Berenberg raises Hochschild Mining to 'hold' following foray into rare earths

Analysts Berenberg upped their rating on British precious metals firm Hochschild Mining from 'sell' to 'hold' on Monday, stating the group's rare earths move was "a bit left-field", but "not a complete surprise".

Berenberg said Hochschild's $56m acquisition of the remaining 93.8% stake in BioLantánidos it didn't already own was "not a major surprise", given that the group had already flagged its investment in rare earths during its 2018 investor day and identified it as an area for "potential additional investment".

The German broker believed that the share price reaction to the news, which had seen the stock shed 13% since the announcement, was a reflection of the size of the initial transaction and lack of data available on BioLantánidos for the market to make a clear analysis of the value proposition.

"Hochschild has talked about the compelling economics of BioLantánidos and the potential upside to the existing feasibility study. However, the feasibility will take 18 months and with limited disclosure on project economics, we believe the market will assign no extra value to BioLantánidos other than the acquisition cost," said Berenberg.

"This is also not helped by the relative opacity of the rare earths market and our belief that investors view the more material entry into rare earths as a departure from its core strategy of precious metals (although management refutes this)."

However, Berenberg said its 'sell' thesis had been based on the view that grades at Hochschild's Inmaculada project would deteriorate as the Angela vein was mined out over the next three years.

"While we continue to believe this to be the case, we think it will take some time for this thesis to play out, and management is improving grades through infill drilling."

The analysts don't expect Hochschild's foray into rare earths to provide a material draw on medium-term cash flow but said it had the potential to distract from the main investment case for some time.

"We adjust our model for recent results and uplift our Pallancata valuation on lower costs; our price target drops to GBp180 per share (we lower our EV/EBITDA multiple to 5x from 5.5x); as the shares have reached our price target," concluded Berenberg.