The Hochschild Mining (LSE:HOC) share price exploded by over 20% this morning. This undoubtedly comes as a giant sigh of relief for shareholders, who had watched the stock cut in half only a few days ago.
The 12-month return is still a disappointing at -30%. But that’s significantly better than the -60% level earlier this week. So what happened? And is now the time for me to buy?
The volatile Hochschild share price
As a quick reminder, Hochschild is a gold and silver mining business operating in Peru. Its flagship Inmaculada and Pallancata projects located in the country’s southern region were thrown into the fire on Monday. A leaked government document containing the minutes of a meeting between ministers and regional authorities showed intention to shut down these mines and others in the region.
Given that these projects represent around 80% of Hochschild’s annual production capacity, this was a major disaster. And it’s what caused the share price to initially tank. The motivation to shut these sites were linked to environmental pollution. And that’s an allegation the company has outrightly denied, calling the government’s decision illegal.
Today, management announced the Peruvian government has now clarified its position. After a lengthy discussion with the National Society of Mining, Energy & Oil, the state has backtracked on its decision. Both of Hochschild’s flagship mines will remain operational. And providing that all legal requirements are met, extensions to operating licenses will also be considered.
With the risk of shutting down no longer tormenting the business, I’m not surprised to see the Hochschild share price erupt on the news.
Revealing a bigger problem
The government’s decision to backtrack is certainly a relief. However, this whole situation perfectly displays how damaging political risks can be for businesses operating in regions with unstable regimes. According to the Financial Times, since president Pedro Castillo took office in July, Puru’s political risks have intensified, leading to potential problems for big businesses, including mining.
Metal ore exports remain one of the country’s primary sources of revenue. And after being devastated by the pandemic, the government has begun raising taxes on the mining industry to help fund social programmes. Consequently, Hochschild’s tax bill may be about to get bigger, putting additional pressure on its net profit margins. And since metal prices are dictated by the market, the company has no pricing power to mitigate this effect.
That’s quite a concerning factor, in my mind. And since three of the firm’s four mines are located in Peru, the business seems to be at the mercy of the government that has already shown its willingness to interfere with operations.
Personally, that’s not the sort of risk I’m interested in adding to my portfolio. So while the business may be in rapid recovery mode over the next few days, I’ll be sitting on the sidelines.