This ambitious mid-cap silver miner offers a decent risk-reward bet.
It's a truism that the market doesn't like uncertainty. Equally, that when it sees uncertainty it often overdoes the pessimism. For brave contrarian investors uncertainty can mean opportunity.
For some time now the market has had its doubts about FTSE 250 silver miner Hochschild Mining (LSE: HOC).
Hochschild's share price has significantly underperformed against silver miner peer Fresnillo (LSE: FRES), as well as other precious metal miners such as Randgold Resources (LSE: RRS) and Petropavlovsk (LSE: POG).
The past
Hochschild has a long and colourful history. The original Hochschild Group was founded in 1911 by Moritz (a.k.a. Mauricio) Hochschild, a German entrepreneur whose travels took him to South America. He was joined in the business by other family members from Germany and became one of the 'tin barons' of Bolivia.
Despite pursuing an affair with the wife of his cousin, being twice arrested and sentenced to death by the Bolivian government, being the victim of a kidnapping, and having his Bolivian assets expropriated, Mauricio and the business survived.
The company has continued under the control of the Hochschild family ever since. When it listed as Hochschild Mining on the London Stock Exchange in 2006, executive chairman Eduardo Hochschild retained a majority shareholding.
Recent history
Hochschild has four underground mines in production -- three in Peru, one in Argentina -- and one open pit mine in Mexico.
It also has significant minority investments in Gold Resource Corporation in Mexico and Lake Shore Gold in Canada, both of which have recently moved from development to production.
Hochschild's investment strategy has been one area of concern for the market. Last October it raised $260m in a share and convertible bond placing. Some believe the company has been investing this with indecent haste and possibly overpaying for what it's getting.
Another negative focus for the market is the recent announcement that Hochschild has filed a suit against junior miner Minera Andes, seeking project financing repayment.
This litigation represents a resumption of hostilities between Hochschild and über-gold investor Rob McEwen who came to Minera's rescue a year ago, when, according to the McEwen/Minera side of the story, Hochschild made an unexpected cash call on Minera that it knew it couldn't cover, and then made a lowball offer for the company.
McEwen, in an entertaining interview with Business News Network, described Hochschild as "the partner from hell," while one mining commentator described the move on Minera as "so low it could limbo under a rattlesnake while wearing a top hat."
The present
Hochschild announced full-year results ahead of market expectations on Wednesday. Revenue jumped to $540m against an analyst consensus forecast of $515m, and there was good news on all financial and operational fronts -- profits, costs, cash, resource life of mines in production, and so on -- as well as a bullish outlook statement.
However, there was also a separate announcement that both the chief executive and chief financial officer were resigning -- the former for 'personal reasons' and the latter to 'develop his career' by pursuing a CEO role elsewhere.
Hochschild informed us that it has promoted its experienced chief operating officer to chief executive and appointed a new finance officer, but the double resignation appears to be one more uncertainty for the market to latch on to, and at the time of writing the share price has been marked down to 270p.
The future
The day before results, analysts were forecasting earnings-per-share for 2010 of 25.5p. At a share price of 270p the price-to-earnings ratio (PER) is 10.6. That compares to Fresnillo's forward PER of 25.7.
I haven't seen any post-results broker comment yet, but ahead of results most were rating the company a buy, with Goldman Sachs having recently raised its target price to 479p.
There is, then, a big disconnect between the view taken by analysts and the view taken by the general market.
The question is: Is the market right to see Hochschild as being under a cloud? Or is there -- as suggested by Eduardo Hochschild's £3m participation in the 295p placing, the consensus forecasts and Goldman Sachs's price target -- a silver lining?
My own view is that in this case uncertainty has created an opportunity and that at sub-295p Hochschild offers a decent risk-reward bet.
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The author owns shares in Hochschild.
