Investors in Hochschild Mining (LSE:HOC) are understandably freaking out this morning as the share price was slashed in half! Shares of the gold and silver mining business collapsed by 45% following the leak of a government document that showed an intention to disrupt its flagship mining activities in southern Peru.
This downward trajectory has wiped out the gains made in recent weeks, and pushed the 12-month return to a disappointing -60%. So what exactly is going on? And is this actually a buying opportunity?
The collapsing Hochschild share price
Management announced this morning that it had discovered a document regarding environmental complaints against several mining companies, including itself, in the Ayacucho region of Peru. This document was the minutes of a meeting signed by the Peruvian Head of Cabinet, vice-ministers, and representatives of regional authorities.
It called for the closure of several mines, including Hochschild’s flagship Inmaculada and Pallancata projects. What’s more, the Head of Cabinet indicated no further approvals would be granted for mining or exploration activities in the area.
Hochschild vehemently denies the allegations of environmental pollution. In a statement, it said it “operates under the highest environmental standards and applies industry best practice”. As such, it has described the government’s decision as unlawful. And it will take all legal action necessary to defend the company’s rights.
Needless to say, this is horrific news for the mining business. Suppose its flagship projects are shut down, or limited in their expansion. In that case, it could have severe consequences for the future growth potential of the company. So seeing the Hochschild share price collapse is perfectly understandable, in my mind.
Taking a step back
This document was leaked through various media outlets. Therefore, no official communication between Hochschild and the Peruvian government has taken place yet. And it seems the firm is already garnering a lot of support. Trade unions, the National Confederation of Private Business and the National Society of Mining, Energy & Oil, have spoken out to support the company in this matter.
With such strong opposition to the decision, it’s possible that no action is taken by the Peruvian government. This would the firm to continue operations unimpeded.
CEO Ignacio Bustamante also said the company is “prepared to enter into a dialogue with the government in order to resolve any misunderstandings with respect to our mining operations.“
If the decision is reversed, then the Hochschild share price could make a rapid recovery. Having said that, it’s too soon to tell what the fate of the firm’s Peruvian mining activities will be.
The bottom line
This is undoubtedly a devastating blow. And there could be more volatility on the horizon for the Hochschild share price, should the worst comes to pass. With that in mind, I’ll be keeping this business on my watchlist while the situation develops.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.