Hochschild – a Sign for Silver?

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One Hochschild Mining, which operates a total of three mines between the countries of Peru and Argentina has been a sector leader over the past year. Specifically, looking at its impressive market recovery, over 460% this year.

Where did the gains come from?

Two macro-factors: (i) the key growth factor of higher silver prices, and (ii) a weaker Peruvian Peso. The weaker Peso makes this a more attractive investment to foreigners with US capital.

Two micro-factors: (i) new production in Hochschild’s Peruvian mines (Inmaculada, specifically), and (ii) a more conservative balance-sheet with less leverage, and a surprising profitability. The former factor is aided by a turnkey strategy of looking for precious metal reserves located close to existing plants. This decreases costs related to processing. In fact, Mr. Ignacio Bustamante claims he has no intentions to purchase or acquire new assets. Doing so, in his opinion, would cost investors long-term value.

A Less than Exciting Prophesy

Hochschild is a paradigm of self-change. Having taken on excessive leverage over the last several year – a play to meet rising Asian commodity demands –  a focus on profits and sustainability has taken hold. Both small and large competitors alike expect the next few years to quiet down.

Looking back, US Fed practises of low overnight rates have propped up alternative investments in precious metals. This is because the lower these rates are, the lower the opportunity cost of buying non yield-bearing investments is. In other words, as interest rates go up, people tend to be less interested in gold and silver. Silver, being the roe volatile of the two tends to experience stronger gains: nearly 40% this year. Unfortunately, there is really no “safe” way to invest in these stocks that promises anything more than a trivial return. We couldn’t have predicted what happened this year. Likewise, we have no way to say what will come.

Hochschild is currently running at approximately 2/3 capacity. At full capacity, it could feasibly process nearly 50 million ounces of silver per annum. With that in mind, large increases in these stocks would be unlikely unless the United States saw overnight rates go into the negative.

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