication is expected in late July 2006. Most of the permits and licenses for Moris mine have now lapsed and require renewal prior to the resumption of production which, can be expedited within the required timescale; ) the Companys mining equipment (either in place or planned in the capital forecasts) is suited to its mine plans and is adequate, with minor adjustments, for the production plans; ) silver and gold ore processing plants and other infrastructure are capable of continuing to supply appropriate quality products to the markets at the forecast production plans; ) the Companys policy of managing operations whilst engaging contractors to complete execute the operations is a successful strategy providing exibility. IMC believes that the Companys relationship with the contractors is both good and effective; ) the Company has, as of 2006, instituted more stringent auditing of accident and incident reporting with the introduction of OSHA 18001 planned for 2007. This has resulted in an increase in the LTIFR as a result of more accurate reporting. The Company is rmly committed to health and safety and is expected to demonstrate a sustained long term improvement. ) environmental issues are well managed and there are no issues that could materially impede production nor are any prosecutions pending; ) the assumptions used in estimating both capital and operating costs are appropriate and reasonable; ) capital and operating costs used in the nancial models incorporating minor adjustments by IMC reect the mine plans, development and construction schedules and the forecast production levels; ) special factors identied by IMC are well understood by management and appropriate action to mitigate these risks is being taken. Further, the mine plans and cost forecasts appropriately account for these risks; and ) management operates an excellent management accounting system and are able to monitor and forecast production and cost parameters. IMC has estimated the value of the Company silver and gold assets at an operating level as US$271.0 million and at a post tax level as US$210.8 million assuming a real discount rate of 6.0 per cent., and product prices, capital and operating costs and production forecasts which are soundly based. 3 Peru IMC visited Arcata, Ares, Selene, Pallancata and San Martin between the 12th June and the 9th July 2006.
295
3.1 Maps and plans Relevant maps and plans are included in Annex C as listed: Plate 5 ************ Plate 6 ************ Plate 7 ************ Plate 8 ************ Arcata mine: Surface map with location of principal veins and prospects. Arcata mine: Longitudinal Prole of Mariana and Mariana Sigmoid veins and map of principal geological features. Ares mine: Surface map with location of veins and prospects and principal geological features. Ares mine: Longitudinal Prole of the Victoria Vein System, including the main Victoria Vein and sub-parallel branches the Ramal Sur, Lula and Ramal Victoria veins. Selene mine: Surface map with principal geological features. Selene mine: Longitudinal Prole of Explorador Vein and map of principal vein outcrops. Pallancata Project: Surface map with principal geological features. Pallancata Project: Longitudinal Prole of Pallancata Vein and map of vein outcrops.
3.2 Arcata 3.2.1 Geological characteristics The Arcata mining unit exploits and is exploring further vein-hosted resources within a concession area of 47,777 ha. This area occupies the north-eastern margin of a circular volcanic structure of approximately 15 km diameter in which a rhyolite dome marks the centre. Vein orientations are determined by the broadly arched fractures of the perimeter of this structure and the majority of the principal veins occupy the line of sub-parallel normal faults of ENE-WSW, E-W and WNW-ESE strike, with inclinations between 40 and 65 . Vein widths vary from centimetre scale to over 10 m. Vein texture shows several phases of mineralisation in which open voids show successively banded ll and crystalline intergrowth. The mineralization corresponds to an IS epithermal deposit with predominant silver values and variable quantities of gold and base metals. The Arcata veins show a strong tendency to zoning, both vertically and horizontally. The top or outer zone of individual veins is marked by chalcedony and ne quartz and associated argillic alteration with no metal values of economic interest. With increasing depth the quartz is more coarsely crystalline and the portion of the vein of economic interest is commonly marked by the presence of manganese minerals (rhodonite and rhodochrosite) associated with strong banding of metallic sulphides. In individual veins, such as the Mariana Vein, the top limit of economic mineralisation can be dened but lower limits generally remain open. The vein systems exploited in the earliest phase of working of the Arcata Mine are now considered exhausted and include the Marion Vein System, comprising the Marion, Luisa, Ramal D and Marciano veins, and the Baja-Alta Vein System. More recent production has centred on the Tres Reyes Vein System at the southern margin of the Arcata mineralised area, and particularly in the splay of veins at the south-east end of this system, and also sporadically on the Macarena Vein System. Most recently exploration and development has centred on the Mariana Vein System at the northern margin of the mineralised area, which includes the majority of reserves and which currently supports the greater part of production. The Mariana Vein System comprises the main ENE-WSW Mariana Vein and the related Alexia Vein which is a steeply oblique spur, orientated NNE-SSW. These veins have only a weak and sporadic expression at surface in comparison with their strong development at depth. At depth, at the 4,600 m level, the Mariana Vein is well-developed over a length of over 3 km with an average width of around 0.80 m and locally up to 1.6 m. The dip of the vein is to the south. The vein characteristically shows a brecciated structure which indicates a number of successive fault movements, and which typically is reected in a number of phases of mineralisation and higher 296
metal grades. The upper limit of economic mineralisation has been dened at a depth of around 150 m from the surface, but the mining potential remains open both laterally and in depth. The Alexia Vein reects oblique dilational strain between adjacent faults. It has been evaluated over a length of 1,200 m and remains open at both extremes, although declining grades indicate that the vein does not extend with economic value in depth. Vein width ranges up to over 2 m and this vein shows similar brecciation and mineralisation to that in the Mariana Vein. Successively south of the Mariana system, the Marion Vein System is currently abandoned, but high gold values in the lower levels of working suggested a number of phases of mineralisation which are still to be tested. The Macarena Vein System can be traced at outcrop as a broad discontinuous arc over a distance of approximately 2 km but has only been sporadically worked in the E-W trending central and western part of this trace and dips northwards. To the east, the trace can be followed as a WNW-ESE structure which has not yet been evaluated and which is an identied exploration target. A cluster of tensional fractures oblique to, and on the south side of, the main vein are developed as the NNW-SSE veins M1, M2 and M3, with strike lengths of up to 500 m. These are currently in development and host signicant reserves in vein widths of around 0.80 m. Although the Baja-Alta Vein System has been worked extensively during the early phases of operation of the mine, at its eastern end the Alta Vein, a sub-parallel branch to the system, known over a strike of 1,600 m, contains currently developed reserves with an average width of 1.00 m. Also, at the western extremity of the Baja-Alta Vein System, an unworked length of the Baja Vein is known over an outcrop of 1 km with an indicative mineral assemblage suggesting signicant mineralisation at depth. This is identied as a priority exploration target and other sectors of the system, including the central area are also considered to have the potential for signicant mineralisation in as yet unidentied ore-shoots in depth. The Tres Reyes Vein was previously extensively worked in its western segment, but the central part of the curved trace swings to a WNW-ESE strike and has only been sporadically accessed underground. Strongly argillised alteration in this sector is known, and considered indicative of signicant potential for economic mineralisation at depth, and this is identied as a primary exploration target. At its eastern end the system branches into a splay of NW-SE and WNW-ESE veins comprising the group Ramal 1 through to Ramal 4. Ramal 2 is currently an important source of production and in underground workings is known over a strike length of 1,100 m with vein widths varying between 0.40 m to 3.00 m; it maintains economic values over a vertical extension in excess of 500 m. In addition to the main developed vein systems, the Arcata area includes a number of prospects which are programmed for more detailed exploration. The Chumille Vein extends N-S from the northern edge of the Marion Vein System across the line of the Mariana Vein System and has been explored by underground core drilling from workings in the Mariana Vein System, which recorded an intersection of 0.65 m wide with grades of 0.80 g/t of gold and 298 g/t of silver; the mineralisation is similar to that of the Mariana Vein. The Pucara Vein is sub-parallel to the Mariana Vein System at the eastern end of the latter and has been identied over a surface strike length of 1.5 km; one surface drillhole has indicated the potential for signicant economic mineralisation at depth. The Consuelo Vein is one of a number of structures with sporadic outcrop between the Marion and Mariana vein systems, and one surface drillhole has intersected a narrow vein of 0.10 m with grades of 1.76 g/t gold and 1,056 g/t silver. The Looby Vein, at the eastern end of the Marion Vein System, outcrops as a vein breccia over an E-W strike length of only 30 m, with a width of 0.40 m to 1.00 m and surface core drilling has recorded an intersection of 0.70 m with grades of 1.52 g/t of gold and 626 g/t of silver. 3.2.2 Reserves and resource statement IMC has veried the reserves and resources presented by the Company on 30 June 2006 for scrutiny. The reserves and resources statements are, therefore, as at 30 June 2006. 297
3.2.3 Losses and dilution The resources as stated include undiscounted reserves; no adjustment for ore loss or dilution has been applied to these gures. Detailed survey methods are used in all the Peruvian operations to dene the volume of the vein material and the dimensions of extracted voids, dening a dilution factor derived from volume differences. Dilution is also monitored by reconciliation of mined tonnage and grade with that recorded at the process plant, allowing also for material in stocks and handling. Dilution in the Arcata veins has generally been comparatively high reecting less competent wall rocks and vein widths commonly thinner and more variable than Ares and Selene. Careful management of stope widths with respect to actual vein widths has resulted in a steady decrease in dilution since March 2006. The following factors for individual veins have been established based on survey management and monitoring: Ramal 2 at 25 per cent.; Ramal 4 at 31 per cent.; Alta at 31 per cent.; Mariana at 30 per cent.; Alexia at 21 per cent.; Macarena 2 at 31 per cent.; and Cimoide Mariana at 30 per cent.. The dilution factor is applied to resource blocks with the assumption that the diluting material has zero content of gold or silver values. Losses of 5 per cent. have been applied uniformly in the estimation of reserves in each of the veins with the exception of Ramal 2 vein, a mature operation in which losses in extraction and handling are wellcontrolled and judged to be minimal. IMC considers the practice adopted for the assessment of dilution and the application of the factors to be realistic and the application of a 5 per cent. loss factor is considered to be an appropriate and conservative value to cover losses in extraction, handling and transportation of material in the stope through to the processing plant. 3.2.4 Cut-off grade The cut-off grade, as at 30 June 2006, used for resource estimation at the Arcata operation is 174 g/t silver equivalent. The equivalent cut-off grade has been calculated on the basis of reference prices for gold of $450/oz and for silver of $7.50/oz. IMC consider the process of determining the cut-off grade and the cut-off grades appropriate. 3.2.5 Verication IMC has veried a portion of the reserves of each mine or project and concur with the gures in Table 2-5 and Table 2-6. The Company have used ordinary linear block kriging for those major veins on which there are sufcient intersections to carry out the necessary variography, and inverse power of distance (IPD) weighted moving averages for other veins. IPD 5th power estimation has been used for all of the minor veins on the Peru properties: i.e. excluding Arcata Ramal 2. IMC believe this is an appropriate and rational selection. IMC carried out check modelling using the Datamine mining software system on a selection of both major and more minor veins for Arcata mine, including the Mariana and Alta veins comprising approximately 65 per cent. of the reserves. 3.2.6 Mines and projects The Arcata mine (elevation approximately 4,630 m), with a current capacity of 353 ktpa and planned to increase to 406 ktpa by January 2007, was commissioned in 1964. The veins in the Mariana, Ramal 2 and Macarena vein systems have a minimum designed mining width of 0.8 m and a maximum 3.0 m, averaging 1.6 m in thickness, and dips at between 70 to 80 . The orebodies are accessed by discrete inclined ramps and these connect underground in each orebody by spiral ramps to a depth of about 400 m below surface. The veins are mined by conventional and mechanised (trackless) cut-and-ll breast or overhand stoping methods utilising timber support. 30 stopes rotate in the production cycle of drilling and blasting, mucking of ore and backlling. This will reduce to 15 stopes as production from the Mariana vein increases. Very little of the production is now from the old Macarena vein system. Thirty per cent. of the production comes 298
from the older Ramal 2 section which exhausts in approximately 18 months. The balance of production is from the Mariana section discovered in 2004 and which is being developed at a rate of over 1,500 m per month on three levels as replacement for Ramal 2. A series of raise-bored (RB) shafts are used primarily for ventilation purposes. Ore is loaded from the ore passes into 22 t standard road haulage trucks carrying the material up the mine ramps to the process plant primary crusher or to the waste dump on surface. Haulage distance from the operations to the plant is approximately 4.9 km and 4.5 km. Backll is with both hydraulic ll utilising approximately 50 per cent. of the tailings produced and also waste rock depending on underground support requirements. IMC considers the proposed development and production plan of Arcata is achievable. 3.2.7 Process plant The plant processes silver ores with associated gold, lead and zinc to produce a silver/gold bulk concentrate by otation. The plant commenced operation in 1964 at 35 ktpa. Plant capacity is now 353 ktpa which was achieved by an expansion from 280 ktpa in 1980. It has been operating at 280 ktpa but the feed increased to the design throughput of 353 ktpa from July 2006. Primary crushing is by jaw crusher preceded by a grizzly screen. Screen undersize and jaw crusher product combine and feed an ore washer from where oversize feeds the secondary short head crusher operating in open circuit. Tertiary crushing is in closed circuit using two short head crushers working in parallel. The product is stored in four hoppers feeding the two primary ball mill circuits. The nes from the ore washer feed a spiral classier from where the sands (large material) are classied and combined with the tertiary crusher product in the hoppers while the classier nes are combined with the product from the primary milling process feeding the secondary milling circuit. Milling is performed in two circuits. Circuit No. 1 feeds ball mill #1 and a Hardinge mill. The product of ball mill #1 is classied by hydrocyclones working in closed circuit with ball mill #1 to which the underow returns. Hydrocyclone overow and the Hardinge mill product are transferred to a different bank of hydrocyclones. The overow of these cyclones forms the otation feed with 70 per cent. minus 200 mesh. The hydrocyclone underow goes to secondary milling in ball mill #4 working in a closed circuit with this hydrocyclone. Circuit No. 2 consists of ball mill #5 for primary milling operating in closed circuit with hydrocyclones. The overow together with the secondary mill product is fed to a bank of hydrocyclones. The overow from this hydrocyclone is the otation feed with a 70 per cent. minus 200 mesh. The underow goes to secondary milling in ball mill #2 and the Comesa mill. Flotation is by conventional otation cells in two parallel circuits. Each circuit consists of an 8-cell rougher, a 6-cell scavenger and a four-phase cleaner. Currently only one cleaner bank is in use with the other only required intermittently providing a small spare capacity. The concentrate is fed to a thickener and then to a disk lter for dewatering. The concentrate is bagged in 50 kg bags for transport off site. Final tailings are classied by cyclone into coarse material used for hydraulic ll and nes fed into a thickener. The thickener product is pumped to tailings area 6 some 2.5 km from the plant. Solids are retained in the dam and decanted water is recovered back to the process by pumping. IMC considers the proposed development and production plans of Arcata are achievable. 3.2.8 Tailings disposal General observations applicable to all of the Peruvian operations dams are that they are raised by the downstream method using contractors with extensive quality control testing. This has enabled the designers to use steeper civil engineering slopes compared to the more typical mining slopes. The dams are operated by the concentration plant managers with supervision of the monitoring 299
equipment and routine inspections carried out by the Companys Environmental Department. Civil Engineers from the Head Ofce inspect informally about twice per year. The basic design of the dams is included in an EIA or a similar report known as a PAMA for pre-1993 dams. The EIA limits the maximum height of the dam. To exceed the agreed height, a new EIA is required. Guides issued by the Ministry of Energy and Mines recommend minimum factors of safety in static and seismic conditions. The mines are all situated in areas of high seismic risk. The designs all take into account the effects of acceleration, settlement and of liquefaction for a 1 in 475 year seismic event. The effect of any large-scale failure would be to stop the concentrator. New dams are built and operated to a high standard with good quality control used to design steeper than normal slopes as is the practice in South America. Regular inspections and monitoring of piezometers and settlement gauges are carried out by the Environment Department. The engineering report for the starter dam at Selene included a full method of operation now being used to draw up similar operation manuals for all of the dams. Standardisation on the use of common factors of safety and seismic parameters based on the Guides issued by the Ministry of Energy and Mines should be implemented to regularize the operations. Arcata mine includes four old dams which have been partially reclaimed, Dam No 5 which is being buttressed and the active Dam No 6. Dam 6 is 23 m high and contains 1.4 Mm3 of tailings. The dam can be lifted by a further 5 m giving a life of about 8 years. The inlet pipes are supported on high wooden trestles at the toe of steep faces on the north side of the dam. These trestles will be buried by tailings during this lift and will need to be moved. There is a channel diverting the upstream water around the south of the dam to a small pond above the southern side. There is some seepage under the concrete walls of this pond. The interceptor drains around the dam are to be built after the completion of the dam. This means an increased freeboard needs to be maintained. About 60 lpm of water seeped from the toe of Stage I of Dam 6. There was some deterioration of the concrete liner but the water was thought to be owing under the dam. This ow was positively drained to the toe as part of the current lifting of the dam. This ow should continue to be monitored and any change in ow reported to a Civil Engineer. Dam 5 is approximately 30 m high contains about 1 Mm3 of tailings. It was closed in 2003 and now has a minimum freeboard of only 300 mm. The slope is being buttressed by the Environment Department to give a downstream slope of 1 in 2. It is important that the slope of the buttress is cut back to 1 in 2 and that the surface drainage of this dam is maintained. Any failure of Dam 6 would ow down the valley towards the base of Dam 5. Dam 5 is above the Eduardo Ramp but from the conguration of the land below the dam, any failure is unlikely to affect that ramp. 3.3 Ares 3.3.1 Geological characteristics The Ares mining unit exploits and is exploring further vein-hosted resources within a concession area of 22,700 ha. This area of epithermal gold-silver mineralisation was discovered by aerial photographic interpretation in 1988. Surface mapping, geochemical sampling and surface drilling were performed in the period 1990 to 1992, and dened the outcrop of seven vein structures. Underground exploration commenced in 1993, leading to development of the Victoria Vein and, in conjunction with further surface exploration, the proving of the Maruja Vein. Subsequent drilling in 1995 proved gold and silver values in the Tania Vein. The greater part of production has been obtained from the Victoria Vein System and its component splits and loops. This system comprises the greater part of the current reserves and resources base and is known over a strike length of over 1.5 km, although there is only a 20 m surface outcrop. The identication of new resource areas is largely guided by underground development and exploration. The strike of the vein systems is predominantly ENE-WSW, interpreted to reect dextral strike-slip faulting. Less persistent veins of NW-SE strike indicate closely related tensional dilation between 300
the strike-slip fractures. The mineralisation is signicantly different to Arcata and Selene in containing a higher abundance of gold although silver rich veins show a relationship to Arcata and Selene indicating a number of separate pulses of mineralisation. The veins show banding successively of massive quartz and hyaline quartz and also exhibit a range of argillic alteration minerals. The precious metal mineralisation includes electrum, native gold, native silver, argentite, pyrargyrite and gold-silver tellurides (petzite-hessite). The vein sulphide minerals in the upper (near surface) zone commonly comprise only pyrite and pyrargyrite while a much more varied suite including minor amounts of chalcopyrite, galena, sphalerite, polybasite, stibnite-enargite, proustite-pyrargyrite, tennantite, tetrahedrite and covellite occur in deeper zones. The gold rich veins indicate LS mineralisation but the silver rich veins IS mineralisation. While the silver rich veins correspond to an IS character similar to that at Arcata, one interpretative model is that the goldrich veins may be considered more typically a low sulphidation phase, in which well-dened rather narrow vertical zoning may be expected. However, the local experience is that there is also a strong lithological control by the host rock on vein development and the competent, massive rhyolitic unit, or dome rocks, provide the most receptive environment for mineralisation within the region. The Victoria vein system comprises several related structures developed over 1,500 m of strike length and 300 m of dip. extent (Figure 5.2). The structure strikes NE to SW and generally has a sub-vertical dip of 65 to 80 generally to the northeast. There are a number of branches, loops, sub-parallel veins and fans of vein splits. Resources and reserves are recognised a number of branches, loops, sub-parallel veins and fans of veins splits in the main Victoria Vein, constituting approximately 80 per cent. of the measured and indicated resource, and in the Ramal Victoria, Cimoide, Split Victoria, Lula, Ramal Sur 096 and Veta 097. Vein widths range from 0.50 m up to 10 m. This system contributes over 80 per cent. of measured and indicated resources and displays consistently high gold content averaging 15.5 g/t over the measured and indicated resources. Values attenuate with depth but principal vein developments remains open laterally with considerable potential to locate further sub-parallel vein developments within the overall structure. The Maruja vein system is sub-parallel to the Victoria Vein System some 300 m to the north. This system is silver-rich with lesser gold values averaging 1.42 g/t in the measured and indicated resources. Substantial mine development has taken place on this system over a strike length in excess of 600 m with vein widths in the range of 0.30 m to 0.50 m. The vein currently contributes only a small proportion of production. Further resource potential exists in the southeast lateral extension. Immediate exploration targets in the immediate vicinity of Ares include extensions to the Maruja vein which remain undened in comparison to the more attractive Victoria system; the Guadalupe vein shown by underground workings to have vein widths of the order of 1.49 m assaying at 1.44 g/t gold and 122 g/t silver; and the Tania vein to the north of the Victoria and developed along 150 m underground showing 1.06 m width and 1.83 g/t gold and 36.2 g/t silver. A further replacement programme has identied the Isabel vein approximately 800 m north of the Victoria with 17 drill hole intersections with silver rich mineralisation over a strike of 450 m with vein thickness reported as between 0.27 m to 4.61 m; the Paola vein 1.0 km north of the Isabel with cored intersections of 2.00 m of silver rich mineralisation; the Poconopausa structure 2km north of Victoria with cored intersections showing a number of closely parallel veins of 0.57 m to 1.90 m width with silver rich mineralisation; and the Claudia system 2 km to the south east of the Victoria considered a future target. 3.3.2 Reserves and resource statement IMC has veried the reserves and resources presented by the Company on 30 June 2006 for scrutiny. The reserves and resources statements are, therefore, as at 30 June 2006.
301
3.3.3 Losses and dilution The resources as stated include undiscounted reserves; no adjustment for ore loss or dilution has been applied to these gures. Dilution in the Ares veins has generally been low and uniform reecting the competent wall-rock. The survey-dened dilution factor has been consistent at close to or below 10 per cent. and is conservative with respect to suggested values based on reconciliation. A 10 per cent. dilution factor has been applied uniformly to each of the veins of the Ares mine. The dilution factor is applied to resource blocks with the assumption that the diluting material has zero content of gold or silver values. Losses of 5 per cent. have been applied uniformly in the estimation of reserves in each of the veins. IMC considers the practice adopted for the assessment of dilution and the application of the factors to be realistic and the application of a 5 per cent. loss factor is considered to be an appropriate and conservative value to cover losses in extraction, handling and transportation of material in the stope through to the processing plant. 3.3.4 Cut-off grade The cut-off grade, as at 30 June 2006, used for resource estimation at the Ares operation is 3.2 g/t gold equivalent. The equivalent cut-off grade has been calculated on the basis of reference prices for gold of $450/oz and for silver of $7.50/oz. IMC consider the process of determining the cut-off grade and the cut-off grades appropriate. 3.3.5 Verication IMC has veried a portion of the reserves of each mine or project and concur with the gures in Table 2-5 and Table 2-6. The Company have used ordinary linear block kriging for those major veins on which there are sufcient intersections to carry out the necessary variography, and inverse power of distance (IPD) weighted moving averages for other veins. IPD 5th power estimation has been used for all of the minor veins on the Peru properties: i.e. excluding Ares Victoria. IMC believe this is an appropriate and rational selection. IMC carried out check modelling using the Datamine mining software system on a selection of both major and more minor veins for Ares mine including, the Victoria, Ramal Sur 096 and Lula veins comprising approximately 64 per cent. of the reserves and resources. 3.3.6 Mines and projects The Ares mine (elevation approximately 4,937 m), with a capacity of 282 ktpa, was commissioned in 1998. The veins in the Victoria (including the Ramal Sur, Ramal Victoria and Lula) system have a minimum designed mining width of 0.8 m and a maximum of 15 m, averaging 2.13 m in thickness, and dip at an average 75 to 80 . The workings are accessed by inclined ramps and these connect underground by spiral ramps to a depth of about 275 m below surface. The veins are mined by conventional and mechanised (trackless) cut-and-ll breast stoping methods utilising both rockbolts and timber as support. 16 stopes rotate in the production cycle of drilling and blasting, mucking of ore and backlling. A series of raise-bored (RB) shafts are used for ore/waste removal. Ore is loaded from these RB passes into 22 t standard road haulage trucks carrying the material up the mine ramps to the process plant primary crusher or to the waste dump on surface. Haulage distance from the workings is approximately 4.4 km. The backll plant supplies four types of cemented paste depending on underground support requirements. Investigations into the Isabel and Paola veins as replacement ore for the Victoria vein system are ongoing. 3.3.7 Process plant Gold is the primary target with recovery of silver for these leaching and precipitation plant processes producing a dore. The minor quantity of mercury contained in the ore is also extracted. The plant commenced operation in August 1998 and has an operating capacity of 280 ktpa which 302
is planned to be increased by upgrading the classication sections to 325 ktpa over the next three years. Homogenization takes place on a ground stockpile and the product is fed to a primary jaw crusher preceded by a grizzly screen. Screen undersize and jaw crusher product combine and are fed to another ground stockpile feeding the milling circuit. The milling circuit consists of a primary SAG mill and a secondary ball mill. Pulp from the SAG mill is screened and overow returns to the mill. Screen undersize is fed to hydrocyclones in closed circuit with the secondary mill. Hydrocyclone overow feeds the leaching circuit. The cyanide leaching circuit consists of 9 agitation tanks arranged in three banks of three. Oxygen is added to assist the leaching process. The slurry is fed to a counter current decantation circuit consisting of ve units and the pregnant solution is decanted to the pre-clarier of the Merrill Crowe circuit and the solids pumped to the tailings. Pregnant solution is fed to the Merrill Crowe circuit where the metals are precipitated onto zinc. The precipitate is ltered and fed into a retort for drying and recovery of the gold/silver/zinc precipitate and removal of the mercury by volatilisation (subsequently condensed and recovered). Silver and gold are nally recovered by smelting. The dore bars weigh 16.5 kg. These bars are packed into individual plastic bags and two bags are packed in each wooden case. Dore containing about 6 per cent. gold and 94 per cent. silver is currently produced. There are also sales of the minor quantities of condensed mercury. Additional plant is being installed at Ares to allow the processing of concentrates of Selene ore. Ground has been broken (July 5) for the new Gekko plant to treat Selene concentrate and equipment is due to arrive on site during week of July 10th. The plant will treat 2.8 ktpa to 3.5 ktpa of Selene concentrate (total Selene output at 350 ktpa ore feed) in two Gekko In Line Reactors from October 2006. Pregnant solution will be fed into the Merrill-Crowe section and the leached solids will be fed into the leach circuit feed tank for further processing. Introduction of Selene concentrate will have the effect of reducing the gold content of the dore to about 3 per cent.. At present, the Company does not have a contract with a rener for this material but Johnson Matthey are aware of the lower grade that will be produced. The Company state that they will also be asking for tenders from Johnson Matthey and others to rene this dore in the near future. Discharge from thickener 5 is pumped to the tailings area. Solids are retained in the dam and decanted water is recovered back to the process by pumping. IMC considers the proposed development and production plans of Ares are achievable. 3.3.8 Tailings disposal The dam is approximately 20 m high and occupies about 30 ha. It is at its maximum height and has a life of 3 years. Any processing after that period will require a new dam. Buttresses were provided in two locations to improve the factor of safety during the last lifting. Ares mine is currently working under the northern part of Ares dam and follows the standard procedure of the mine manager and the civil engineer liaising to ensure the integrity of the dam and the mine during the undermining. Some minor backsapping was noticed onto the buttress on the north ank during the inspection for this report but this was felt to be as a result of rainwater and could readily be resolved by an inverse lter drain at minimal cost. The adjacent piezometer should continue to be monitored. Failure would affect the concentrator. 3.4 Selene 3.4.1 Geological characteristics Selene, within a concession area of 19,540 ha, is dened by a prominent annular structure of 5 km to 6 km diameter interpreted as a caldera with a collapsed central area partially lled by a 303
complex volcanic edice. This comprises a number of domes of ow-banded rhyo-dacitic lava intrusions providing an important guide to locating prospective vein systems. The most important ow-banded dome structure hosts the Explorador-Tumiri-Aycha vein system. The host rock is extremely competent and the majority of veins identied in adjacent areas are also developed within this lithology. A number of similar domes have been identied around the perimeter and in the centre of the annular structure. The younger sequences of lavas and volcano-clastic sediments host a markedly different style of HS mineralisation. Four principal lineations affect the mineralised structures in the general area around the Selene area: The ESE-WNW lineation controls the principal gold and silver mineralised structures identied in the district and particularly the Huachuhuilca, Colcabamba and Pallancata vein systems. The NE-SW lineation affects the rhyolitic ow-banded domes and reects the strike of the Explorador vein system. The E-W lineation controls the strike of the Tumiri and Aycha vein systems and the Cuello Cuello prospect. The N-S lineation controls the strike in the Colcabamba prospect and the Huachuhuilca Vein. The Explorador Vein System supports all current operations in the Selene Operating Unit and hosts all reserves and the majority of mineral resources. The vein system comprises a complex quartz vein up to 200 m wide along a strike oriented N55 E and length of 2,400 m. This complex includes parallel and sub-parallel veins, splits, loops (cimoides) and branches (ramales) of which the principal Explorador vein is currently mined over a strike of 1,500 m but the complex includes the Ramal Sur, Claudia, Ines, Monica, Patty, Lola, Gaby, Marina and Rosa veins. The dip is sub-vertical and averages 80 and comprises clearly visible banded quartz with diffuse layers of dark sulphides. Subsequent phases of mineralisation are indicated by quartz with reticular texture and by massive milky quartz usually in the centre of the vein. The sulphide mineralogy is characterised by ruby silver with proustite (Ag3AsS3) more common than pirargyrite (Ag3SbS3) and also by argentiferous varieties of tetrahedrite (e.g. freibergite). It is reported that gold occurs as calaverite (AuTe2) and native gold has been reported as occurring in voids in the later phase quartz. The continuity of the vein system is affected by a number of sinistral strike-slip faults of ENE-WSW and E-W strike. The most important is the Soa Fault. The continuity of the system has been established and the mineralisation has been proved extending up to Tumiri Vein cutting across the strike of the Explorador Vein and forms the NE limit to the vein system. Vein width in the economically exploited panels of the Explorador Vein System averages 1.98 m, ranging from 0.80 m to 10.20 m although locally thinner vein widths occur due to faulting. The Tumiri Vein System (veins Tumiri, Timida and Soa) has been determined along a strike length of approximately 2200 m. The vein strike direction is essentially E-W with sub-vertical dip. The upper levels of the Tumiri Vein were worked between 1973 and 1990 and currently Inferred Resources are identied below the worked area. The quartz mineralisation demonstrates successive phases with locally intense brecciation and re-cementing of angular quartz fragments by later phases at low temperatures of emplacement. Metallic minerals are primarily ruby silver, pyrite and disseminated chalcopyrite. There is a close genetic relationship between the Explorador and Tumiri vein systems. Exploration is focused on extensions to depth and ore shoots in the north, central and south of the Exporador vein with approximately 0.25 Mt of inferred resources grading approximately 320 g/t silver and 1.57 g/t gold as well as an intersection towards the Tumiri of 0.40 m at 735 g/t silver and 3.19 g/t gold; the Tumiri vein with approximately 0.12 Mt of inferred resources at 238 g/t silver and 0.47 g/t gold; the Soa Fault vein some 500 m west of the Explorador vein with 2.0 m intersections at 249 g/t silver and 0.33 g/t gold; the Intermediate vein traceable over 2.0 km and to the north east of the Explorador vein with a single intersection of 0.35 m at 269 g/t silver and 7.05 g/t gold; the discontinuously outcropping Lola vein parallel and 1 km north of the Explorador with an intersection of 0.35 m at 81.8 g/t silver and 24.2 g/t gold; the Pucanta vein 1.5 km north west of Explorador with an intersection of 0.55 m at 805 g/t silver and 0.55 g/t gold; the Caylloma Breccia Structure approximately 5 km north west of Selene with an intersection of 4.5 m at 188 g/t silver 304
and 10.57 g/t gold; and the Cuello Cuello Structure located 8 km north east of Selene with intersection ranging from 0.65 m to 2.00 m at 294 g/t silver and 1.28 g/t gold. 3.4.2 Reserves and resource statement IMC has veried the reserves and resources presented by the Company on 30 June 2006 for scrutiny. The reserves and resources statements are, therefore, as at 30 June 2006. 3.4.3 Losses and dilution The resources as stated include undiscounted reserves; no adjustment for ore loss or dilution has been applied to these gures. A dilution factor of 10 per cent. has been applied uniformly to each of the Selene veins. Whereas estimates based on reconciliation have shown considerable variation, the survey dened dilution factor has been consistent at close to 10 per cent. and is conservative with respect to suggested values based on reconciliation. The dilution factor is applied to resource blocks with the assumption that the diluting material has zero content of gold or silver values. Losses of 5 per cent. have been applied uniformly in the estimation of reserves in each of the veins. IMC considers the practice adopted for the assessment of dilution and the application of the factors to be realistic and the application of a 5 per cent. loss factor is considered to be an appropriate and conservative value to cover losses in extraction, handling and transportation of material in the stope through to the processing plant. 3.4.4 Cut-off grade The cut-off grade, as at 30 June 2006, used for resource estimation at the Selene operation is 167 g/t silver equivalent. The equivalent cut-off grade has been calculated on the basis of reference prices for gold of $450/oz and for silver of $7.50/oz. IMC consider the process of determining the cut-off grade and the cut-off grades appropriate. 3.4.5 Verication IMC has veried a portion of the reserves of each mine or project and concur with the gures in Table 2-5 and Table 2-6. The Company have used ordinary linear block kriging for those major veins on which there are sufcient intersections to carry out the necessary variography, and inverse power of distance (IPD) weighted moving averages for other veins. IPD 5th power estimation has been used for all of the minor veins on the Peru properties: i.e. excluding Selene Explorador, IMC believe this is an appropriate and rational selection. IMC carried out check modelling using the Datamine mining software system on a selection of both major and more minor veins for Selene mine, including the Explorador and Ramal Betty veins comprising approximately 91 per cent. of the reserves and resources. 3.4.6 Mines and projects The Selene mine (elevation 4,600 m), with a current capacity of 353 ktpa, was commissioned into production in 2003. The Explorador vein system has a minimum designed mining width of 0.8 m and a maximum of approximately 5.0 m, averaging about 2.0 m in thickness, and dips at between 70 to 80 . The workings are accessed by inclined ramps and these connect underground by spiral ramps to a depth of 350 m below surface. The veins within the system are mined by conventional and mechanised (trackless) cut-and-ll overhand stoping methods. 12 stopes rotate in the production cycle of drilling and blasting, mucking of ore and backlling. A series of raise-bored shafts is used for ore/waste removal and for the supply of backll material. Ore is loaded from the base of these shafts into 22 t standard road haulage trucks carrying the material up the mine ramps to the process plant primary crusher or to the waste dump on surface. Haulage distance from the operation to the plant is approximately 1.3 km. 305
3.4.7 Process plant The plant commenced operations in November 2003 at 177 ktpa, expanding to 265 ktpa and processes silver ores with associated gold to produce a silver/gold bulk concentrate by otation. Additional equipment was installed in November 2005 and the plant now has an operating capacity of 353 ktpa. High frequency screens are being installed and are scheduled for production in the last week of August 2006 to increase plant capacity to 406 ktpa by being more efcient than the current hydrocyclones in sizing mill product and thus reducing the circulating load. Primary crushing is by jaw crusher preceded by a grizzly screen. Screen undersize and jaw crusher product combine and are screened. The undersize is fed to the mill bunker and the oversize is fed to the two secondary short head crushers operating in closed circuit with screens. The primary mill works in closed circuit with a hydrocyclone. Hydrocyclone overow is fed to the secondary milling circuit. The secondary milling circuit consists of two ball mills operating in parallel in closed circuit with a bank of hydrocyclones. Hydrocyclone overow is fed to the otation circuit. Flotation is by conventional otation cells. The circuit consists of a rougher, a scavenger and a two-phase cleaner. The concentrate is fed to a thickener and then to a disk lter for dewatering. The concentrate is bagged in 50kg bags. Currently the concentrate is sold to a third party but as of October 2006, concentrate will start to be sent to Ares for conversion to dore. Ore from the Pallancanta project is to be processed at the Selene concentrator from 2007. The concentrator will be expanded to 720 ktpa in order to process this ore. Testwork on core samples has been completed and mineral processing and metallurgical testing on development ore samples will start in October 2006. The basic engineering for the rst stage has been completed and the detailed engineering is currently in progress. Site work and installation are scheduled to be completed by the end of March 2007 for production to commence in April 2007. The original work for the 2003 plant took 8 months and the current extension construction schedule is considered reasonable. Main equipment is readily available or on order. Pallancata concentrate will be sold as concentrate under the current mine plan. The Companys longer term intention to sell Pallancata as concentrate until 2008 at which time the concentrate will be sent to Ares and processed at Ares as per the Selene concentrate. Ares will have the capacity to treat all of the concentrate from Selene but will require a further expansion to treat all of the maximum feed of 720 ktpa planned to the Selene plant. Tailings are fed to a thickener from where the underow is pumped to the tailings pond. Solids are retained in the dam and decanted water is recovered back to the process by pumping. IMC considers the proposed development and production plans of Selene are achievable. 3.4.8 Tailings disposal The dam is about 50 m high and when full will contain 1.1 Mm3 of tailings. The mine proposes to increase production and to dispose of 40 per cent. of the tailings underground. With these changes, the life of the current dam is about 3 to 4 years. The dam can be lifted a further 5 m within the EIA, giving a total life of 6 to 7 years. Consent will then either be sought to lift the dam by further 5 m giving a further 3 to 4 years life or to build a new dam in the adjacent valley. A new dam would cost about US$M 2.3 to build at current prices. If the current dam were to fail it would only affect an unoccupied valley. 3.5 Pallancata 3.5.1 Geological characteristics The Pallancata project, within a concession area of 7,330 ha, lies at approximately 17 km to the south-west of the Selene vein system and is considered part of the same geological environment. 306
Ancient Spanish colonial period workings are known on the vein system. The vein system extends over a length in excess of 2 km along a WNW-ESE strike and forms a prominent surface feature of silicied material up to 40 m wide. The dip is sub-vertical with branch veins and splay structures typically of 0.50 m to 3.00 m thick. Higher grade zones have been identied where there is a strong stockwork of quartz veins typically with a NE-SW strike intersecting the main vein structure in the West Breccia. This reects a wider structure of intersection of the persistent WNW-ESE veins (Mercedes) by swarms of NE-SW veins (Mariana and San Javier structures). The mineralisation is hosted in a sequence of Tertiary lavas and volcano-clastic rocks of Miocene age. The volcanic sequence near the Pallancata vein includes a large porphyritic andesite intrusion and large areas of the host volcanic sequence are masked at outcrop by a rhyolitic tuff. The low-sulphidation type mineralisation of the Pallancata vein shows multiple phases of banded chalcedonic silica and massive quartz with argentite, ruby silver (pyrargyrite / proustite), pyrite, marcasite, galena, electrum and rarely, native gold. A noticeably higher gold content appears characteristic of the stockwork in the West Breccia structure. Initial surface sampling programmes on the local Mariana and San Javier structures, and some underground sampling in old colonial-era workings indicate similar epithermal mineralisation with high silver and gold values to the north of the Pallancata vein constituting future exploration targets. 3.5.2 Reserves and resource statement IMC has veried the reserves and resources presented by the Company on 30 June 2006 for scrutiny. The reserves and resources statements are, therefore, as at 30 June 2006. 3.5.3 Losses and dilution The resources as stated include undiscounted reserves; no adjustment for ore loss or dilution has been applied to these gures. A dilution factor of 10 per cent. and losses of 5 per cent. have been applied uniformly to the Pallancata veins based on the similarity of the deposit to Selene. IMC considers the application of these factors to be appropriate. 3.5.4 Cut-off grade The cut-off grade, as at 30 June 2006, used for resource estimation at the proposed Pallancata operation is 167 g/t silver equivalent. The equivalent cut-off grade has been calculated on the basis of reference prices for gold of $450/oz and for silver of $7.50/oz. IMC consider the process of determining the cut-off grade and the cut-off grades appropriate. 3.5.5 Verication IMC has veried a portion of the reserves of each mine or project and concur with the gures in Table 2-5 and Table 2-6. The Company have used ordinary linear block kriging for those major veins on which there are sufcient intersections to carry out the necessary variography, and inverse power of distance (IPD) weighted moving averages for other veins. IPD 5th power estimation has been used for all of the minor veins on the Peru properties. IMC believe this is an appropriate and rational selection. IMC carried out check modelling using the Datamine mining software system on a selection of both major and more minor veins for Pallancata mine, including Pallancata 2 vein comprising 100 per cent. of the reserves and resources. 3.5.6 Mines and projects The Pallancata project, in relation to which the Company signed a contract on 30 June 2006 with a joint venture partner for 60 per cent. of the property and operational management, is located 17 307
km from Selene mine, in a straight line, and approximately 22 km by a proposed new road to haul ore to the Selene processing plant. This project is designed to augment production to the Selene process plant as the process plant expands. The orebody has a minimum designed mining width of 0.8 m and a maximum of approximately 25.0 m averaging about 5.0 m in thickness. The dip of the orebody is 70 to 80 . The planned operation access is by inclined ramps and these will connect underground by spiral ramps. The orebody will be mined by conventional and mechanised (trackless) cut-and-ll overhand stoping methods. 3 stopes are currently scheduled to rotate in the production cycle of drilling and blasting, mucking of ore and backlling at full production by mid 2007. A series of raise-bored shafts will be used for ore/waste removal and for the supply of waste backll material. Ore is loaded from the base of these shafts into 22 t standard road haulage trucks carrying the material up the mine ramps to the process plant primary crusher at Selene or to the waste dump on surface. The Company is nalising plans in-house with the commencement of construction scheduled for August 2006 for the ramp providing access to the workings. 3.5.7 Process plant Pallancata ore will be transported by road to the Selene process plant. 3.5.8 Tailings disposal The tailings will be disposed in either the Selene workings or tailings dams. 3.6 Long term prospects The 8 km by 5 km San Martin site is located approximately 20 km north west of the Arcata mine and extensive surface channel sampling was undertaken in the 1980s during which Arcata mine excavated a number of small mine cross-cuts. The project is currently under exploration by the Company using two surface diamond drill rigs. IMC has visited the site and inspected the camp facilities, core store and observed the evidence of extensive surface channel sampling and the ongoing drilling activity. 14 drillholes have been completed supported by surface mapping and activity is on-going. Mineralised veins and structures have been identied widely across the area and are hosted within a sequence of volcano-clastic rocks and andesite lavas into which an extensive ow-banded dacite dome has intruded. The dome has an outcrop of approximately 40 ha and hosts the most prospective and highest grade veins. The maximum grade at surface within the dome area is 8,970 g/t of silver and 27 g/t of gold. Veins also extend widely beyond the dome and surface samples show a gold content in the range 2 g/t to 8 g/t. The current drilling programme indicates discontinuous ore-shoots where most promising grades are found where NW-trending veins intersect or veer to a WNW lineation. Mineralogical interpretation of results to date is that a LS Arcata-style polymetallic gold/silver mineralisation target occurs at depth. IMC is of the opinion that the San Martin is very a promising replacement prospect. 4 Argentina IMC visited the San Jose project between the 12th and 23rd June 2006. 4.1 Maps and plans The relevant maps and plans are included in Annex C as listed. Plate 13 *********** Plate 14 *********** Plate 15 *********** San Jose Project: Surface map with location of veins and prospects and principal geological features San Jose Project: Longitudinal Prole of the Huevos Verdes Vein San Jose Project: Longitudinal Prole of the Frea Vein 308
4.2 San Jose project 4.2.1 Geological characteristics The San Jose project, within a concession area of 40,499 ha, is owned by Compania Minera Santa Cruz S.A. (MSC). MSC is a joint venture between the Company (51 per cent.) and Minera Andes S.A. (MASA) (49 per cent.). Signicant geological anomalies of gold and silver were detected at San Jose by MASA in 1997 resulting in exploration programmes between 1997 and 2005 leading to the discovery of the two San Jose ore zones known as the Huevos Verdes and Frea vein systems and a delineation of the mineralized resources. MSC drove two 45 inclined shafts to the North and South zones of the Huevos Verdes Vein in 2003, and has recently completed an inclined shaft to the Frea Vein. The Deseado Massif, in Patagonia, Southern Argentina comprises Paleozoic metamorphic basement rocks unconformably overlain by Middle to Upper Jurassic andesitic to rhyolitic volcanic and volcano-clastic rocks, Cretaceous sedimentary rocks and is capped by Tertiary to Quaternary basalts. The Jurassic volcanic rocks are the principal host for gold and silver mineralisation in which veins are typically developed in competent andesite ows and less so in phyllitic altered volcanoclastic units. The Jurassic volcanic rocks and contained mineralisation have only limited outcrop in erosional windows. The mineralisation displays typical epithermal characteristics with quartz veining, breccia and stockwork systems occupying steeply inclined fractures ranging from normalsinistral faults striking NNW-SSE and conjugate dextral faults striking approximately WNW-ESE. The LS mineralisation displays three main episodes of quartz deposition with the initial banded quartz associated with massive sulphide veinlets and the second phase of massive milky quartz, predominantly in the central portion of the vein, containing disseminated sulphides in the form of argentite and pyrite together with minor amounts of sphalerite and galena. The Huevos Verdes Vein System comprises an array of sub-parallel quartz veins striking approximately NW-SE and dipping between 45 and 75 to the northeast. The vein system is hosted in andesitic rocks close to the contact underlying volcano-clastic rocks and drilling has traced a strike length of 2,000 m comprising the Huevos Verdes North (HVN), Huevos Verdes Central (HVC) and Huevos Verdes South (HVS) discontinuous zones. The overall geometry of the main vein zone is relatively continuous with width varying from less than 1 m to 15 m. Average vein width with signicant gold and silver mineralisation ranges between 0.30 m to 4.00 m. The Frea Vein System is located approximately 1,700 m to the north-east of Huevos Verdes and comprises one main quartz vein of strike NW-SE and a large stockwork of subordinate hanging wall veins and breccia zones. The vein dips to the northeast at approximately 52 . This vein system does not outcrop and has been traced over a strike length of approximately 600 m. The main vein structure varies in width between 0.50 m and 7.00 m, averaging around 4.25 m. Recent investigation has identied the Kospi Vein approximately 400 m to the north-east of Huevos Verdes and also developed on a NW-SE strike. This has been dened only by some 10 drillhole intersections along a strike of approximately 600 m to date. 4.2.2 Reserves and resource statement (a) General IMC has veried the reserves and resources presented by the Company on 30 June 2006 for scrutiny. (b) Losses and dilution The resources as stated include undiscounted reserves; no adjustment for ore loss or dilution has been applied to these gures. Reserves are quoted after the application of a modifying factor for dilution of 12 per cent. for the Huevos Verdes vein, and for many of the reserve panels in the Frea vein. Higher values of 16 per cent. and 17 per cent. have been applied to some specic panels in the Frea vein as a reection of 309
wall rock conditions. Only minimal losses are anticipated, for the Huevos Verdes vein amounting overall to 2 per cent. and for the Frea Vein amounting overall to 2.3 per cent.. IMC considers the application of these factors to be appropriate. (c) Cut-off grade The cut-off grade, as at 30 June 2006, used for resource estimation at the San Jose operation is 250 g/t silver equivalent. The equivalent cut-off grade has been calculated on the basis of reference prices for gold of $450/oz and for silver of $7.50/oz. IMC consider the process of determining the cut-off grade and the cut-off grades appropriate. (d) Verication IMC has veried a portion of the reserves of each mine or project and concur with the gures in Table 2-5 and Table 2-6. The Company have used ordinary linear block kriging for those major veins on which there are sufcient intersections to carry out the necessary variography, and inverse power of distance (IPD) weighted moving averages for other veins. IMC believe this is an appropriate and rational selection. IMC carried out check modelling using the Datamine mining software system on the Huevos Verdes vein comprising approximately 54 per cent. of the reserves and resources. 4.2.3 Mines and projects The San Jose Project, with a designed capacity of 273.7 ktpa, is due to be commissioned into production in July 2007. The Huevos Verdes orebody, has a minimum width of 0.15 m and a maximum 1.25 m averaging 0.6 m in thickness which averages 55 to 70 in dip. The Frea orebody, has a minimum width of 1.3 m and a maximum 4.3m averaging 3.1 m in thickness which averages 55 in dip. Both orebodies are accessed by inclined ramps and these connect underground by spiral ramps. It is proposed to mine both veins by mechanised (trackless) and manual (slusher) cut-andll breast stoping methods depending on the mined width, both methods using rockbolts, timber or no support as stope conditions dictate. 5 stopes will rotate in the production cycle of drilling and blasting, mucking of ore and backlling. A series of raise-bored (RB) shafts will be used for ore/waste removal, ventilation and auxiliary services. Ore is loaded from these RB passes into 28 t standard road haulage trucks carrying the material up the mine ramps to the process plant primary crusher or to the waste dump on surface. Haulage distance from both the Huevos Verdes and Frea workings is approximately 1.8 km. A backll plant will supply various types of cemented paste depending on underground support requirements. Investigations into the Kospi and Odin veins as replacement ore for the Huevos Verdes and Frea orebodies are ongoing. IMC considers the proposed development and production plans of San Jose are achievable. 4.2.4 Process plant A feasibility study has been completed by AMEC during which metallurgical testwork has been conducted to select and develop the preferred process owsheet for the San Jose project. The process ow sheet submitted by AMEC used conventional crushing, grinding, otation and concentrate cyanidation leach technology with cyanide recovery and destruction. Gold and silver would be recovered by standard Merrill Crowe zinc precipitation and rened to produce dore bars. The design milling rate is 265 ktpa. Subsequently it was decided to investigate the use of a Gekko reactor. However, Hochschild have decided to implement the project with processing as far as a saleable otation concentrate as the Geccko equipment is not yet proven as suitable for San Jose material and as the necessary permits to allow the use of cyanide have not yet been obtained. Detailed engineering design is scheduled to be complete by end July 2006. Long lead items have been identied and will be purchased in the immediate future. 310
The crushing plant will be a two-stage closed circuit facility producing material of which 80 per cent. is smaller than 9 mm (80 per cent. minus 9 mm material). Ore will be fed to a stationary grizzly screen from where oversize passes through the primary crusher and then joins grizzly undersize which together are conveyed to a screen in closed circuit with the secondary cone crusher. Crushed ore will be stored in two bins each of 500 t capacity from where it is fed to the ball mill. The ore will be milled so that 80 per cent. of the product is smaller than 74 microns (80 per cent. minus 74 microns) in a simple closed milling circuit using hydrocyclones for classication. A bleed from the cyclone feed is taken to a centrifugal concentrator to produce a gravity concentrate while the tailings return to the crushing circuit. Hydrocyclone underow returns to the mill and the cyclone overow ows to the conditioning tank of the otation circuit. The otation circuit will consist of a primary rougher bank of four cells of 5 m3 each. Rougher concentrate reports to the three stage cleaning circuit of 24 cells of 1.42 m3 capacity. Rougher tailings report to a scavenger circuit, a bank of four cells of 5 m3 each. Scavenger concentrate is sent back to the roughers while the tailings report to the tailings thickener. The otation and gravimetry concentrate will be thickened and then dewatered using a vacuum disc lter. After this the concentrate will be bagged in 50 kg sacks then stored prior to dispatch by road. The tailings will be thickened and pumped to the tailings dam. IMC considers the proposed development and production plans of San Jose are achievable. 4.2.5 Tailings disposal 85 per cent. of the tailings will be otation tailings and will be benign. These will be disposed of in an unlined natural basin to the north east of the plant site with a capacity of 1.71 Mt or double that required by the current reserves. The maximum depth will be 10 m and no formal dams are needed. 15 per cent. of the total output will be concentrate tailings and will contain up to 50 ppm cyanide. These will be disposed of in the eastern part of the same depression which will be lined with low permeability soil and an HDPE liner. The two dams will be separated by a separating bank. This bank should be designed for rapid draw down conditions. The area is subject to high winds. To minimise dust, the tailings ponds will be operated under water. In addition, cement or pfa will be added as required. In the later stages, 2 per cent. to 5 per cent. of cement or pfa will be added to both tailings to provide a dust resistant cap. Average rainfall is 144 mm pa and evapotranspiration 1,256 mm pa. The concentrate tailings will therefore have a water decit. Water will therefore be pumped from the otation pond to the concentrate pond with any excess being recycled. 4.2.6 Long term prospects The Sierra de las Minas quartz-sulphide vein district produced gold on a small scale intermittently in the rst half of the twentieth century. The Company controls properties with a drill indicated geological resource and has mapped over 15 kilometres of mainly northwest and northeast striking quartz veins. The property package comprises 65,536 ha and includes 58,622 ha of wholly owned exploration claims, 6,860 ha of exploration and discovery claims in Joint Venture with Canadian junior Golden Peaks Resources Ltd and 54 ha of mine claims under an option to purchase agreement with a local property owner. The Company is undertaking a mapping, sampling and diamond drilling programme to conrm whether there exists an economically viable target in the district. The prospect is situated in the Pampeana metallogenic terrain comprising a metamorphosed basement of Precambrian to early Palaeozoic migmatites and granitoid igneous intrusives. The 311
basement rocks, particularly a dioritic to granodioritic plutonic complex, host the gold-bearing veins. The basement rocks are overlain by a Carboniferous sedimentary series and Tertiary and Quaternary sediments. The mineralisation is quartz-sulphide containing gold and variably with copper minerals. Free gold commonly occurs associated with common haematite and variably with malachite and chrysocolla indicating an oxidised zone and secondary enrichment of gold. Drilling has proved the oxidised, supergene enriched zone to extend in depth for at least 140 m. Remnant sulphides and casts indicate the original mineralisation to have been pyrite-chalcopyrite with sporadic presence of galena. Sericitic alteration occurs at the vein margins. Veins are NW-SE trending and generally individual veins have not been traced for more than 1 km. The veins are typically sub-vertical with average width of approximately 1 m. Geological resources have been inferred from previous drilling by Golden Peaks Resource Limited on two vein structures: the JV-14 structure estimated to host inferred resources of 98,748 t at average width 1.26 m with an average grade of 8.05 g/t gold and the Vallecito structure estimated to host inferred resources of 54,454 t at an average grade of 10.66 g/t gold. The basis of these resource estimates has not been veried by IMC. 5 Mexico IMC visited the Moris project and the San Felipe prospect between the 12th and 23rd June 2006. The Company have been completing Due Diligence diamond core drilling and sample analysis on the site and completed the purchase of the project on 30 June 2006 with the relevant licences to operate. 5.1 Maps and plans The relevant maps and plans are included in Annex C.
Plate 16 *********************************************** Plate 17 *********************************************** Moris Project: Surface map with principal geological features. Moris Project: Longitudinal Prole of the El Creston Vein and map at the 900m level.
5.2 Medium term projects 5.2.1 Moris mine (Mina Maria) Hochschild signed a contract to purchase a 70 per cent. share of Minera Moris S.A. de C.V. (Moris mine or Mina Maria) totalling 7,838 ha near the town of Moris in the State of Chihuahua on 30 June 2006 for an initial payment into a joint venture company of US$1.05 M (excluding taxes) with Exmin as the other 30 per cent. owner. Hochschild will pay a further US$3.15 M (excluding taxes) on completion of a satisfactory due diligence within 6 months. Additionally, Hochschild has signed a separate contract on 17 June 2006 of Mining Exploration, Option for Assignment of Rights, Option to Incorporate a New Company and Option to Execute a Shareholders Agreement over approximately 9,889 ha in the surroundings of Moris mine. Hochschild also receives the right to manage any operation. Hochschild is obliged to incur exploration expenses totalling US$4.8 M over ve years in annual tranches of US$0.4 M, US$0.6 M, US$0.8 M, US$1.0 M and US$2.0 M. plus US$0.85 M in private placements into Exmin during this ve year period. Hochschild has the option to terminate the contract without penalty after the rst year. This second contract is designed to enable the Company to possibly increase its resource base to feed Moris mine in the future. The geological structure of the Moris region is underlain by a basement of moderately metamorphosed Mesozoic sediments. A sequence of upper Cretaceous to lower Tertiary sediments (volcanic tuffs, agglomerates and andesitic lavas) unconformably overlies the basement and dome like intrusions of granitic stocks and ow-banded rhyolite occur. The stratigraphic sequence is capped unconformably by an extensive layer of rhyolitic ignimbrite of middle Tertiary age which forms prominent escarpments. The structure in the Moris region is dominated by normal faults of N-S, NW-SE and NNE-SSW strike appearing to have controlled the local emplacement of ow312
banded rhyolite intrusions and the hydrothermal epithermal vein mineralisation. The LS has undergone alteration at higher levels characterised by chalcedonic silica and the alteration is phyllic and propylitic at deeper levels. Three general areas of mineralisation are the Santa Maria-Tecolote area in the northern part of the district, the El Pilar-Mesa de las Tunas area in the south eastern part of the district west of the Moris township, and the La Cienega-Sahuayacan structural zone in the western part of the district. Santa Maria vein system in the Santa Maria-Tecolote area was partly exploited by surface mining at the Moris mine, vein outcrops have been identied as El Creston, San Luis and Eureka. The system is exposed over a distance of about 1 km on the eastern margin of the Moris valley. The host rocks are bedded conglomerate and volcanic ow breccia. The main vein system consists of a west dipping zone of anastamosing milky quartz veins up to 10 m in width with typical epithermal textures such as ne banding, tabular pseudomorphs and leached cavities. The Tecolote Vein System is closely similar and exposed on the opposite, west side of the valley from the Moris mine. Sampling has shown the presence of many gold-bearing veins and veinlets over an area of several hundred meters width across strike and at least 2 km along strike with at least 500 m of vertical extent. Manhattan Minerals, the previous owner, calculated a mineable reserve of 4 Mt at a grade of 1.9 g/t gold and 8.75 g/t silver at a strip ratio of 1:1 (t:bcm). The mine closed in April 1999 having produced about 50,000 oz of gold and 150,000 oz of silver from about 1.1 Mt of ore and Manhattan Minerals published a formal estimate of remaining reserves comprising 3.1 Mt at a grade of 1.9 g/t gold and 6.6 g/t silver. The Moris mine, with a capacity of 1,095 ktpa, was operated by Minera Manhattan, S.A. de C.V. between 1996 and 1999. The Company has recently acquired the mine and intend to recommission it back into production in 2007. The previously mined El Creston orebody, has a minimum mining width of 2.0 m and a maximum 35 m averaging 13 m in thickness. The orebody averages 45 to 50 in dip and outcrops along a 1,100 m strike length. The El Creston vein was mined from 9.0 m benches using conventional blast, shovel and truck open pit methods. The current planning envisages 5.0 m benches with the same method of mining at a strip ratio of 1:3.68 (t:t) ore to waste. Ore will be loaded from these benches into 33 t dump trucks carrying the material down the haul road to the process plant primary crusher or to the waste dump. Haulage distance from the pit is approximately 2.0 km and 1.5 km to the waste tip. Investigations into the San Luis and Eureka veins as replacement ore for the El Creston orebody are ongoing. IMC considers the proposed re-establishment of Moris mine achievable. The Moris processing operation used crushing, agglomeration, leaching, carbon adsorption desorption-recovery, electrowinning and smelting to produce dore. The crushing plant capacity is now 1,095 ktpa after modication during Minera Manhattan operational period, which is greater than the original design. IMC understand that the crushing plant design and operation will be reviewed by Hochschild during recommissioning to achieve an acceptable material size distribution for optimal leaching efciency which, was not achieved in the Minera Manhattan operational period. Mined ore was crushed in a three stage system, agglomerated and then deposited onto the leach pads where the silver and gold was dissolved into pregnant solution using sodium cyanide. The pregnant solution was pumped to activated carbon columns adsorbing the silver and gold. The carbon was then transferred to the pressure strip circuit using a cyanide and caustic soda solution to re-dissolve the metals. The strip solution went into electrolytic cells where the gold and silver were precipitated onto steel wool. The steel wool was then oxidized in a furnace to produce dore. There are no ne tailings produced at Moris mine, the only waste is in the form of leached ore deposited on the leach pads in accordance with a prescribed prole. 313
5.2.2 San Felipe exploration project The San Felipe comprises of concessions totalling 548 ha located near the town of San Felipe de Jesus and in the El Gachi y Moctezuma district and are currently owned by Grupo Serrana, S.A de C.V. (GS) of San Felipe de Jesus and Moctezuma, Mexico. The Company has a Contract of Mining Exploration, Option to Acquire and of Promise to Incorporate a New Company, with Grupo Serrana, S.A. de C.V. (GS), whereby the Company has an option to acquire up to 70 per cent. of all the rights and ownership. Hochschild has paid US$0.2 M for the exploration rights with an obligation to invest US$6.7 M in exploration, over 3 years. Hochschild will additionally invest US$10.0 M for Gruppo Serrana and US$33.3 M in an incorporated New Company (exploitation), for their 70 per cent. ownership. Hochschild have conceptual plans for the mine to be in production by year 6 with a 730 ktpa process plant. The San Felipe mining concession was operated by Grupo Serrana, S.A de C.V. (GS) from 1974 to 1991 operating a 100 tpd mill at San Felipe de Jesus. Approximately 210,000 t was mined and milled from three local districts. It was estimated that the San Felipe district alone offered resources to support a viable mining operation with an output in the range 1,000 tpd to 2,000 tpd. GS and Exmin de Mexico in association with Boliden of Sweden commenced a detailed and systematic exploration of the district in 1997. The Boliden exploration project commenced with geochemical and geophysical survey and geological mapping focussing on a number of mineralized structures in the San Felipe concession area. Subsequent diamond drilling revealed the La Ventana structure to be signicant with lead-zinc mineralisation including sporadic silver, copper and cadmium values. The programme reportedly demonstrated an orebody of over 500 m length at an average thickness of 10 m and continuity in depth of 300 m containing an Inferred Resource of 4.5 Mt with a combined content of 9.6 per cent. zinc, lead and copper sulphides and silver content of 69.7 g/t over the western end of the structure only comprising only two of the ve structures identied. The Company is currently engaged on verication drilling on the site and has thus far reported an Inferred Resource essentially in line with that suggested by Boliden. The mineralisation is hosted in rock units of Early Cretaceous age and appears controlled by the contact between metamorphosed volcanics and clastic marine sediments and major Late Cretaceous and Tertiary intrusives. The package of volcanics and associated sediments has been folded and faulted to produce a general E-W strike. The La Ventana structure is expressed as a very prominent wall of intensely oxide stained, massive silica and siliceous breccia striking roughly east-west and can be traced for about 3 km making it the longest mineralized structure in the district. The structure is sub-parallel to a contact between a package of mac volcanics and ne sediments, and a large area of quartz feldspar porphyry. 5.3 Long term prospects 5.3.1 San Luis del Cordero Hochschild has entered into a contract to undertake exploration and evaluation with an option to acquire all rights and ownership with the Mexican company Exploraciones del Altiplano S.A. de C.V. (EA) holding title to a block of mining concessions to a potentially mineralised area totalling 2,825 ha. Hochschild has an obligation to pay up to US$0.5 M in xed tranches of US$0.025 M, US$ on ratication of the contract, and thereafter US$0.25 M at the end of 6 months, US$0.05 at the end of 12 months, US$0.1 M at the end of 24 and 36 months and US$0.2 M at the end of 48 months with proscribed exploration spends for each year, for a 100 per cent. option which may be terminated at any time Should the agreement remain valid after 48 months from the date of the agreement, Hochschild are obligated to execute the option. The consideration for the execution of the option includes a 3 per cent. royalty on net smelter returns. Various shallow mines have operated in the concession and district for polymetallic oxide ore during the 1950s and 1960s with the Santa Rosa mine reportedly producing a polymetallic ore grading 600 g/t to 700 g/t silver and 2 per cent. to 3 per cent. copper. Three diamond core drillholes were drilled on the Santa Rosa Vein in 2002 with intersections of a quartz sulphide vein of 0.37 m to 2.10 m width with signicant values of silver, zinc and copper and intersections of wallrock showing locally 314
extensive replacement with zinc and copper sulphides. The principal structure is a recumbent anticline affecting a sedimentary sequence of Jurassic to Cretaceous shales, sandstones and limestones intruded by extensive stocks of granitic and dioritic composition. The sediments around the intrusions show silicication and metamorphosis to hornfels with locally extensive skarn alteration features. Remnant areas of Tertiary rhyolite volcanics display small intrusive bodies and silicication, suggesting that the mineralisation event took place in the Tertiary period. The Santa Rosa vein shows marked zoning with the upper levels marked by jasperoids (amorphous chalcedonic silica) and minor values of silver, antimony and copper zoning down to a copper-silver orebody associated with coarse-grained crystalline quartz. The length and width of the Santa Rosa vein oreshoot increases with depth and currently accessible old mine workings show this to be 2 m wide and 150 m long. There are other extensive areas adjacent to the Santa Rosa mine which exhibit abundant high-level jasperoids considered to be indicative of the potential for underlying vein-hosted and carbonate replacement polymetallic mineralisation. The broader geological environment is considered highly favourable for the generation of large scale replacement or skarn deposits possibly supporting bulk mining extraction. 6 Further disclosure on mineral potential The historical success and continuing capacity of the Company to maintain and expand the reserves and resources base to assure continuing levels of production is dependent upon a commitment to wide-ranging research, investigation and exploration of potential mineral prospects. The company has an extensive portfolio of exploration targets at different stages of evaluation. The Company necessarily maintains an internal assessment of mineral potential within its exploration targets as the basis for planning exploration priorities and long term development options. In the opinion of IMC this mineral potential is material in appreciating the reserve replacement strategy and long term development prospects for the Company. Information on the mineral potential in the exploration targets of the Company does not at present meet internationally recognised criteria for expressing reserves and resources. However, leading jurisdictions on mineral disclosure recognise that it is often appropriate that there is disclosure of the mineral potential in exploration targets and the information supporting such interpretation of potential, but always, without exception, that such disclosure cannot be misconstrued or misrepresented as reserves or resources (JORC Code 2004, Section 18). IMC has reviewed with the Company the various exploration targets summarised below. The summary statement of potential for each target is expressed explicitly on the basis that) the potential range of quantity and grade is conceptual in nature, there has been insufcient exploration to dene a mineral resource on the target and it is uncertain if further exploration will result in the discovery of a mineral resource on the target; and ) the mineral potential constitutes a possible mineral deposit that is to be the target of further exploration. The disclosure of mineral potential follows specic guidance in the JORC Code, Section 18 in relation to mineral disclosure in exploration targets that the mineral potential should be expressed as a range of quantity and grade, with explanation of the basis of the statement. Internally, the Company takes a conservative approach to its assessment of mineral potential; mineral potential is only recognised where supported by one or more intersections with grade and width which meet current economic parameters, or where the lateral extent of mineralisation is supported by physical sampling which indicates economic parameters will be met, or where the lateral extent of mineralisation is known and its characteristics may be assessed on the basis of immediately adjacent similar, economically delineated mineralisation. 315
6.1 Peru 6.1.1 Arcata mining district Mariana Vein NE: potential mineralisation is identied to the NE of existing operations in the 4,530 m level of the mine (average vein width 0.18 m, 3,355 g/t of silver and 11.3 g/t of gold), over a length of 1,300 m to drillhole DDH-35 (intersection 1.35 m, 181 g/t of silver and 0.8 g/t of gold); two intervening drillholes dene continuity with a weighted average intersection of 0.64 m with 392 g/t of silver and 1.41 g/t gold. Known characteristics of the mineralisation in the mine indicate a mineralized belt of 200 m to 250 m in height and an extractable width of 1.00 m to 1.50 m. The mineralisation is open to the north-east. The range of mineralised potential is considered within 0.48 Mt to 1.36 Mt with 450 g/t to 550 g/t of silver and 1.5 g/t to 2.0 g/t of gold. Mariana Vein SW: potential mineralisation is identied to the SW of existing operations in the 4,530 m level of the mine (average vein width 0.38 m, 6,354 g/t of silver and 29.6 g/t of gold) over a length of 400 m to drillhole DDH-106 (intersection 0.15 m, 754 g/t of silver and 1.5 g/t of gold). Known characteristics of the mineralisation in the mine indicate a mineralized belt of 220 m height. The range of mineralised potential is considered within 0.2 Mt to 0.5 Mt with 150 g/t to 1,000 g/t of silver and 1.5 g/t to 14.0 g/t of gold. Julia Vein: the potential mineralisation is in a vein sub-parallel with Mariana Vein System identied through three drillhole intersections (DDH-117, DDH 119, DDH-80) with intersections ranging 0.65 m to 1.63 m and grades ranging 592 g/t to 1,984 g/t of silver and 0.8 g/t to 4.4 g/t of gold. Projected potential length of mineralisation is in excess of 750 m and the vertical extent of mineralisation is anticipated to be 200 m, in line with experience with the adjacent veins. The range of mineralised potential is considered within 0.5 Mt to 1.0 Mt with 500 g/t to 1,000 g/t of silver and 1 g/t to 4 g/t of gold. Macarena 2 Vein: the potential mineralisation is in one of a system of tensional veins oblique to and on the south side of the main Macarena Vein. Experience of working the adjacent Macarena 1 Vein provides supporting data in addition to two drillholes in the Macarena 2 Vein (DDH-15-ME: intersection of 0.40 m with 1,358 g/t of silver and 0.4 g/t of gold. DDH-20-E: intersection of 0.80 m with 585 g/t of silver and 0.4 g/t of gold). A block of proven and probable reserves have formally been reported and mineral potential is projected around this. Lateral extent of the potential oreshoot is 400 m and vertical extent of mineralisation is expected to be 210 m. The range of mineralised potential is considered within 0.2 Mt to 0.5 Mt with 500 g/t to 1,000 g/t of silver and 0.3 g/t to 0.5 g/t of gold. Ramal Marion Vein: the potential mineralisation is in a transverse vein extending NNW-SSE between the well-dened Marion and Mariana vein systems which are developed on a more general E-W trend. The vein is dened by three drillhole intersections (DDH-22, DDH-115, DDH106) with intersections ranging 0.50 m to 1.40 m and grades ranging 549 g/t to 3,489 g/t of silver and 0.5 g/t to 8.9 g/t of gold. The lateral extent of mineralisation is expected to be of 500 m length, being limited between the major vein systems, and the vertical extent of mineralisation is expected to be 220 m corresponding to the known mineralisation of the Marion Vein System. The range of mineralised potential is considered within 0.2 Mt to 0.4 Mt with 500 g/t to 1,000 g/t of silver and 0.5 g/t to 3.0 g/t of gold. Pullallu Structure: mineral potential is in a structure of 3 km length located at the north-eastern margin of the Arcata mining district at approximately 15 km from the centre of the main mining eld. Field mapping, trenches and geochemical sampling have identied a potential oreshoot of 750 m length; similar characteristics of mineralisation as in the main Arcata veins has been assumed. The range of mineralised potential is considered within 0.7 Mt to 1.0 Mt with 100 g/t to 200 g/t of silver and 1.5 g/t to 2.0 g/t of gold.
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6.1.2 Ares mining district Victoria Vein System: the mineral potential relates to the system of branches, splits and loops which accompany the main vein and which have consistently contributed to new reserve tonnage since commencement of exploitation. A signicant component of the potential relates to the projection of exploitable mineralisation beyond already evaluated resources in subsidiary veins and loops of the Victoria Vein System. In general, the depth of the lower limit of mineralisation is constrained but many oreshoots are open laterally. There is a current evaluation programme for the halo of argillised alteration, up to 20 m wide, recognised at many points in cross-cuts underground and drillholes, enclosing the vein system within the host environment of the rhyolitic dome. In the 4,675 m level of the mine, composite widths of alteration ranging 1.30 m to 5.10 m have been determined with weighted average grades of 2 g/t to 360 g/t of silver and 2.6 g/t to 20.8 g/t of gold over a strike length of 100 m. Economically signicant potential in the argillised alteration halo may extend as signicant oreshoots at numerous points along each side of the length of the vein system with a vertical extent of 150 m. A representative horizontal length of 500 m has been conjectured for projection of mineralised potential. The range of mineralised potential is considered within 1.0 Mt to 1.5 Mt with 100 g/t to 200 g/t of silver and 3.0 g/t to 10.0 g/t of gold. Paola Structure: the mineralised potential is in a vein structure identied 1.5 km to the north of the Victoria Vein System. The structure does not outcrop and was discovered by diamond core drilling. Based on two drillhole intersections (AS-0991: intersection of 1.35 m with 311 g/t of silver and 0.23 g/t of gold. AS-1000: intersection of 0.94 m with 297 g/t of silver and 0.01 g/t of gold), an oreshoot length of 800 m is projected with a vertical extent of mineralisation of 250 m. The range of mineralised potential is considered within 0.5 Mt to 0.8 Mt with 200 g/t to 400 g/t of silver. 6.1.3 Selene mining district Explorador/Sophia Vein System: the mineral potential relates to the system of branches, splits and loops which accompany the main vein and which have consistently contributed to new reserve tonnage since commencement of exploitation. Specic identied targets include the sub-parallel Monica Vein, projected over a strike length of 1 km and indicated in three drillholes (DDH-MO 04, DDH-MO 05, DDH 39S. Intersections of 0.55 m to 2.06 m with grades of 59 g/t to 276 g/t of silver and 0.5 g/t to 0.9 g/t of gold) and also the Soa Vein, projected along the Soa Fault north of its intersection with the main Explorador Vein for a distance of 1.5 km and indicated in 17 core drillholes (intersections of 0.20 m to 2.75 m with grades of 2 g/t to 1,612 g/t of silver 0.3 to 11.6 g/t of gold). Vertical extent of mineralisation in the Monica Vein is 265 m and in Soa Vein 300 m. The potential oreshoot in the Soa Vein is projected as 600 m long with width of 1.75 m. The range of mineralised potential is considered within 1.2 Mt to 1.5 Mt with 200 g/t to 400 g/t of silver and 1.0 g/t to 2.0 g/t of gold. Huachuhuilca Breccia Structures: the mineral potential is a number of breccia structures identied in an area approximately 7 km to the northwest of the Explorador Mine. The breccia structures have been identied by surface mapping and geochemical sampling. Core drilling has commenced on one of four identied breccia structures. Two drillholes have been completed on the rst structure (DDH-AO3: intersection of 13.3 m with 215 g/t of silver. DDH-AO8: intersection of 14.1 m with 410 g/t of silver. Gold is present only as traces in both intersections). The lateral extent of the structure established by mapping is over 200 m and indications are of mineralisation extending in depth in excess of 150 m. The range of mineralised potential is based on expectation of economic values in all of the four structures representing 2.0 Mt to 4.0 Mt with 200 g/t to 400 g/t of silver. 6.1.4 Pallancata West Breccia Extension NW: the mineral potential is in the lateral extension to the northwest of the main Pallancata system in the Huararani area. Drilling in the West Breccia area of the main system demonstrates that the structure remains open to the northwest and the continuity has been established by surface mapping. Lateral extent is taken as 500 m and based on the known 317
West Breccia area, the width of mineralisation is taken as minimum 15 m and the vertical extent of mineralisation as 250 m. Similar characteristics of mineralisation in the West Breccia Extension are assumed. The range of mineralised potential is considered within 2.0 Mt to 5.0 Mt with 250 g/t to 300 g/t of silver and 1.0 g/t to 2.0 g/t of gold. Mercedes Vein System: the mineral potential is in a vein complex located 1.5 km to the north of the Pallancata system with general ENE-WSE strike converging on the Pallancata system. Surface mapping has identied numerous outcrops of sub-parallel veins in this system over a strike length of 1.3 km. The results of geochemical sampling conrm structural continuity. The projected potential assumes similar characteristics of mineralisation to that known in the main Pallancata system. The range of mineralised potential is considered within 1.0 Mt to 2.0 Mt with 250 g/t to 300 g/t of silver and 1.0 g/t to 2.0 g/t of gold. 6.2 Argentina 6.2.1 San Jose Kospi Vein Extension: the mineral potential comprises a well-dened vein structure of length in excess of 1.3 km, identied by drilling and geophysical survey. The structure remains open to north and south and southwards continuation is strongly indicated. The vertical extent of mineralisation is well-dened to a depth of 200 m with strong possibility of oreshoots with deeper extent. The mineral potential is projected both to the north and south of the block of inferred mineral resource which has been formally quoted. The potential is based on an area including 23 drillholes showing mineralised intersections of 0.53 m to 5.23 m with mineral content in the range of 2 g/t to 4,567 g/t of silver and 1.9 g/t to 38.2 g/t of gold. The range of potential is considered to fall within 1.1 Mt to 1.4 Mt with 200 g/t to 400 g/t of silver 3.0 g/t to 8.0 g/t of gold. Frea Vein Extension: the mineral potential falls within a well-dened vein structure of length in excess of 1 km, identied by drilling and geophysical survey. The structure remains open to north and south. The vertical extent of mineralisation is well-dened to a depth of 220 m in the block of probable reserves which has been formally quoted. Development work in the reserve block and recent drilling conrms a vein structure with potentially productive splits, branches and loops. The mineral potential is projected both to the north and the south of the block of probable reserves. The projection to the north is supported by one drillhole (SJD-188: intersection of 2.51 m with 334 g/t of silver and 18.9 g/t of gold) 250 m north of the reserve block. The projection to the south is supported by one drillhole (SJD-184: intersection of 1.83 m with 122 g/t of silver and 1.9 g/t of gold) 110 m south-east of the reserve block. The range of potential is considered to fall within 1.0 Mt to 2.0 Mt with 120 g/t to 400 g/t of silver and 4.0 g/t to 9.0 g/t of gold. Odin Vein System: the mineral potential falls within a well-dened vein structure of length in excess of 1.6 km identied by drilling and geophysical survey. Two closely sub-parallel veins, Odin A and Odin B, are identied diverging to the south-east. Odin A has been investigated by 8 drillholes of which three have intersections of economic signicance (SJD-204: intersection of 12.31 m with 210 g/t of silver and 1.9 g/t of gold. SJD-199: intersection of 2.45 m with 45 g/t of silver and 2.7 g/t of gold. SJD-210: intersection of 1.35 m with 188 g/t of silver and 8.6 g/t of gold). These delineate a potential oreshoot of 800 m length with a vertical extent of 180 m. Odin B has been investigated by 7 drillholes of which three have intersections of economic signicance (SJD209: intersection of 2.53 m with 445 g/t of silver and 6.6 g/t of gold. SJD-205: intersection of 0.90 m with 856 g/t of silver and 15.3 g/t of gold. SJD-201: intersection of 0.55 m with 91 g/t of silver and 8.7 g/t of gold) These delineate a potential oreshoot of 650 m length with a vertical extent of 60 m. The range of potential is considered to fall within 0.7 Mt to 1.7 Mt with 150 g/t to 500 g/t of silver 4.0 g/t to 9.0 g/t of gold. Ayelen Vein: the mineral potential is in a clearly dened vein identied over a length of 800 m by geophysical survey and 5 drillholes. Two drillholes have intersected signicant mineralisation (SJD200: 1.24 m with 152 g/t of silver and 1.4 g/t of gold. SJD-208: 12.26 m with 1,723 g/t of silver and 25.7 g/t of gold) which delineate a potential oreshoot of 600 m, open to the south-east with a 318
vertical extent of mineralisation 160 m to 200 m. The range of potential is considered to fall within 0.5 Mt to 2.0 Mt with 150 g/t to 500 g/t of silver 4.0 g/t to 9.0 g/t of gold. 6.2.2 Sierra de las Minas The prospect is currently under evaluation. An estimate of inferred resources of 144,000 t at two targets with grades respectively of 8.1 g/t and 10.7 g/t gold was reported by earlier investigators based on approximately 50 drillholes and surface geochemistry. This tonnage is incorporated in the overall projection of mineral potential. The property includes numerous sub-parallel NWtrending veins for which a cumulative strike length of 15 km has been determined by mapping, geochemical sampling and drillholes although economic mineralisation may be restricted to vein exures. Supergene enrichment appears locally to inuence high grades near surface. At least six separate targets for economic mineralisation have been identied, with considerable potential for more as regional investigation progresses. Individual targets are assessed as each comprising 80,000 t to150,000 t conceptualised as each comprising a strike length of not less than 100 m with mineralisation to 125 m depth and orebody width of 2.5 m. The range of potential is considered to fall within 0.6 Mt to 1.0 Mt with 8.0 g/t to 15.0 g/t of gold. 6.3 Mexico 6.3.1 Moris prospects Tecolote Vein System (underground): the mineral potential is within a vein system identied at surface over a length of 2 km including old mine workings to shallow depth at a number of points. The range in topographic height conrms the consistency of mineralisation within a vertical interval in excess of 150 m. The structural control and mineralisation, comprising layered silicication demonstrate close similarity to the parallel Santa Maria Vein System on the opposite side of the Moris Valley which provides a model for assessing mineral potential. The width of mineralised structure has been measured as 20 m and one surface channel sample has reported a 12 m section with 4 g/t gold. Mineralisation to shallow depth, no greater than 150 m is identied for potential surface mine extraction. The range of potential is considered to fall within 2.0 Mt to 4.0 Mt with 6.0 g/t to 15.0 g/t of silver and 1.0 g/t to 2.0 g/t of gold. This vein system is considered to host signicant potential for ore-shoots at greater depth by analogy with the Ocampo mineral district (8 km distant) which has closely similar structural control. However, quantication of this potential will only be based on future drill intersections. Mesa de las Tunas-El Pilar: the mineral potential is within a system of over 14 narrow veins, a number of which hosted small mineral workings up to the 1950s. Identied cumulative continuity of veins is over 500 m with vein widths of 0.28 m to 0.80 m with grades in the range of 137 g/t to 759 g/t of silver and traces to 30.4 g/t of gold. The range of potential is considered to fall within 0.3 Mt to 0.5 Mt with 100 g/t to 200 g/t of silver 10.0 g/t to 15.0 g/t of gold. Finlandia: the mineral potential is within a structure comprising a narrow vein located within a laterally continuous stockwork. The structure has been identied on the surface over 1 km within which three exploration trenches have identied mineralisation over 400 m and sampled a mineralised width ranging 6.0 m to 12.0 m. The three composite channel samples report grades of 166 g/t to 186 g/t of silver and 1.30 g/t to 1.79 g/t of gold. The range of potential is considered to fall within 0.9 Mt to 1.8 Mt with 100 g/t to 200 g/t of silver and 1.0 g/t to 2.0 g/t of gold. La Cienega: the area of mineral potential lies in the central part of the La Cienega structural zone which extends for more than 7 km. The prospect comprises six veins, each of width ranging 0.50 m to 1.00 m, identied in previous mine workings and for each of which a strike length of between 100 m to 300 m has been identied. Gold grades in the range 10.0 g/t to 15.0 g/t are reported but have not been veried by formal sampling. The range of potential is considered to fall within 0.3 Mt to 0.6 Mt with 10.0 g/t to 15.0 g/t of gold. Balleza: the area of mineral potential lies in the central part of the La Cienega structural zone which extends for more than 7 km. The mineralisation comprises a wide silicied stockwork319
breccia zone at the contact with a rhyolite dyke. The width is interpreted to extend up to 50 m and previous exploration has indicated a strike length up to 1 km. Limited rock chip and dump sampling is reported to yield values of 25 g/t to 450 g/t of silver and 1.0 g/t to 3.5 g/t of gold. Mineral potential is identied for bulk tonnage extraction for which the range of potential is considered to fall within 5.0 Mt to 10.0 Mt with 30 g/t to 60 g/t of silver and 1.0 g/t to 2.0 g/t of gold. El Pinito: the area of mineral potential lies in a system of veins on the margin of the southern part of the La Cienega structural trend. Artesanal underground working occurred until the 1990s in narrow veins for high grade silver content plus signicant gold. Later surface sampling and limited drilling is reported to have identied a prospect for lower grade bulk tonnage mining encompassing the narrow higher grade veins. Three exploration trenches report mineralised zones ranging 3.0 m to 40.0 m with composite channel samples reporting grades of 16 g/t to 615 g/t of silver and 0.9 g/t to 5.4 g/t of gold. Mineral potential is identied for bulk tonnage extraction for which the range of potential is considered to fall within 1.0 Mt to 2.0 Mt with 30 g/t to 60 g/t of silver 1.0 g/t to 1.5 g/t of gold. Prospect X: the area of mineral potential lies in the northern part of the La Cienega structural zone consisting of volcanic hosted epithermal veins with gold mineralisation and subsidiary silver in a well-dened structure of over 2 km length. This has been the site of medium-scale underground mining from around 1900 to recent times working high grade veins in 7 levels and for which resources of 12 Mt were reported with content of 26 g/t of silver and 2.4 g/t of gold. A large area of silicication and veining occurs adjacent to the higher grade vein system. The prospect offers potential for further investigation for vein-hosted mineralisation and for bulk tonnage extraction of larger volumes of disseminated mineralisation. The range of potential is considered to fall within 5.0 Mt to 10 Mt with 6 g/t to 15 g/t of silver and 1.0 g/t to 2.0 g/t of gold. 6.3.2 Mexico San Felipe La Ventana: potential mineralisation has been identied through resampling and reinterpretation of the earlier Boliden drilling programme and by a recent and continuing programme of four drillholes. The previous estimation of an inferred resource in the main La Ventana structure has been conrmed as reported. The new drilling and interpretation process indicates additional lateral continuous mineralised skarn structure sub-parallel to and below the main La Ventana structure and also a previously unidentied mineralised silicied vein structure sub-parallel to and above the main La Ventana structure. The lower skarn mineralisation has been determined in two new drillholes, although full sample results have not yet been received. These drillholes conrm the continuity of the mineralised structure determined and sampled in two of the older Boliden drillholes (SF-98-01 and SF-99-09; intersections 8.00 m to 16.49 m; average values of 49 g/t of silver, 1.46% lead, 6.21% zinc and 0.19% copper). Potential mineralisation of the skarn structure is projected over a strike length of 200 m over a depth of 300 m and the range of mineralised potential is considered within 1.5Mt to 2.0 Mt with 45 g/t to 50 g/t of silver, 1.0% to 2% lead, 4% to 7% zinc, 0.1% to 0.3% copper. The upper silicied mineralisation has been determined in three older Boliden drillholes (SF-98-04, SF-99-09, SF-00-23), in one completed new drillhole (HFLV-1) and in one new drillhole for which assay results are awaited. The potential mineralisation is projected over a strike length of approximately 300 m within a mineralised belt of 80 m vertical dimension and width of 1.6 m to 6.8 m and the range of mineralised potential is considered within 0.3 Mt to 0.5 Mt with 20 g/t to 100 g/t of silver, 1% to 15% lead, 4% to 13% zinc, 0.1% to 0.3% copper. The combined mineral potential of the La Ventana structure is considered to be 1.5 Mt to 2.5 Mt within the indicated grade ranges. Artemisia: the potentially mineralised vein structure is well identied and mapped on the surface over a length of 1.5 km and was the site of localised surface mining and limited underground extraction in the 1940s. Two drillholes in the Boliden programme (SF-00-16, SF-00-17) failed to dene the structure with certainty. The grade of mineralisation is known only from the reported average values of the mine exploitation (70 g/t of silver, 10% lead, 15% zinc, 0.5% copper). The 320
mineral potential is currently identied only to the east of the Boliden drillholes and between points known from previous mining over a strike length of 300 m and assumes mineralisation over a vertical interval of 200 m although future exploration will evaluate potential over the full length of the structure which displays dimensions and mineralisation closely similar to the La Ventana structure. The Company currently identies mineralised potential of 2.5 Mt to 5.0 Mt with 50 g/t to 80 g/t silver, 3% to 5% lead 7% to 10% zinc and 0.2% to 0.4% copper. Las Lamas: the mineral potential comprises a silicied vein structure sub-parallel to the La Ventana structure which has been identied by surface mapping over a strike length of 250 m. It was the site of underground mining in the 1940s. Underground data covers a strike length of 100 m and indicates vein thickness of 1.2 m to 2.0 m and reported weighted average grades are 194 g/t of silver, 0.1% lead, 13% zinc and 0.2% copper. A single drillhole in the Boliden programme (SF-00-21) intersected the structure at a depth of 50 m below the old workings with a cored length of 2.35 m showing grades of 152 g/t of silver, 0.4% lead, 8% zinc and 0.2% copper. The range of mineralised potential is considered within 0.2 Mt to 0.4 Mt with 150 g/t to 200 g/t of silver, 0.1% to 0.4% lead, 8% to 13% zinc, 0.2% to 0.3% copper. San Felipe: the potentially mineralised vein structure is well identied and mapped on the surface over a length of 1.5 km and was the site of mining between the 1940s and 1980s, initially by surface extraction and later through more extensive underground mining reaching a depth of 120 m and reported vein widths 5 m to 10 m. Two drillholes in the Boliden programme (SF-00-18, SF00-19) failed to dene the structure with certainty and indicated local areas of reduced vein width. The mineral potential is identied in the ore-shoots identied by mining to a depth of 230 m and with a composite strike length of 320 m and vein width 2.5 m to 10.0 m. However, the structure is open over a strike length of 700 m to the east. The grade of mineralisation is known only from the reported average values of the mine exploitation (84 g/t of silver, 3% lead, 9% zinc, 0.2% copper). The range of mineralised potential is considered within 1.5 Mt to 3.0 Mt with 20 g/t to 40 g/t of silver, 2% to 3% lead, 3% to 4% zinc, 0.1% to 0.3% copper. 7 Special factors Risks likely to impact on the Companys forecast production, capital and operating costs by less than 10 per cent. are not considered signicant. Any signicant risks not adequately addressed in the Companys production plans are considered to be material and are listed under Special Factors following. Risk ) The dependence on the use of mining contractors for mining operations. The Company does, however employ a number of mining contracting companies and is not over reliant upon any single Company. ) Any unforeseen political intervention such as the expropriation of all mineral assets and operations. Synergy ) The Company is based in a Spanish speaking country with experience of working in South and Central American countries. It is, therefore, well placed to exploit opportunities in other Spanish speaking countries within South and Central America. 8 Conclusions IMC concludes from the independent technical review that: ) Managements geological and geotechnical knowledge and understanding is of a satisfactory level to support short, medium and long term planning as appropriate and operations are well managed; 321
) the mine plans appropriately consider geological and geotechnical factors to minimise mining hazards; ) all statutory rights, permits and contracts are in place with the following exceptions. San Jose has made an application for the exploitation of the reserves where approval has been granted and certication is expected in late July 2006. Most of the permits and licenses for Moris mine have now lapsed and require renewal prior to the resumption of production, which can be expedited within the required timescale; ) the Companys mining equipment (either in place or planned in the capital forecasts) is suited to its mine plans and is adequate, with minor adjustments, for the production plans; ) silver and gold ore processing plants and other infrastructure are capable of continuing to supply appropriate quality products to the markets at the forecast production plans; ) the Companys policy of managing operations whilst engaging contractors to complete execute the operations is a successful strategy providing exibility. IMC believes that the Companys relationship with the contractors is both good and effective; ) the Company has, as of 2006, instituted more stringent auditing of accident and incident reporting with the introduction of OSHA 18001 planned for 2007. This has resulted in an increase in the LTIFR as a result of more accurate reporting. The Company is rmly committed to health and safety and is expect to demonstrate a sustained long term improvement. ) environmental issues are well managed and there are no issues that could materially impede production nor are any prosecutions pending; ) the assumptions used in estimating both capital and operating costs are appropriate and reasonable; ) capital and operating costs used in the nancial models incorporating minor adjustments by IMC reect the mine plans, development and construction schedules and the forecast production levels; ) special factors identied by IMC are well understood by management and appropriate action to mitigate these risks is being taken. Further, the mine plans and cost forecasts appropriately account for these risks; and ) management operates an excellent management accounting system and are able to monitor and forecast production and cost parameters. IMC has estimated the value of the Companys silver and gold assets at an operating level as US$271.0 million and at a post tax level as US$210.8 million assuming a real discount rate of 6.0 per cent., and product prices, capital and operating costs and production forecasts which are soundly based. Yours Faithfully, IMC Group Consulting Ltd Innovate Ofce Building Lake View Drive Sherwood Park Nottinghamshire NG15 0DT United Kingdom John S Warwick B Sc (Hons) FIMMM, C Eng, Eur Ing Director 322
Distribution list Competent Persons Report Hochschild Mining plc Copy No. Copies of this report have been distributed as shown below:
Copy No. Type CD Recipient
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Yes
Hochschild Hochschild Hochschild Hochschild Hochschild IMC Group Consulting Ltd, Nottingham IMC Group Consulting Ltd, London
Project Personnel: Key Words: IMC, London; Silver; Gold; South America, Underground; Mexico Signature Production: Name/Designation N O Liddell Project Manager Verication: C Wells Contracts & Commercial Director Approval: Date: 3 November 2006 J S Warwick Director Mining
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*Dr P TannerEnvironmental Engineer B. Sc Agric Hons (London). University College of Rhodesia and Nyasaland, 1966; M. Phil. (soil science). University of Rhodesia, 1976; PhD (Science). University of London, 1989. 16 years in the agricultural soils industry followed by 26 years in the environmental, health and safety disciplines. *D W GrifthsInfrastructure Engineer B Sc Electrical Engineering (1st Class Hons) University of Cape Town, South Africa (1967); Member Institution of Electrical Engineers; Member South African Institute of Electrical Engineers; Chartered Engineer. 38 years experience in the infrastructure industry worldwide. *Dr D T CarterTailings Dam Geotechnical Engineer B Sc Civil Engineering, Leeds University (1965); Ph D Soil Mechanics, Leeds University (1968); Chartered Engineer; Member Institution of Civil Engineers; Fellow Geological Society; Fellow Institute of Materials, Minerals and Mining. 37 years in the design, operation and management of major tailings dams. P C RobinsonValuation Engineer Associate, Chartered Institute of management Accountants 25 years experience in the mining, minerals and consulting industry worldwide with specic experience of investment and mine purchases including the rst successful listing outside China of a Chinese coal mining company.
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Capital Reduction************
CREST***********************
CRESTCo ******************** CRU Strategies ************** Disclosure Rules ************* EBITDA ********************* Exchange Act**************** Executive Directors **********
FSMA *********************** GDP ************************ Global Offer***************** GMT ************************ Goldman Sachs or Goldman Sachs International ******** Group or the Hochschild Mining Group, ************ Hochschild Group ************
Hochschild Mining or Hochschild Mining plc****** IFRS************************* IMF ************************* IRS************************** ISIN ************************* ISO ************************* Johnson Matthey ************ Joint Sponsors, Joint Global Co-ordinators or Joint Bookrunners ************** JORC Code ******************
JPMorgan Cazenove Limited and Goldman Sachs International; the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia; J.P. Morgan Securities Limited; JPMorgan Cazenove Limited in its capacity as nancial adviser, joint sponsor, joint global co-ordinator and joint bookrunner; The London Interbank Offered Rate; the rules relating to admission to the Ofcial List made in accordance with s.73A(2) of FSMA; 345
Member States ************** Noon Buying Rate *********** Non-Executive Directors ****** Offer Price ****************** Offer Shares***************** Ofcial List ****************** Ordinary Shares ************* OSHAS ********************** Over-allotment Option *******
Over-allotment Shareholders ************** Over-allotment Shares ******* Penoles ********************* Prospectus ******************
Qualied Institutional Buyers or QIBs ******************* Registrar ******************** Regulation S **************** Regulations ***************** Relationship Agreement ***** RSA 421-B *******************
Shareholders **************** Stabilising Manager********** Treasury Regulations ********* Underwriters **************** Underwriting Agreement ****
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Brownelds ***************** BS ************************** By-product ****************** Cadmium (Cd) *************** Caldera *********************
Capex*********************** Cash Flow ******************* CESR ************************ Chalcedony****************** Chalcopyrite***************** Chemical treatment ********** Chrysocolla ****************** Clastic ********************** Clean-up ********************
Crush, Crushing, Crushed ***** Crusher ********************* Cu ************************** Cut and Fill *****************
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Emission standard *********** Enargite ******************** Environment **************** Environmental audit *********
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kt ************************** ktpa ************************ kV ************************** Leach Process**************** Leachate ******************** Leaching ********************
Lease *********************** Lithology******************** LME ************************ Load-out ******************** LOM ************************ Losses Geological ************ LossesMining ************** LSE ************************* LTIFR************************ m***************************
Marcasite ******************* Measured Resources ********* Mechanised Mining ********** Merrill-Crowe Plant ********** Mesozoic******************** Metallurgical Recovery ******* Metallurgy ****************** Metamorphic, metamorphosed *********** Migmatite*******************
Mineral Potential ************ Mineral Rights*************** Mineralisation *************** Mining Licence ************** Mining Permit ***************
Ore *************************
Orebody ********************
Ounce or oz***************** Outcrop********************* Outfall ********************** Overburden ***************** Pegmatoid Intrusion(s) ******* Permeability***************** Permit **********************
Pit Head Value ************** Plant************************ Plutonic ********************* Pollutant ******************** Polybasite ******************* Polymetallic *****************
Prospect ********************
Pyrargite ********************
Recoverable *****************
Residual*********************
Resource(s) ******************
RightsSurface Rights ******* Royalty ********************* Ruby silver ****************** Sampling******************** Screen ********************** Sedimentation*************** Sediments *******************
Sericite**********************
Silicication *****************
Skarn ***********************
Specic Gravity (SG) ********* Sphalerite ******************* Spot ************************ Steel arches ***************** Stibnite ********************* Stockpile ******************** Stockwork******************* Stope *********************** Stoping ********************* Strike ***********************
Stripping ********************
Sulfosalts********************
Sulphidation ****************
Sulphide ********************
Supergene ******************
t**************************** Tailing(s) ******************** Tailings Dam **************** Tectonic inuence *********** Tennantite ****************** Tertiary *********************
Volcano-clastic***************
Wastewater treatment plant ********************* Water makes **************** Working Capital *************
A facility containing a series of tanks, screens, lters, and other processes by which pollutants are removed from water. The quantity of water owing into an area or the mine. Accounts receivable less accounts payable.
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