Recommendations

Summary 

Moving to Fair Value: We initiate coverage of Hochschild with a Buy recommendation. In our opinion Hochschild just makes it as a Buy with the minimum 10% upside to the current share price to reach our target price of £3.41/share. However, we do expect good exploration results over the next 12 months and if current gold and silver prices are sustained then there is upside to our figures from higher commodity prices. However, since Hochschild presents its accounts in $US, the share price on the London Stock Exchange is most sensitive to the sterling-dollar exchange rate.

Strong Cash Position: Due to the recent fund raising, Hochschild has a strong cash position and we foresee no problems in repaying the $200m debt, funding the aggressive exploration programme, maintaining the existing dividend and maintaining its 40% ownership of Lake Shore. In arriving at this conclusion we have assumed little or no dividend from the two subsidiaries, Lake Shore Gold and Gold Resource Corporation over the next two years and we believe that any cash generated by these companies will be either used to expand their existing operations or reduce debt.

Exploration proceeding apace: Hochschild has a number of promising exploration opportunities but from the Fox-Davies perspective we do not believe that any of them will be sufficiently far advanced to develop into a mine before the end of 2010, suggesting that 2012 will be the year production growth resumes. Of course, any prominent news as to new mine development will be announced prior to this and incorporated into the share price, but we do not expect this to occur the short term.

Download FDC's Hochschild Mining Initiation Report