Broker Note, Hochschild Mining, 23/01/2007 (Cannacord Adams)

8/15/2019 Broker Note, Hochschild Mining, 23/01/2007 (Cannacord Adams)

1/60

Canaccord Adams is the global capital markets group of Canaccord Cap ital Inc. (CCI : TSX|AIM)The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal,independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For importantinformation, please see the Important Disclosures section in the appendix of this document or visithttp://www.canaccordadams.com/research/Disclosure.htm.23 January 2007 2007-010

Damien Hackett44.20.7050.6641

[email protected]

Nicholas Pickens44.20.7050.6646

[email protected]

BUY

HOC : LSE : 3.95

TARGET PRICE:4.50

Inside

Company Overview.....................................3

Valuation .....................................................7

Application of Funds ..........................13

Investment Risks ................................13

Company History and Structure ..............15Company Assets .......................................17

Peru .....................................................17

Mexico .................................................29

Argentina.............................................34

Market Position.........................................37

Silver Market Overview ............................41

Share price data COB 22 January 2007.

Metals and Mining -- Precious Metals and Minerals

Hochschild Mining PlcSpecialists from Latin America in narrow-vein, high-value mining

Figure 1: Production and cash flow growth (2003-2012E)

0

10

20

30

40

50

60

2003 2004 2005 2006e 2007e 2008e 2009e 2010e 2011e 2012e

TotalProduction(Moz)

0

50

100

150

200

250

300

EBITDAandCashFlow(

US$M)

Silver Production Gold and base metals (Ag equiv)EBITDA Cash from Operations

Source: Canaccord Adams estimates, company data

We initiate coverage on Hochschild Mining with a BUY recommendation. HOC is a

silver and gold mining company with over 40 years of experience and was the fourth-

largest producer of primary silver in the world in 2005 with production totaling 10.5

million ounces of silver plus 232,000 ounces of gold. We expect silver production to

increase by at least 95% thru 2009, Figure 1.

We set our initiating target price for 2007 at 4.50 based on our analysis of comparable

company financials, which suggests a current price of 3.67 rising to 4.82 in 2008; a

10 times multiple of cash, which suggests a price of 3.68 for 2007 rising to 5.15 in

2008; and our NAV estimate of 3.55/share based on our expectation of declining

commodity prices. With current precious metal prices carried forward, our NAV

estimate for the stock is 4.80/share.


2/60


3/60

3

23 January 2007 Hochschild Mining plc

COMPANY OVERVIEW

INTRODUCTION

Hochschild Mining is a silver and gold mining company with over 40 years of experiencein mining precious metals. It has 3,100 employees, three operating mining assets in

Peru, one advanced mining project in each of Peru, Argentina and Mexico, and one early

stage project in Mexico, Figure 2. The Group was the fourth largest producer of primary

silver in the world in 2005 with production totaling 10.5 million ounces of silver (plus

232,000 ounces of gold) and has seen production expand by 80% over the previous three

years. The company is focused on high-grade, mid-scale underground mining with

production in 2005 recovered from narrow-vein ore grading on average, 373g/t of silver

and 4.98g/t gold. The companys policy is to mine at life of mine grades in all operations

and not to hedge product prices.

Figure 2: Summary of company assets

Asset Status Description Product Start Date OwnershipPERUArcata Mine UG mine. Ag, Au concentrate 1964 100%

Ares Mine UG mine Au, Ag dor 1998 100%

Selene Mine UG mine Ag, Au dor 2003 100%

Pallancatta Advanced Project UG mine Ag, Au dor 2007 60%

Sipn Closed Open pit Au, Ag dor Closed 100%

ARGENTINASan Jos Advanced Project UG mine Au, Ag dor 2007 51%

MEXICOMina Moris1 Advanced Project Mothballed open pit/heap leach Au, Ag dor, Pb-Zn concentrate 20071 70%

San Felipe Medium-term Project UG mine Ag, Pb, Zn, Cu concentrates 2009 70%

1) Mina Moris initially operated between 1996-99 by Minera Manhatten S.A. de C.VSource: Company data

Management has plans to diversify and further increase production in the near term, in

the case of silver by at least 95% through 2009 via a combination of expansions to

existing operations and project development. In addition, the company plans to pursue

value accretive acquisitions, initially with a target value in the range US$150-250

million. This would see the company evolve from its current configuration of 100%

dependence on three Peruvian operations to at least seven separate mines in three

countries where less than 50% of production would be from Peru. With the seven mines

in Figure 2 fully developed, we calculate that the companys share of precious metal

production could double from 24.4 million ounces of silver equivalent in 2005 to more

than 50 million ounces silver equivalent over the next five years.

There also appear to be significant production growth opportunities beyond the seven

mines in Figure 2. The companys development pipeline holds interests in at least 20

other properties, ranging from prospects to defined targets across four countries in Latin

America: Mexico, Peru, Argentina and Chile. Argentina ranks highly in the companys

development plans because of the geological reality of the eastern slopes of the Andes

despite limited past mining activity. Peru, Mexico and Chile on the other hand have

significant and widely documented mining potential.


4/60

4

Hochschild Mining plc 23 January 2007

The company follows three important and differentiating pillars of management

philosophy:

RESPONSIBILITY for safety, the environment and social relationships in thecommunities in which it operates. Concerns such as these have kept the company

out of high risk areas such as Bolivia, Colombia and parts of Venezuela and have

focused management on qualitative measures of responsibility rather than

quantitative measures of expenditure.

EXCELLENCE in all technical aspects of operation from exploration to tailingsmanagement. The companys expertise and efficiency has come from decades of

experience in small-scale, narrow vein mining.

PROFITABILITY derived from its focus on high margin operations which targetcash costs of less than US$2.5/oz of silver equivalent and a capital cost of US$1/oz

silver equivalent of developed reserve. It has posted cash operating margins in the

range of 45-50% of revenue over the last three years, before administration,

exploration and other expenses.

The company listed on the main board of the London Stock Exchange in November 2006as Hochschild Mining plc (HOC), with a free float of 29% of the companys stock, 25% as

new issue plus a further 4% of secondary shares as part of the greenshoe at listing.

Money raised is intended for expansion, development and acquisition and we expect the

companys solid reputation in the region to help add to the expansion opportunities

already in the pipeline.

The company came to market because it saw possible project development opportunities

in the region exceeding its own cash flow. We expect the funds raised to bring forward

planned project development, while in our view, the company is also likely to use its now

publicly traded shares as acquisition currency to enhance organic growth via value

accretive acquisitions consistent with the companys growth strategy.

Reserves and resources

Hochschild Mining estimates its precious metal resources at 221 million ounces of silver

equivalent (3.7 million ounces of gold equivalent) from 3.849 million tonnes of ore with

an average grade of 374gm/t silver and 5.0gm/t gold, Figure 3.

Figure 3: Attributable reserves and resources as at November 2006

Project Reserves Silver Gold Silver eq Gold eq Million ounces Silver equivalent O'ship000t gm/t gm/t gm/t gm/t P & P M & I Inferred R & R %

Arcata 930 462 1.26 538 9 16 19 24 43 100Ares 835 327 12.24 1061 17.7 29 30 1 31 100Selene 799 377 2.56 530 8.8 14 14 5 18 100San Jose 642 418 7.9 892 14.9 19 19 7 26 51Pallancata 643 263 1.09 328 5.5 6 7 15 22 60Moris 10 10 70San Felipe 70 70 70Total 3,849 374 4.99 673 11.2 84 99 122 221

Source: Company data

The company also appears to have a different approach to exploration from many major

mining companies. We believe its long-term and sustained commitment to exploration,


5/60

5


through various commodity price cycles, is an approach best suited to preserving

intellectual capital and building an integrated project portfolio. It is similar to the

commitment made by Rio Tinto, for example, and one that has yielded the company

success across a range of minerals and metals.

Hochschilds approach is to focus on precious metals, in particular deposits with high

grade, and these typically occur as narrow vein deposits. The Andean fault zone alongthe South American plate boundary is a classic environment for such occurrences.

Figure 4: Group production summary

Production 2006e 2007e 2008e 2009e 2010e 2011e 2012eSilver 000 ozs 11,604 13,086 24,123 26,941 28,370 28,370 28,370

Gold 000 ozs 196 206 280 224 207 207 207

Zinc 000 t - - - 36 66 66 66

Lead 000 t - - - 10 19 19 19

Copper 000 t - - - 1 2 2 2

RevenueSilver $000's 132,604 168,169 287,112 292,670 265,981 265,981 265,981Gold $000's 121,279 133,553 174,162 127,794 113,140 113,140 113,140

Zinc $000's - - - 73,479 104,127 89,665 89,665

Lead $000's - - - 10,589 19,000 19,000 19,000

Copper $000's - - - 3,195 4,888 4,213 4,213

Total revenue $000's 253,883 301,722 461,273 507,728 507,135 491,999 491,999

Revenue splitSilver % 52.2 55.7 62.2 57.6 52.4 54.1 54.1

Gold % 47.8 44.3 37.8 25.2 22.3 23.0 23.0

Zinc % - - - 14.5 20.5 18.2 18.2

Lead % - - - 2.1 3.7 3.9 3.9

Copper % - - - 0.6 1.0 0.9 0.9

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

EBITDA $000's 132,561 146,778 245,189 274,081 232,176 211,221 208,069Margin % 52% 49% 53% 54% 46% 43% 42%

Source: Canaccord Adams estimates

With this style of mineralisation, we believe there is little value for investors in life-of-

mine reserve delineation the classic porphyry model for North America, for example.

Hochschilds targeted mineralisation does not lend itself to such a practice while over 20

years of proven reserve and resource replenishment suggests it is unnecessary. For each

of the 15 years since 1990, the companys current practices of reserve delineation have,

on average, more than replaced its expanding production over that period, see

Company Assets section for more details.

The company appears to us to understand an age-old practice in narrow vein mining

drill for structure and drift for grade. By far the majority of the companys mineral

resources have been discovered and delineated from underground operations rather

than from pre-production surface drilling. Further, we consider that Hochschilds

digitised geological database, right down to core storage and sample preparation, reflects

its focus on excellence in all aspects of the operations. This rigorous approach to

exploration supports a more efficient and less subjective approach to target generation,


6/60

6


which, in our view, increases management focus on reserves and resources and, in turn,

enhances cash flow and profitability.

Figure 5: Group financial summary

FYE Dec 2006e 2007e 2008e 2009e 2010e 2011e 2012eSales $000's 253,883 301,722 461,273 507,728 507,135 491,999 491,999

Other income $000's 0 0 0 0 0 0 0

Operating costs $000's 121,322 154,943 216,084 233,647 274,960 280,778 283,930

EBITDA $000's 132,561 146,778 245,189 274,081 232,176 211,221 208,069

D, D & A $000's 19,311 34,007 37,205 57,328 52,141 46,345 43,194

EBIT $000's 113,250 112,771 207,985 216,753 180,034 164,877 164,875

Interest $000's 5,894 -15,861 -14,964 -14,536 -18,362 -23,410 -28,646

Pre tax profit $000's 107,356 128,633 222,948 231,289 198,396 188,286 193,521

Income tax $000's 34,354 41,162 71,343 74,013 63,487 60,252 61,927

Profit from cont.. operations $000's 73,002 87,470 151,605 157,277 134,909 128,035 131,594

Discontinued $000's 0 0 0 0 0 0 0

Minority interest $000's 0 2,770 44,915 53,586 38,486 36,529 37,073

Net profit to shareholders $000's 73,002 84,700 106,690 103,691 96,423 91,506 94,521Shares on issue x mill 307.4 307.4 307.4 3 07.4 307.4 307.4 307.4Earnings per share $/share 0.24 0.28 0.35 0.34 0.31 0.30 0.31

Payout ratio % nmf 30% 30% 30% 30% 30% 30%Dividend per share $/share 0.08 0.10 0.10 0.09 0.09 0.09



7/60

7


VALUATION

Net Asset Value

We have derived a range of values for the net assets of Hochschild Mining plc using a

sum-of-the-parts, net present value based calculation for each of the current and planned

operations, Figure 6, based on a discount rate of 10%. In addition, we have ascribed a

value to all defined targets and prospects not included in our cash flow analysis at a

nominal 20% of the estimated value of producing assets. A total contribution of 20% is

what we believe to be reasonable for up to 25 prospects with similar geological

characteristics to producing assets but with, as yet, limited drill confirmation of

mineralisation. We have not applied a completion risk to the present value of advanced

projects given that they are in the later stages of development and given managements

experience and record of bringing on new projects.

Figure 6: Hochschild Mining net asset value estimate

Net Asset Value SummaryNet Present Values (Attributable): US$M LOW MID HIGH

Arcata (100%) 282 330 379

Selene (100%) 116 128 140

Ares (100%) 209 248 286

Pallancatta (60%) 78 98 118

San Jose (51%) 183 219 255

Mina Moris (70%) 58 73 88

San Filipe (70%) 123 169 215

Defined production 1,048 1,265 1,481Defined targets and prospects @ 20 % 210 253 296Group level and other:

Group G&A -325 -325 -325Current assets Jun '06 107 107 107

Current liabilities Jun '06 -152 -152 -152

Long-term liabilities Jun '06 -92 -92 -92

Net Asset Value US$M 796 1,056 1,316Pre-IPO value with market premium 50 % 1,194 1,584 1,974Cash raised US$M 514 514 514Less IPO expenses 3% -15 -15 -15Post-IPO value with market premium US$M 1,692 2,082 2,472Shares on issue x mill 307.350 307.350 307.350

/Share @ exchange rate of 1.91 2.88 3.55 4.21Source: Canaccord Adams analysis

Our current base-case, net asset value for the company is 3.55/share based on our

commodity price assumptions and a /US$ exchange rate of 1.91, Figure 6. The

commodity price assumptions that underpin this valuation are shown in Figure 7 while

our high and low case valuations in Figure 6 have been derived from a 10% variation

in commodity prices. Our analysis shows our valuation varies by 19% for a 10% change

in the profile of key commodity prices.


8/60

8


Figure 7: Canaccord price assumptions metal prices

2006 2007e 2008e 2009e 2010e 2011e 2012eGold US$/oz 622.60 650.00 625.00 575.00 550.00 550.00 550.00

Silver US$/oz 11.58 13.00 12.00 11.00 9.50 9.50 9.50

Copper $/lb 3.06 2.50 2.18 1.75 1.45 1.25 1.25

Lead $/lb 0.58 0.72 0.54 0.46 0.45 0.45 0.45

Zinc $/lb 1.48 1.88 1.36 0.94 0.72 0.62 0.62

Source: Canaccord Adams estimates, Bloomberg

Some might argue for a lower discount rate than our 10% per annum given that more

than 70% of the companys revenue is derived from gold and silver both a natural

hedge against inflation and seen to be a store of value in more difficult economic times.

An 8% discount rate against our estimated project cash flows would deliver a value for

the company of 3.88/share compared to our mid-point 3.55/share at a 10%pa discount

in Figure 6, while a 5% per annum discount rate would deliver a value of 4.48/share.

Market pricing on sector-average comparables

We believe a single-point, present day NAV calculation masks potential underlying

growth in a stock. We consider that the process simply delivers a value at a point in time

and an opportunity for short-term investors to close out any market mis-pricing. We

suggest it is more helpful to show investors how we believe potential value accrues over

time from expanding production, earnings, cash flows and the PV of residual cash flow

after capital has been invested.

Figure 8 presents such parameters for Hochschild Mining out to 2012 based on market

average multiples, see Market Position in this report, but with production restricted to

just the seven current and sanctioned operations in Figure 6. Clearly, we would expect

upside potential from other new projects and potential acquisitions:

We price production at US$65/oz for an estimate of EV, after consideration of othergold and silver producers, Figure 37;

EBITDA is priced at 15 times also as an estimate of EV, with 15 being more or lesscomparable to other silver and gold producers, Figures 39 and 40;

We price earnings at 25 times as an estimate of market capitalisation with 25 beingthe average of a suite of comparable silver and gold producers.

We suggest it is appropriate to include multiples of EBITDA and earnings for gold

companies as we are comparing income in US$ and not metal production, and for

Hochschild in 2007, we expect gold revenue to account for more than 40% of revenue


9/60

9


Figure 8: Market valuation of Hochschild Mining

US$ M 2006e 2007e 2008e 2009e 2010e 2011e 2012eSilver prod'n Koz 11,604 13,086 24,123 26,941 28,370 28,370 28,370

Gold prod'n Koz 196 206 280 224 207 207 207

EV/Prod'n 65 617 1,327 2,039 2,351 2,563 2,672 2,774EV/EBITDA 15 1,852 2,678 4,148 4,711 4,202 3,996 4,051PE Ratio 25 1,825 2,117 2,667 2,592 2,411 2,288 2,363NAV+premium US$M 1,531 2,504 2,471 2,659 2,701 2,786 2,870

Average US$M 1,456 2,157 2,831 3,078 2,969 2,935 3,014Per share /share 2.48 3.67 4.82 5.24 5.06 5.00 5.13


The average valuation for Hochschild Mining based on the four m ethods for 2007E is3.67/share, on our num bers, rising to 4.82/share for 2008.It is important to note that our analysis also shows that expected growth in this company

from existing projects only, can offset our expected decline in gold and silver to

US$550/oz and US$9.50/oz respectively by 2010, and support a value for the company at

around 5.00/share over the next five years, Figures 8 and 9.

Figure 9: Value growth in Hochschild Mining (2006E-2012E)

0.00

2.00

4.00

6.00

8.00

10.00

2006e 2007e 2008e 2009e 2010e 2011e 2012e

Market

value(/share)


In our opinion, this ability to offset the effect of declining commodity prices points to

significant possible upside in value for the shares if precious metal prices maintaincurrent levels or even appreciate further as some forecasters suggest.

If current precious metal prices were maintained then our 3.67/share valuation for

2007 would become 3.99/share, rising to 6.98/share by 2010 based on this

methodology.


10/60

10


Pricing for growth

We expect Hochschild Mining to enjoy substantial production growth to 2009 from

existing projects on our numbers almost a 100% lift in terms of silver output over the

next three years assuming the new projects come on stream and existing projects are

expanded to full potential, Figure 8. This production growth is not as spectacular as that

which we see in say, Yamana Gold (AUY: BUY) or Peter Hambro Mining (POG: BUY),

Figure 11, but on our estimates it is stronger than the average of other gold and silver

producers. Based on a 28% per annum expansion in sliver output from 2006 to 2009

we estimate a PEG ratio of 0.92 for Hochschild, which suggests to us that at a PE of 28

times 2007E earnings, the stock does not look expensive, see Figure 10.

Figure 10: Growth ratio analysis for silver producers

Company Ag equiv (Koz ) Growth % pa P/E EV/EBITDA PEG Ratio2006E 2009E 2006E-09E 2007E 2007E

Pan American Silver 24,000 30,000 8 15x 17x 1.93

Coeur d'Alene Mines(1) 22,000 35,900 18 15x 9x 0.87

Hecla Mining(1) 22,000 22,000 - 28x 9x na

Hochschild 23,348 48,839 28 28x 13 0.92Source: Canaccord Adams estimates, 1. First Call, Datastream

As an aside, neither Yamana Gold nor Peter Hambro Mining appear expensive on our

numbers either compared to their peers given the production growth we estimate is on

offer. PEG ratios of 0.31 and 0.63 respectively, based on our production growth

estimates, would seem to support our claim, Figure 11. At a PEG ratio of 0.92,

Hochschild Mining is second only to Yamana and Peter Hambro Mining in terms of

attractively priced growth potential, on our estimates.

Figure 11: Growth ratio analysis for gold producers

Company Au equiv (Koz) Growth% pa P/E EV/EBITDA PEG Ratio2006E 2009E 2006E-09E 2007E 2007E

Barrick Gold 8,777 8,725 (0.1) 17x 9x na

Buenaventura(1) 8x 10x na

Goldcorp 1,650 2,509 15 27x 18x 1.82

Hochschild 389 814 28 28x 13x 0.92Kinross 1,450 1,876 9 22x 13x 2.49

Meridian 296 361 7 27x 16x 3.95

PeterHambro 256 1,069 61 38x 25x 0.63

YamanaGold 313 800 37 11x 50x

Source: Canaccord Adams estimates, 1. First Call, Datastream


11/60

11


Cash flow valuation

Figure 12: Net cash flow and projected share price

0

100,000

200,000

300,000

400,000

500,000

2006e 2007e 2008e 2009e 2010e 2011e 2012e

0.0

2.0

4.0

6.0

8.0

10.0

Net cash flow US$000 (LHS) /share FD (RHS) 8x 12x


We also price Hochschilds shares on a multiple of net cash flow from operations.

Figures 12 and 13 show our estimates of Hochschilds cash flow from operations with a

8% CAGR over the six years under review from US$149.7 million in 2006 to US$237.6

million in 2012, in spite of our expectations of declining commodity prices.

We have priced the stock each year to 2012 at 10 times cash flow for that year and

added the previous years cash balance. We suggest a multiple of 10 is appropriate given

Hochschild is primarily a silver producer, which as a precious/industrial metal places itbetween base metal producers that trade around 8 times and platinum producers that

trade around 12 times net cash flow. Based on our estimate of US$164.4 million as cashflow from operations in 2007 and a cash balance of US$518 m illion at year end 2006,we estimate an appropriate market price for Hochschild Mining at 3.68/share, Figure13 . Subsequent to raising $514 million in November 2006, we estimate IPO expensesabsorbed $15 million while the company reduced debt by $40 million.

Figure 13: Net cash flow and projected share price

Unit 2006e 2007e 2008e 2009e 2010e 2011e 2012eCash flow from operations US$000's 149,667 164,426 232,904 261,666 251,006 241,593 237,557

Priced at multiple of fwd cash flow US$000's 1,496,674 1,644,256 2,329,044 2,616,656 2,510,056 2,415,928 2,375,565Cash balance US$000's 518,001 696,321 829,140 1,019,553 1,241,563 1,463,065 1,671,636

Exchange rate US$/ 1.91 1.91 1.91 1.91 1.91 1.91 1.91

Value per share /share 2.55 3.68 5.15 5.87 6.01 6.23 6.54Source: Canaccord Adams estimates


12/60

12


Conclusion

In summary, the three valuation methods have delivered indications of a current market

price for the stock in the range 3.55 - 3.68 per share. At the low end of the range is our

NAV for the company at 3.55/share based on declining commodity price projections but

note that the methodology also indicates a value of 4.80/share if current precious metal

prices are carried forward or 4.21/share with a commodity price profile just 10%

higher than we are forecasting.

Near the top end of the range is a current market value of 3.67/share based on

comparable market parameters - the market value of production, EV/EBITDA and price/

earnings multiples a method which also suggests a comparable market price in 2008 of

4.82/share.

Also at the top end of our valuation range we have a current market price of 3.68/share

based on a multiple of 10 times 2007E cash flow from operations, rising to 5.15/share

based on 2008E cash flow.

Although the current price for Hochschild Mining stock at 3.95/share may have

captured a little of the underlying future growth that we see in this company, we suggesta market price of 4.50/share during 2007 can be justified on the basis of value that we

believe is yet to be extracted from existing operations and projects.


13/60

13


APPLICATION OF FUNDS

Figure 14: Use of proceeds

Maximising Existing Operations of next 5 years US$M 140Expenditure by Operation % Subtotal

Arcata 40% 56

Ares 30% 42

Selene 30% 100% 42 140

Expenditure by UtilisationMining Development 80% 112

Plant, Property, Equipment 20% 100% 28 140

Timing of expenditureFirst 2 years 35% 49

Following 2 years 55% 77

Remainder 10% 100% 14 140

Growth of Project Pipeline US$M 250Expenditure by Project % Subtotal

San Jos 40% 100San Felipe /Moris Mine 45% 113

Pallancata 15% 100% 38 250

Expenditure by UtilisationMining Development 40-50% 100-125

Plant, Property, Equipment 50-60% 100% 125-150 250

Timing of expenditureFirst 2 years 70% 175

Remainder 30% 100% 75 250

Repayment of Debt US$M 40Acquisitions & Additional Growth Remaind er

UtilisationTwo Feasibility Studies

Further exploration studies in South America

Strategic acquisitions where opportunities arise

Source: Figures in grey shading from Company presentation, Others Canaccord Adams estimates

INVESTMENT RISKS

The following comprise risks to our target price and rating.

Mining riskWe note that Hochschild Mining is ISO 14001 certified on all its mines. However, there areinherent dangers associated withunderground, narrow vein mining. Extraction is difficultand the process is carried out in an environment that is not always predictable. Whilst themanagement team and mine operators may be effective in identifying risks and well able to

take measures in order to mitigate them, it is impossible to remove the possibility of an

unexpected event occurring that could impact on the operation of a mine. There are alsorisks associated with the use of mining contractors for operations, although the company

employs a number of mining contracting companies and is not over reliant on one company.


14/60

14


Reserve and resource risk

Hochschilds proven and probable reserves have been reviewed by an independent

consultant and are compliant with the Joint Ore Reserves Committee (JORC). Based on

the companys historical track record and taking into account the type of deposit, our

analysis assumes production beyond the current reserve base. We recognise the

companys reserve replacement program has more than replaced production of the past20 years; however this past success does not guarantee reserve replacement in the

future. There are therefore risks associated with replacement of reserves.

Development risk

A proportion of the companys value lies in the development of new projects which carry

a completion risk. Delays in the development schedule or increases in capital

requirements for example, may negatively impact our suggested valuation range.

Country risk

There are risks associated with unforeseen political intervention, such as an increase in

royalties, restriction on business practices, changes in permitting legislation or

expropriation of mineral assets and operations. Following a year of elections, some

investors may feel increasing uncertainty over the changing political face of LatinAmerica, particularly those whom perceive a movement towards the left and are wary of

nationalisation. We note that Peru has a democratic government, recently voting in a

moderate-left politician Alan Garcia as President over the more extreme Peruvian

Nationalist Party. In Mexico, leader of the conservative National Action Party Felipe

Calderon was declared winner of presidential elections in July 2006, with victory over

his left-wing rival and in Argentina, the current government, led by left-leaning Nestor

Kirchner, has been in power since 2003. Although much improved, all three countries

have some history of social unrest and there are risks associated with the transition to a

new government.

Economic risk

Our suggested valuation range is impacted by our long-term price assumptions for silver,

gold, copper, lead and zinc. We have indicated the impact of price on our valuation

using low, medium and high price scenarios (Valuationsection). Our net present value

calculation assumes a discount rate of 10% per annum; however should the weighted

average cost of capital differ our estimated value range would also change. Peru

experienced high inflation rates, exchange rate instability in the 1980s and 1990s and

Argentina fell into deep recession and economic collapse in 2001. A re-occurrence of

these environments could impact our valuation range.


15/60

15


COMPANY HISTORY

The Hochschildname is synonymous with mining in South America. The Group was

founded in Chile nearly 100 years ago, with operations largely focused on the

commercialisation of some of the worlds largest mines in Chile. The company expandedinto Bolivian tin mining following World War II and later acquired Mantos Blancos in Chile

during the 1970s; this was subsequently sold to Anglo American in 1984 along with most

of the Groups other South American operations.

Luis Hochschild (father of the current CEO Eduardo Hochschild) in the same year that all

South American operations were sold to Anglo American, bought back the Peruvian

operations. The Arcata mine in Peru, which commenced production in 1964, is still

operated by the company today. Eduardo Hochschild became head of Hochschild Mining

in 1998 and under his guidance the company began extensive exploration on its prospects

in Peru. Mining commenced at Sipn in 1997 followed by commissioning of the Ares

sliver-gold mine in 1998 while the Selene operation commenced in 2003.

In 2001, the Group began building its project portfolio and extending its asset base outsidePeru. It opened an exploration office in Mexico, followed by further offices in Argentina

and Chile in 2003 and 2004 respectively.

CORPORATE STRUCTURE

Figure 15: Company structure Post-IPO

Source: Company data

CompaiaMinera

Coriorco

Arcata

(Per)

Ares

(Per)

Sipn

(Per)

MH Argentina(Argentina)

Minera SantaCruz

(Argentina)

MineraHochschild

(Mxico)

MH Chile

(Chile)

Per

Hold co

MH Nevada

(Delaware)

Mxico

Hold co

Chile

Hold co

Argentina

Hold co

UK plc

UK Hold co

100%100% 100% 100% 100% 51% 100% 100%

100% 100% 100%100%100%

100%

CompaiaMinera

Suyamarcs

60%


16/60

16


DIRECTORS AND MANAGEMENT

Eduardo Hochschild - Executive Chairman

Eduardo Hochschild joined the Hochschild Mining Group in 1987. He was head of the

Hochschild Mining Group between 1998-2006 and has been Executive Chairman since

2006. He holds directorships with Banco de Crdito del Peru, Compaa de Seguros ElPacfico, Asian Pacific Economic Council Business Advisory Committee, Sociedad Nacional

de Minera y Petroleo, COMEX, Patronato Universidad Nacional de Ingeniera y de la

Universidad de Ciencias Aplicadas, TECSUP & Conferencia Episcopal Peruana.

Mr.Hochschild also holds a B.Sc. degree in Physics and Mechanical Engineering from Tufts

University, USA.

Alberto Beeck - Executive Director

Alberto Beeck joined the Hochschild Mining Group in 1998. Previously he served as

Managing Director and Head of Latin American Investment Banking for Barings, Inc. in

New York and Baring Brothers in London (1992-97), Vice President of Dillon, Read Ltd

(1988-92) and Vice President of Lehman Brothers, Inc. (1982-88). Mr. Beeck holds a B.Sc.

degree in Mechanical Engineering from Purdue University, and an MBA in Finance and

International Business from Columbia University.

Roberto Daino - Executive Director

Roberto Daino joined the Hochschild Mining Group in1995, where he remained until

2001. Since 2001 he has held positions as Senior Vice President and General Counsel of

the World Bank Group (2003-06), Prime Minister of Peru (2001-02) and Ambassador to the

United States (2002-03). Previously he was a partner at Wilmer, Cutler & Pickering and

Rogers & Wells and Chairman of the firms Latin American Practice Groups (1993-2001)

and Founding General Counsel of the Inter-American Investment Corporation (1989-93).

Mr. Daino holds an SJD (abd) and LLM from Harvard Law School and JD from the

Pontificia Universidad Catlica del Peru.

Miguel Aramburun - General Manager, Mining Division

Miguel Aramburun joined the Hochschild Mining Group in 1995 as General Manager of

Compaa Minera Pativilca. He has been General Manager of the Hochschild Mining

Group since 2006. He was Chief Financial Officer of the Hochschild Mining Group (2002-

05) and Mr. Aramburun holds an MBA from Stanford University and BA Industrial

Engineering, from Pontificia Universidad Catlica del Peru.

Jorge Benavides - General Manager, Exploration and Geology Division

Jorge Benavides joined the Hochschild Mining Group in 2001 as Exploration and Geology

Manager. He has nearly 30 years experience in the mining industry, including with Phelps

Dodge Mining Company in South America. Mr. Benavides holds a MSc. from StanfordUniversity and a B.Sc. in Geological Engineering from the Colorado School of Mines.

Ignacio Rosado - Chief Financial Officer

Ignacio Rosado has been CFO of the Hochschild Mining Group since 2005. Previously he

has held positions as a Senior Engagement Manager, McKinsey & Company (2000-05),

Project Manager at Banco de Crdito del Peru (1995-96) and Corporate Banker at Banco

Wiese (1993-94). Mr. Rosado holds an MBA from the University of Michigan Business

School and a B.Sc. in Economics from the Universidad del Pacfico del Peru.


17/60

17


COMPANY ASSETS

Hochschild Mining owns and operates three silver-gold underground mines in southern

Peru, Arcata, Ares and Selene, which produced 10.5 million ounces of silver and 232.6

thousand ounces of gold during 2005. The company also has a majority interest in two

advanced development projects, San Jos in Argentina and Pallancata in Peru plus two

early-stage development projects in Mexico, Moris and San Felipe. In addition the

company has long-term prospects throughout Latin America (Figure 16).

Figure 16: Company projects

Producing assets

Projects

xResource delineation

Development

Legend

Mine

Target definition

Prospect

Producing assets

Projects

xResource delineation

Development

Legend

Mine

Target definition

Prospect

San Felipe

Mina Moris

El Pino

La Enramada

Las Tortugas

Pocito

Sierra Mojina

San Luis del Cordero

Caldern

Pozos

Julia

Paracoya

Cerro Blanco

Quevar

AmbargastaSierra de las Minas

Puesto Chacn

San Jos

xFronteraParaiso

Ares Mine

San MartnMinaspataAzuca

TincosSan Andrs

PallancataCerro Blanco Arcata MineSelene Mine

Tacna

x

Source: Company presentation

PERU

Peru is central to the companys current production capabilities. All three operating mines

owned by the company are located in close proximity in Southern Peru while Pallancata,

one of the advanced development projects, is adjacent to the Selene mine and thus offers

synergy benefits. The properties lie between 4,600-5,000 metres above sea-level in the

Puquio-Cayollma Belt and all the deposits display similar mineralisation characteristics.

Arcata and Selene each produce a silver concentrate with contained gold, while Ares

produces a refined silver-gold dor. The Selene mine has been producing dor since

October 2006 and thus retaining more downstream value from its mined products.

The company also owns the Sipn mine, which closed in 2004, and holds rights for eight

other prospects in Peru, including San Martin, located between Arcata and Selene.

Hochschild also previously owned the Caylloma silver mine, but sold the property to

Fortune Silver Mines in June 2005.


18/60


19/60

19


In Peru, the company has a strategy of exploring new ground within the concession area

and adjacent to mines, often the best place to find additional resources. Preliminary work

is typically undertaken with long surface drill holes to define an inferred resource the

company currently has several contracted diamond drill rigs around the Peruvian

operations.

In our view, the ability of the company to more than replace production with reservesconsistently over the last 15 years goes some way towards mitigating any risk that might

be attributed by some to a relatively short life-of-mine proven reserve. We note the

company has more than replaced production year-on-year since production of the mines

began, Figure 18. On average, over all of the companys operations since mining began,

the company has replaced 37% of total reserves by new reserves each year. With a three

year proven reserve, the company has produced 33% of its reserves each year while

adding 37% of its proven reserve.

Figure 18: Reserve replacement (LHS: Ore in Kt, RHS: Life of mine in years)

Arcata Ares Selene

-500

0

500

1000

1500

2000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Ore ( '000tonnes)

-2.0

0.0

2.0

4.0

6.0

8.0

Life of Mine(Yrs)

Resources Production Reserves LOM -400

-200

0

200

400

600

800

1000

1200

1990 1992 1994 1996 1998 2000 2002 2004 2006

Ore ( '000tonnes)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Life of Mine(Yrs)

Production Resources Reserv es LOM -400-200

0

200

400

600

800

1000

1200

1990 1992 1994 1996 1998 2000 2002 2004 2006

Ore ( '000tonnes)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

L i fe of Mine(Yrs)

Pr od uct ion Res ourc es R ese rv es LOM Source: Company data, Canaccord Adams

Our valuation of these mining assets is based partly on the life-of-mine discounted cashflow. Given the companys long history of replacing reserve ounces, in most cases we haveassumed a longer life-of-mine in our analysis than the current reserve statements wouldsuggest.

Figure 19: Peru Proven and probable reserves (as at June 2006)

Reserves (Kt) Ag Au Ag Ag eq.Proved Probable Total (g/t) (g/t) mm oz Mm oz

Selene Mine 763 37 799 377 3 10 4

Aracata Mine 647 283 930 462 1 14 2

Ares Mine 642 193 835 327 12 9 20

Pallancata Project - 643 643 263 1 5 1

Total 2,052 1,156 3,207 366 4 38 27We note that since 1999, the company has applied the JORC classification system to delineate its reserves.Prior to this, a Peruvian system was applied and this has resulted in some variation in the historical averageLOM of reserves.Source: Company reports


20/60

20


Arcata Mine

Arcata is located in the Arequipa region of Peru, 800km from Lima, at an altitude of 4,400

metres and is 100% owned by Hochschild. The mine commenced production in 1964 and

production has averaged 4.3 million ounces of silver and 6.5 thousand ounces of gold per

year since 2003.

Three vein systems (The Mariana, Ramal 2 and Macarena) are currently being mined byconventional, trackless cut-and-fill breast or overhand stoping methods with timber

supports. The veins have a minimum mining width of 0.8 metres and maximum of 3.0

metres. Each orebody has been accessed via discrete inclines and ramps to a depth of 500

metres. Ore is loaded from passes into 22t haulage trucks distances to the plant are

between 4.5km and 5km depending on the system.

The processing facilities at Arcata have a capacity of 350ktpa of ore following an expansion

from 280ktpa in 1980. Two further expansions are planned, with throughput expected by

the company to increase to 420ktpa in January 2007 for a minimum of capital, perhaps as

little as US$200,000 and then expand by a further 25% to approximately 530ktpa in 2009

for a cost of US$10 million. Processing consists of a conventional crushing, grinding and

flotation circuit which produces a silver concentrate, containing approximately 400oz/t of

silver and gold in concentrate. Processing recoveries are relatively low compared to the

other two operations (~88.5% Ag and 83.5% Au) due to arsenic in the ore. We estimate

ongoing sustaining development of approximately US$6.0 million per annum, but we

expect full operating costs to fall from US$55/t at current throughput of 350ktpa to US$48/t

when fully developed at 530ktpa. Further detail is shown in Figure 21.

Figure 20: Arcata mine



21/60

21

23January2007

Ho

chschildMiningplc

Figure21:Arcataforecas

tassumptionsandeconomicanalysis

0246810

12

2003

2004

2005

2006

2007

2008

2009

2010

00.5

11.5

22.5

33.5

44.5

5

EquivSilverProduction(Moz)-LHS

TotalCashCost($/ozAg-RHS

GrossSalesRevenue

Silver

Gold

Mining

Sales

OperatingCost

s

Valuation

Mineclosure

year

2025

Smeltingconc

$/t

conc

112.5

Admin

$

/t

5

Ds

Re

NUM)

Recoverysilver

%

89%

RefiningAg

$/o

z

0.3

0

Genservices$

/t

11

5%

453

$

Recoverygold

%

84%

RefiningAu

$/o

z

6.0

0

Plant

$

/t

4

8%

371

$

Saleproduct%conc

%

100%

Freight&Ins

$/k

gdore

0.0

0

Mine

$

/t

26

10%

330

$

Concentrategrade

oz/t

400

Payablesilver

%

97.0

%

Geology

$

/t

2

12%

296

$

Payablegold

%

96.0

%

TotalOpCost$

/t

48

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Annualthroughput

000

'st

314

350

420

530

530

530

530

530

530

530

530

530

530

Silverproduction

000'soz

4,7

54

4,5

81

5,6

40

8,1

43

7,5

40

7,5

40

7,5

40

7,5

40

7,5

40

7,5

40

7,5

40

7,5

40

7,5

40

Goldproduction

000'soz

12

12

15

24

23

23

23

23

23

23

23

23

23

Cashcosts

$/oz

Ag

4.0

7

4.5

9

4.0

1

3.5

4

3.6

9

3.6

9

3.6

9

3.6

9

3.6

9

3.6

9

3.6

9

3.6

9

3.6

9

Cashcosts

$/oz

Au

219

230

209

185

214

214

214

214

214

214

214

214

214

Netsales

$00

0's

56,4

76

61,5

43

69,7

34

93,4

06

75,2

99

75,2

93

75,2

88

75,2

85

75,2

84

75,2

82

75,2

82

75,2

81

75,2

81

Cashoperatingcosts

$00

0's

17,2

53

19,2

50

20,1

60

25,4

40

25,4

40

25,4

40

25,4

40

25,4

40

25,4

40

25,4

40

25,4

40

25,4

40

25,4

40

EBITDA

$00

0's

39,2

23

42,2

93

49,5

74

67,9

66

49,8

59

49,8

53

49,8

48

49,8

45

49,8

44

49,8

42

49,8

42

49,8

41

49,8

41

EBIT

$00

0's

31,1

38

34,0

27

40,3

52

58,9

96

41,9

29

42,5

98

43,0

33

43,3

15

43,4

99

43,6

18

43,6

96

43,7

46

43,7

79

NetProfit

$00

0's

20,5

54

22,4

62

26,6

36

38,9

43

27,6

78

28,1

19

28,4

06

28,5

93

28,7

14

28,7

93

28,8

44

28,8

77

28,8

99

Capex

$00

0's

6,2

00

11,0

00

11,0

00

6,0

00

6,0

00

6,0

00

6,0

00

6,0

00

6,0

00

6,0

00

6,0

00

6,0

00

6,0

00

Projectcashflow

$00

0's

22,4

39

30,7

27

35,8

59

47,9

13

35,6

08

35,3

74

35,2

22

35,1

23

35,0

58

35,0

17

34,9

89

34,9

72

34,9

60

Source:Companyreports,

Cana

ccordAdamsestimatesfor2006-2018


22/60

22


Ares Mine

The 100% owned Ares concession was discovered in 1988 following interpretation of

aerial photography and covers over 22,700 hectares. In the early 1990s, geological

mapping, geochemical mapping, surface drilling and subsequent underground drilling

were undertaken. By 1995, at least two vein systems had been defined, including the

Victoria Vein, now being mined, and the Tanis Vein.

Mineralogy of the Ares ore is significantly different from both Arcata and Selene in that it

contains a much higher abundance of gold relative to silver. The operation was

commissioned in 1998 and produced 3.1 million ounces of contained metal in dor

during 2005 (2.9 million ounces of silver and 199 thousand ounces of gold).

The Victoria Vein system has a minimum designed mining width of 0.8 metres, a

maximum width of 15 metres and averages 2.13 metres in thickness. As with Arcata,

each system is accessed via discrete inclines which are connected underground to a

depth of 275 metres below surface. A conventional trackless cut-and-fill breast or

overhand stoping mining method is utilised. The ore is loaded from ore passes in to 22t

trucks and hauled 4km and 5km depending on the system. Dilution at Ares is

comparatively low at 10% or less owing to the competent wall-rock.

Ore is delivered to an on-site cyanide leaching plant which feeds pregnant solution to

Merril Crowe plant to produce dor; recoveries being achieved are approximately 93%

for silver and 96% for gold. The plant is currently operating at 280ktpa of ore, however

the company plans to increase throughput to 325ktpa in 2007, little more than a de-

bottlenecking exercise. We expect production to decrease slightly from current levels as

silver grades fall from around 410g/t to below 250g/t over the long-term, Figure 21.

We estimate sustaining development at this mine will be approximately US$3.5 million

per annum while we expect operating costs to remain relatively constant around current

levels of US$68/t of mill feed. Further detail is shown in Figure 23.

Figure 22: Ares mine



23/60


24/60

24


Selene Mine

The Selene mine is 100% owned by the company and is located in Cotanuse District,

650km from Lima and at an altitude of 4,600 metres above sea-level. Operations

commenced in November 2003.

The deposit is associated with a 5-6km geological structure interpreted as a collapsed

caldera and the concession area itself covers an area of 19,540 hectares. The regional

structure hosts the Explorador-Tumiri-Aycha vein system and these mineralised zones

are currently the focus of mining and development. The mining method at Selene is

similar to the other Peruvian underground operations, utilising standard cut-and-fill

overhand stoping. Current workings are at a depth of 350km below surface and haulage

distances from stope to plant are approximately 1.3km.

Mineralised veins are relatively thin; in the Explorador system, thicknesses range from

0.8-5.0 metres and average around 2.0 metres. However, the ore body benefits from a

relatively competent host rock, reducing the risk of excessive dilution and based on

historical mining, a dilution factor of 10% is a reasonable assumption.

The processing plant is similar to that at Arcarta, following a standard crushing,

screening, grinding and flotation route to produce a silver-gold bulk concentrate.

However, since October 2006 concentrate from Selene has been treated at Ares to

produce dor. As such, the company has been gaining access to more of the value chain

from its metal production and benefiting from a reduction in working capital by virtue of

the reduced metal in inventory.

The Selene mine and concentrator currently have capacity of 350ktpa, however the

company plans to expand the plant to 700ktpa in 2007 so as to be able to treat 350ktpa

of ore from the nearby Pallancata project due for production from 2007. The plant will

then be expanded a further 180ktpa to 880ktpa so as to accommodate an expansion of

the Selene mining operation from 350ktpa to 530ktpa. We estimate the total cost of the

plant expansion at US$10 million, half of which will be allocated to the development cost

of Pallancata.

We estimate sustaining development at the Selene mine will be approximately US$3.0

million per annum while we expect operating costs will fall 13% from US$44/t of mill

feed in the current configuration to US$38.6/t when fully developed in 2010. Further

detail is shown in Figure 25.

The Selene mine pays a 2% NSR royalty as a carried-interest royalty to its previous

owners but will benefit from the economies of scale through the plant when Pallancata

comes on stream from 2007.

Figure 24: Selene Mine



25/60

25

23January2007

Ho

chschildMiningplc

Figure25:Seleneforecastassumptionsandeconomicanalysis

01234567

2003

20

04

2005

2006

2007

2008

2009

2010

0123456

EquivSilverProduction(Moz)-LHS

TotalCashCost($/ozAg-RHS

GrossSalesRevenue

Silver

Gold

Mining

Sales

OperatingCost

s

Valuation

Mineclosure

year

2025

Smeltingdore

$/k

g

6.1

1

Admin

$

/t

5.6

Ds

Re

NUM)

Recoverysilver

%

91%

RefiningAg

$/o

z

0.7

5

Genservices$

/t

7

5%

170

$

Recoverygold

%

87%

RefiningAu

$/o

z

0

Plant

$

/t

7

8%

142

$

Saleproduct%conc

%

0

Freight&Ins

$/k

gdore

7

Mine

$

/t

16

10%

128

$

Concentrategrade

oz/t

1000

Payablesilver

%

99.8

5%

Geology

$

/t

3

12%

116

$

Payablegold

%

99.7

5%

TotalOpCost$

/t

38.6

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Annualthroughput

000

'st

360

180

180

180

180

180

180

180

180

180

180

180

180

Silverproduction

000'soz

4,1

62

1,9

22

1,9

17

1,6

32

1,6

85

1,6

85

1,6

85

1,6

85

1,6

85

1,6

85

1,6

85

1,6

85

1,6

85

Goldproduction

000'soz

28

13

13

7

3

3

3

3

3

3

3

3

3

Cashcosts

$/oz

Ag

2.8

3

3.0

8

2.7

1

3.4

8

3.8

0

3.8

0

3.8

0

3.8

0

3.8

0

3.8

0

3.8

0

3.8

0

3.8

0

Cashcosts

$/oz

Au

152

154

141

182

220

220

220

220

220

220

220

220

220

Netsales

$00

0's

60,7

71

30,3

77

27,7

86

19,5

20

14,9

86

14,9

82

14,9

79

14,9

77

14,9

76

14,9

75

14,9

75

14,9

75

14,9

74

Cashoperatingcosts

$00

0's

16,0

42

7,9

20

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

6,9

48

EBITDA

$00

0's

44,7

29

22,4

57

20,8

38

12,5

72

8,0

38

8,0

34

8,0

31

8,0

29

8,0

28

8,0

27

8,0

27

8,0

27

8,0

26

EBIT

$00

0's

39,8

29

16,4

72

15,0

23

7,7

42

3,8

49

4,2

61

4,5

29

4,7

03

4,8

16

4,8

89

4,9

37

4,9

68

4,9

89

NetProfit

$00

0's

26,2

91

13,5

73

15,3

06

10,4

99

7,9

29

8,2

02

8,3

78

8,4

93

8,5

68

8,6

17

8,6

48

8,6

69

8,6

82

Capex

$00

0's

8,0

00

8,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

Projectcashflow

$00

0's

23,1

91

19,5

58

21,1

21

15,3

29

12,1

19

11,9

75

11,8

81

11,8

20

11,7

80

11,7

55

11,7

38

11,7

27

11,7

20

Source:CanaccordAdamsestim

atesfor2006-2018


26/60

26


Pallancata Project

In June 2006, Hochschild signed a joint venture agreement with International Minerals

Corporation (a TSX listed company) for 60% ownership of the Pallancata project with

Hochschild as the operator. The deposit is located approximately 17km from the Selene

mine and is considered to be part of the same mineralised structure. Old colonial

workings are found in the concession area and current reserves of 643,267 tonnes at263g/t silver and 1.09g/t gold are associated with a mineralised vein system stretching

over 2km along strike. Beyond the current resource, hosted by the West Breccia

structure, surface sampling programmes at more workings to the north have returned

promising results and constitute future exploration targets. The company intends to use

Pallancata ore to supplement feed to the Selene concentrator as the plant undergoes

expansion. The current mine plan envisages mining methods similar to the other

Peruvian operations; trackless cut-and-fill and overhand stoping. Mining widths will

range between 0.8-25 metres, averaging five metres. Three stopes are scheduled to

rotate in the production cycle and ore will be loaded on to 22t trucks and transported

directly to the primary crusher at Selene mine.

Initial construction permits were granted in August 2006 with first production scheduled to

commence in 2007. The total capital expenditure requirement will be US$10.5 million

being the JV share of the plant expansion at Selene plus approximately US$3.0 million per

annum for ongoing development. Costs for transporting ore from the mine to the plant at

Selene are estimated by us to be US$5/t of ore and this is included in the total estimated

operating cost of US$52/t of ore milled, which includes a management fee for the JV

operation of 10% of all generating costs to Hochschild Mining. The Selene operation should

also benefit from a processing margin on ore treated at the expanded Selene mill, which we

estimate will be US$11/t of ore above the cash cost of ore processing.

Figure 26: Pallancata development project


Other prospects

The company also holds rights to eight other targets in Peru, including the San Martin

prospect which lies between Arcata and Selene. Other prospects include La Colorada,

Tincos, Minaspata Azuca, Cerro Blanco, San Andrs, Frontera and Paraso. There is also

further exploration potential at the companies, with a number of new vein systems

targeted for development.


27/60

27

23January2007

Ho

chschildMiningplc

Figure27:PallancataPro

jectassumptionsandeconomicanalys

is

Mining

Sales

OperatingCost

s

Valuation

Mineclosure

year

2025

Smeltingdore

$/k

g

6.1

1

Admin

$

/t

4.7

Ds

Re

NUM)

Recoverysilver

%

0.9

1

RefiningAg

$/o

z

0.7

5

Genservices$

/t

5

5%

141

$

Recoverygold

%

0.8

7

RefiningAu

$/o

z

-

Plant

$

/t

18

8%

113

$

Saleproduct%conc

%

0

Freight&Ins

$/k

gdore

7

Mine

$

/t

20

10%

98

$

Concentrategrade

oz/t

400

Payablesilver

%

99.8

5%

Geology

$

/t

4

12%

87

$

Payablegold

%

99.7

5%

TotalOpCost$

/t

51.7

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Annualthroughput

000

'st

0

125

520

520

520

520

520

520

520

520

520

520

520

Silverproduction

000'soz

0

784

3,9

55

3,9

55

5,4

77

5,4

77

5,4

77

5,4

77

5,4

77

5,4

77

5,4

77

5,4

77

5,4

77

Goldproduction

000'soz

0

3

16

16

20

20

20

20

20

20

20

20

20

Cashcosts

$/oz

Ag

0.0

0

12.0

7

5.6

2

5.6

2

4.0

5

4.0

5

4.0

5

4.0

5

4.0

5

4.0

5

4.0

5

4.0

5

4.0

5

Cashcosts

$/oz

Au

0

604

293

294

234

234

234

234

234

234

234

234

234

Netsales

$00

0's

0

11,3

13

52,5

65

47,8

62

56,5

13

56,5

12

56,5

11

56,5

10

56,5

10

56,5

10

56,5

10

56,5

10

56,5

10

Cashoperatingcosts

$00

0's

0

11,3

09

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

26,8

84

EBITDA

$00

0's

0

4

25,6

81

20,9

78

29,6

29

29,6

28

29,6

27

29,6

26

29,6

26

29,6

26

29,6

26

29,6

26

29,6

26

EBIT

$00

0's

0

-4,1

96

21,9

01

17,4

71

26,2

99

26,4

14

26,4

88

26,5

36

26,5

67

26,5

88

26,6

01

26,6

10

26,6

15

NetProfit

$00

0's

0

-2,7

70

14,4

57

11,5

33

17,3

60

17,4

36

17,4

85

17,5

16

17,5

37

17,5

51

17,5

59

17,5

65

17,5

69

Capex

$00

0's

10,5

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

Projectcashflow

$00

0's

-10,5

00

1,4

30

18,2

37

15,0

40

20,6

90

20,6

50

20,6

24

20,6

07

20,5

96

20,5

89

20,5

84

20,5

81

20,5

79


atesfor2006-2018


28/60

28


Infrastructure

Establishing and maintaining infrastructure at the Peruvian operations is challenging

owing to the sites remoteness, terrain and elevation (~5,000m). However, national grid

power supply is available and sufficient. Selene and Ares run from the grid and both

have standby generation. Arcata is also run from the grid but the operation can

generate only 33% of its required power from its stand by generators the company is

considering additional generation capacity. In most cases, goods are transported to and

from mine site by a mixture of tarmac and good dirt roads from the nearest main city

and provincial capital, Arequipa. Arequipa is approximately 300km from Arcata, 285km

from Ares and 180km from Selene. The majority of goods (~80%) destined for Selene are

actually sourced from Lima, a distance of 650km.

The undeveloped Pallancatta Project has only basic infrastructure at this time. The

company has budgeted for installation of a new 12.5km transition line to run from

Selene at a cost of US$0.352 million. A new road is also planned at a cost of US$2 million

and this should improve access to Selene. It is expected that the workforce will be based

at Selene and transported to Pallancatta each day.

Fiscal Regime

Corporate tax is payable at a prima facie rate of 30% while royalties are charged on a

sliding scale at the pre-tax level: 1% of profit from US$0-60 million, 2% of profits

between US$60-120 million and 3% of profit thereafter.

Permitting and Environmental Regulation

In Peru, the environmental requirements for operating a mine are detailed in a

government decree and applications are made to the Ministry of Energy and Mines

(MEM). Mines operating prior to 1993 have to compile a Programa de Adecuacion y

Manejo Ambiental (PAMA). Mines commissioned post-1993 require an Environmental

Impact Statement (EIS). All the Peruvian mines are operating with the necessary

environmental permits and an application for the Pallancata Project is currentlyundergoing the necessary authorisation process.

The company has certain obligations regarding its closed operations in Peru, namely the

Sipn open pit. The mine generates acid mine drainage and this is currently being

treated at liming plants. The cost of water treatment for Sipn is approximately US$1.0

million a year. Environmental liabilities for the Peruvian assets are included in a mine

closure plan prepared by an independent party and approved by the local authority.

All three mining operations have tailings dam facilities, but with varying degrees of

remaining capacity. The mines are all located in high seismic risk areas and so

engineering design and monitoring requirements are strict under guidelines issued by

the Ministry of Energy and Mines and details of the tailings dam are included in the EIA.

At Arcata, the mine is on its sixth tailings dam; Dam No.6 can be lifted a further five

metres giving a remaining life of approximately eight years. The Ares mine tailings

facilities are currently near maximum height and have a life of only three years

remaining.


29/60

29


MEXICO

The company has rights over two advanced projects in Mexico via joint venture

partnerships. Hochschild has purchased the Moris silver-gold mine and related

concessions from Exmin and other parties. The company also has an option to acquire a

70% interest in San Felipe polymetallic project in northern Mexico in addition to rights

over several exploration prospects and targets.

Figure 28: Mexico - advanced projects location map

Mina Moris

San Felipe

Source: Company presentation, Canaccord Adams

Mina Moris Project

The Moris mine is located in Chihuahua, along the Sierra Madre. The mine was

operated between 1996-1999 by Minera Manhatten S.A. de C.V. and produced 50,000

ounces of gold and 150,000 ounces of silver from 1.1 million tonnes of ore over this three

year period. The asset is now subject to a joint venture, agreed in June 2006, through

which Hochschild has exercised the option to purchase up to 70% in the project for

US$4.2 million. Hochschild is in the process of developing a business plan for the mineand expects production to re-commence in July 2007, subject to mine plan approval.

The company also has an option to acquire (at a cost of US$4.8 million plus an

investment of US$0.85 million in Exmin) a 70% interest in 9,889 hectares of concessions

around the Moris Mine.

Moris is an epithermal deposit and mineralisation is predominately gold and silver with

minor lead and zinc sulphides hosted by conglomerates and volcanic breccias. Several

vein systems have been identified, but only the El Creston has been mined to date.

Vein thicknesses are up to approximately 10 metres the average mining width for El

Creston was 13 metres. Manhatten Minerals calculated a life of mine reserve of 4.0

million tonnes at 1.9g/t gold and 8.75 g/t silver then following closure in 1999, the

company stated resources of 3.1 million tonnes at 1.9g/t and 6.6 g/t silver. Latestattributable resource estimates updated by Hochschild are shown in Figure 29.

Mining is by open pit methods; the El Creston ore body, previously mined by Manhattan

was extracted through conventional blast, shovel and haulage techniques. The current

mine plan involves continuation of open pit mining with 5.0 metre benches, strip ratio

1:3.6 (O:W) and haulage utilising 33 tonne trucks. The mine currently has a capacity of

just over one million tonnes per year of ore.

Figure 29: Moris Resources

Kt Ag Au(g/t) (g/t)

Measured 2,951 4 1.32

Indicated 404 3.7 1.24

Total 3,354 4.0 1.3Source: Company data


30/60

30


The ore will be hauled approximately 2km to the current processing facilities, which

currently has a capacity of 1,095ktpa. Previously ore was crushed, agglomerated and

then heap leached using cyanide solution. From solution, the gold and silver was

recovered through a carbon adsorption, electrowinning and smelting circuit to produce

dor.


31/60

31

23January2007

Ho

chschildMiningplc

Figure30:MinaMorisProjectassumptionsandeconomicanalysis

Mining

Sales

OperatingCost

s

Valuation

Mineclosure

year

2025

Smeltingdore

$/k

g

6.1

1

Admin

$

/t

0

Ds

Re

NUM)

Recoverysilver

%

70%

RefiningAg

$/o

z

0.7

5

Genservices$

/t

0

5%

100

$

Recoverygold

%

35%

RefiningAu

$/o

z

0

Plant

$

/t

0

8%

82

$

Saleproduct%conc

%

0%

Freight&Ins

$/kgdore

7

Mine

$

/t

0

10%

73

$

Concentrategrade

oz/t

400

Payablesilver

%

100%

Geology

$

/t

0

12%

66

$

Payablegold

%

100%

TotalOpCost$

/t

7

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Annualthroughput

000

'st

0

400

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

2,7

00

Silverproduction

000'soz

0

255

2,0

05

2,0

05

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

Goldproduction

000'soz

0

6

46

46

46

46

46

46

46

46

46

46

46

Cashcosts

$/oz

Ag

0.0

0

11.7

9

5.5

6

4.3

2

4.9

2

4.9

2

4.9

2

4.9

2

4.9

2

4.9

2

4.9

2

4.9

2

4.9

2

Cashcosts

$/oz

Au

0.0

0

589

290

226

285

285

285

285

285

285

285

285

285

Netsales

$00

0's

0

6,7

99

49,8

68

45,5

81

34,9

69

34,9

60

34,9

66

34,9

70

34,9

61

34,9

54

34,9

50

34,9

48

34,9

46

Cashoperatingcosts

$00

0's

0

6,4

00

24,3

00

18,9

00

18,9

00

18,9

00

18,9

00

18,9

00

18,9

00

18,9

00

18,9

00

18,9

00

18,9

00

EBITDA

$00

0's

0

399

25,5

68

26,6

81

16,0

69

16,0

60

16,0

66

16,0

70

16,0

61

16,0

54

16,0

50

16,0

48

16,0

46

EBIT

$00

0's

0

-3,8

01

22,8

38

24,0

31

13,4

72

14,3

72

13,7

44

13,3

36

14,2

83

14,8

99

15,2

99

15,5

60

15,7

29

NetProfit

$00

0's

0

-2,5

09

15,0

75

15,8

63

8,8

93

9,4

87

9,0

72

8,8

03

9,4

28

9,8

35

10,0

99

10,2

71

10,3

83

Capex

$00

0's

12,0

00

0

0

5,0

00

0

0

7,0

00

0

0

0

0

0

0

Projectcashflow

$00

0's

-12,0

00

1,6

91

17,8

05

18,5

13

11,4

90

11,1

75

11,3

95

11,5

37

11,2

06

10,9

90

10,8

50

10,7

59

10,7

00


atesfor2006-2018


32/60

32


San Felipe Project

The San Felipe concession is a small project covering an area of 544 hectares located in

northern Sonara, Mexico. The property is currently owned by the Mexican company

Grupo Serrana S.A de C.V, but Hochschild has an option to acquire 70% of the full

mining rights and ownership. The company has paid US$0.2 million with an obligation

to invest US$6.5 million over three years. Additionally, the company plans to invest

US$10 million in Grupo Serrana and US$33.3 million in a Newco for the 70% ownership.

We expect the mine to be in production by 2009; the current capacity is 730ktpa but that

is expected to increase to 1,250ktpa. Hochschild will invest approximately US$33 million

for the development, with any excess being equally divided between parties.

The property was previously exploited by Grupo Serrana and between 1974-1991 a

100tpd mill processed around 210,000 tonnes of ore. The deposit is a polymetallic skarn

and mineralisation is associated with the contact between volcanic and metamorphic

rocks. Swedish mining group Boliden carried out exploration in the area in 1997,

defining an attributable resource of 4.5Mt at 69.7 g/t silver a metal content of 6.5% zinc,

12.7% lead and 0.4% copper. Hochschild is currently engaged in verification drilling on

the property with a 10,000 metre program in operation to define an indicated andmeasured resource. The company hopes to start an engineering study by early in 2007,

meanwhile exploration at other identified potential targets will continue.

Infrastructure

Having been an operating mine until relatively recently, Moris mine has adequate

infrastructure in place. There is enough power generation capacity at the minesite to be

self sufficient and there is a system in place for re-cycling industrial water supply. Raw

materials are transported to the mine via road from Chihuahua, 260km away and dor is

exported from the minesite to the airport in Chihuahua.

Fiscal Regime

Corporate tax is payable at a prima facie rate of 29% and there are no mineral royalties.We have assumed straight line depreciation over 10 years.

Permitting and Environmental Regulation

The environmental requirements in Mexico are relatively standard; an EIA has to be

submitted for approval prior to commissioning. Although in operation until 1999, the

permit for the Moris mine has now expired and an EIA will have to be re-applied prior to

production. Permitting for the San Felipe currently only covers exploration and drilling;

an EIA is yet to be submitted.

Figure 31: San Felipe Resources

Kt Ag Au(g/t) (g/t)

Measured 5,160 182 3.60Indicated 1,938 310 3.55

Total 7,098 217 3.59Source: Company presentation


33/60

33

23January2007

Ho

chschildMiningplc

Figure32:SanFelipePro

jectassumptionsandeconomicanalys

is

Mining

O

peratingCosts

Valuation

Mineclosure

Yr

2025

Pbconc

Znconc

Cuconc

A

dmin

$/t

0.0

0

Ds

Re

NUM)

Grades

Recov%

Transport

$/tconc

70

70

70

P

lant

$/t

0.0

0

5%

270

$

Zinc(%)

8%

88%

Concgrade

%

0.7

60%

21%

M

ine

$/t

0.0

0

8%

203

$

Lead(%)

2%

88%

%Payable

%

0.9

5

85%

99%

G

eology

$/t

0.0

0

10%

169

$

Copper(%)

0%

65%

Deduction

%

0.0

4

2%

1%

T

otal

$/t

25.0

0

12%

142

$

Silver(g/t,%)

70

88%

AgPayable

%

0.9

5

0

0%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Annualthroughput

000

'st

0

0

0

650

1,2

00

1,2

00

1,2

00

1,2

00

1,2

00

1,2

00

1,2

00

1,2

00

1,2

00

Silverproduction

000'soz

0

255

2,0

05

2,0

05

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

1,2

15

Goldequivproduction

000'soz

0

0

0

163

300

300

300

300

300

300

300

300

300

Zincproduction

000

'st

0

0

0

35.5

3

65.6

0

65.6

0

65.6

0

65.6

0

65.6

0

65.6

0

65.6

0

65.6

0

65.6

0

Leadproduction

000

'st

0

0

0

10.3

7

19.1

5

19.1

5

19.1

5

19.1

5

19.1

5

19.1

5

19.1

5

19.1

5

19.1

5

Copperproduction

000

'st

0

0

0

0.8

3

1.5

3

1.5

3

1.5

3

1.5

3

1.5

3

1.5

3

1.5

3

1.5

3

1.5

3

Cashcosts

$/oz

Ag

0

0

0

4.0

2

4.3

2

4.8

1

4.8

1

4.8

1

4.8

1

4.8

1

4.8

1

4.8

1

4.8

1

Netsales

$00

0's

0

0

0

80,0

71

111,3

68

96,2

32

96,2

32

96,2

32

96,2

32

96,2

32

96,2

32

96,2

32

96,2

32

Cashoperatingcosts

$00

0's

0

0

0

16,2

50

30,0

00

30,0

00

30,0

00

30,0

00

30,0

00

30,0

00

30,0

00

30,0

00

30,0

00

EBITDA

$00

0's

0

0

0

63,8

21

81,3

68

66,2

32

66,2

32

66,2

32

66,2

32

66,2

32

66,2

32

66,2

32

66,2

32

EBIT

$00

0's

0

0

0

43,3

21

63,3

68

51,2

32

53,6

32

55,5

52

57,0

88

58,3

17

59,3

00

60,0

86

60,7

15

NetProfit

$00

0's

0

0

0

43,3

21

41,1

89

33,3

01

34,8

61

36,1

09

37,1

07

37,9

06

38,5

45

39,0

56

39,4

65

Capex

$00

0's

0

8,0

00

88,0

00

13,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

3,0

00

Projectcashflow

$00

0's

0

-8,0

00

-88,0

00

50,8

21

56,1

89

45,3

01

44,4

61

43,7

89

43,2

51

42,8

21

42,4

77

42,2

02

41,9

81


atesfor2006-2018


34/60

34


ARGENTINA

Hochschild has a presence in Argentina through Compania Minera Santa Cruz S.A., a

joint venture company in which the Group holds a 51% stake. The remaining 49% is

owned by Minera Andes S.A. (MASA) which is controlled by Minera Andes Inc., a TSX

listed company. The joint venture company holds a 40,499 hectare concession area inPatagonia, which includes the San Jos Project. The company also holds rights to four

other exploration prospects in the country, including Sierra de las Minas, Ambargasta,

Quevar and Puesto Chacon.

Figure 33: Argentina - San Jos location map

San Jos

Source: Company presentation, Canaccord Adams

San Jos Project

The San Jos silver-gold project is located in the Deseado Massif of the Santa Cruz

Province, Patagonia. Geologically, the deposit is very similar to the epithermal deposits

in Peru, although the volcanic host rock is slightly older. The deposit currently consists

of two defined vein systems, Huevos Verdes was discovered by MASA in 1997 and Freadiscovered in 2004 under Hochschild Minings management. Most recently, the

company has developed shaft inclines into both vein systems to better delineate the

resources. Current attributable reserves for the San Jos Project are estimated at 642kt

containing 9.04 million ounces of silver and 168,000 ounces, Figure 34.

The current mine plan involves initial development of a 265ktpa of ore operation,

ramping up to 500ktpa after two years producing approximately 118,000 ounces of

silver and 70,000 ounces of gold per year. Mining will be by underground cut and fill

breast stoping methods using timber and steel bolt supports where necessary. Five

stopes will rotate the production cycle and ore will be loaded on to 28t haulage trucks.

Haulage distances form Huevos Verdes and Frea to the plant will be approximately

18km. Metallurgical testwork on the ore has already been carried out; the plant will

incorporate conventional crushing, grinding, flotation and concentration methods. Go

Documents

Broker Note, Hochschild Mining, 23/01/2007 (Cannacord Adams)