London-based Hochschild Mining (LSE: HOC; US-OTC: HCHDF) says it will fight what it claims are “illegal” efforts by Peru to close and block extensions of its Pallancata and Inmaculada silver mines on environmental grounds.
The company said in a statement Monday it had learned via media reports that Peru’s head of cabinet, certain vice-ministers and regional authorities in the town of Coracora in the Ayacucho region had signed minutes of a meeting that detailed alleged environmental complaints.
The minutes also state that a commission has been established to negotiate the timetable and terms for the closure of specific mining projects in southern Ayacucho, including the company’s Pallancata and Inmaculada mines.
According to Hochschild, the Peruvian head of cabinet subsequently indicated that approvals would no longer be granted to facilitate additional mining or exploration activities concerning these mining operations.
Hochschild said it had not received any formal communication from the government regarding this matter. The news was enough to scuttle the value of the company’s London-listed shares, sending them down nearly 60% in early morning trading.
ShareCast News reported over the weekend that Peru’s Prime Minister Mirtha Vasquez said that four mines in the nation’s Ayacucho region would be closed “as soon as possible.”
However, Hochschild said it would defend its position in Peru and asserted that its mines operated under the “highest environmental standards.”
“Our goal is to continue investing in Peru,” Hochschild chief executive Ignacio Bustamante said in a statement. “However, given the illegal nature of the proposed action, the company will vigorously defend its rights to operate these mines using all available legal avenues.”
He said the company would seek to enter dialogue with the Peru government to resolve any “misunderstandings” concerning its mining operations.
The communities close to the affected operations and the trade unions representing the operations’ workforce have issued formal statements supporting Hochschild. The company employs more than 5,000 people directly and about 40,000 people indirectly in Peru.
Hochschild’s Inmaculada mine is the company’s most significant, representing more than 60% of its cash flows, according to its latest 2020 annual report.
Both the mines account for the bulk of the company’s output. In 2020, the Immaculada mine produced 15.14 million silver-equivalent ounces and the Pallancata mine produced 4.79 million silver-equivalent ounces.
BMO Capital Markets said in a research note the announcements over the weekend would probably cast a cloud of uncertainty over the future of the operations.
“Although Hochschild will not go down without a fight, it is very difficult for us to envision a scenario where the stock outperforms, given the current government’s stance on the operations; we are therefore moving to the sidelines with a ‘Market Perform’ rating until more certainty emerges,” said analyst Ryan Thompson.
Hochschild shares tumbled on the news and were down 57.5% at 70p each by 08:30 GMT.