Compania de Minas Buenaventura SAA (BVN) 2004 Q1 法說會逐字稿

Please stand by. Good day, everyone. Welcome to the Minas Buenaventura First-Quarter Earnings Release Conference Call. As a reminder, today's call is being recorded. For introductions and opening remarks, I would like to turn the call over to Pete Majesky (ph) with iAdvise Corporate Communications. Please go ahead.

Thank you, Mark. Good morning, everyone. Welcome to Compania de Minas Buenaventura First-Quarter 2004 Earnings Conference Call. With us today from Lima are Mr. Roque Benavides, Chief Executive Officer, and Mr. Carlos Galvez, Chief Financial Officer, who will be discussing Buenaventura's results as per the press release distributed Friday, April 23rd. If you've not received a copy, please call us in New York at (212) 406-3690, and we'll email it to you immediately.

We'd like to remind you that any forward-looking statements made today by Buenaventura's management are subject to various conditions and may differ materially. These conditions are outlined in the last page of the company's press release in a disclaimer. We ask you to refer to it for guidance. It is now my pleasure to turn the call over to Roque Benavides. Mr. Benavides, you may begin.

Good morning and welcome to our first-quarter conference call. With us, with Carlos Galvez and myself is Mr. Alberto Benavides, Chairman of the Board of Buenaventura; Mr. Fernando Schwalb, Vice President of Marketing, and Humberto Rodriguez, Comptroller of the Company. Buenaventura's net income was $50.2 million for the first quarter, a decrease of 10% as compared to the first quarter of 2003. The main difference corresponds to a credit of 95 million soles, stated during the first quarter of 2003 related to the provision for a derivative instrument compared to a credit of $8.5 million in the first quarter of 2004.

This has to do with converting two-thirds of our hedge book to normal sales in the quarter. The two remarkable facts this quarter are a 43% increase in operating income, and 149% increase in non-consolidated affiliate results, mainly due to Yanacocha. Our EBITDA is up for the first quarter of 2004, $104.3 million, a 69% increase when compared to the first quarter of 2003. These results were mainly attributed to our cost cutting improvement at Orcopampa with Uchucchacua and Antapite, an increase of 67 and 64% in silver and lead sales, respectively, and to higher metal realized price.

Essentially in terms of our financial highlights, our operating revenues increasing 25%, our operating income increasing 43%, our EBITDA was decreased by 24%, but this was influenced by a $10.4 million exchange of buying back 120,000 ounces of gold in our hedge book. Our EBITDA was 59% up, and our net income was 10% down also due to the same fact that I mentioned before of $10.4 million expense in 120,000 ounces during the quarter. Our operating highlights, essentially our sales have been going up by 24% in the quarter, compared to the first quarter of 2003. In terms of our operating revenues, the volume of gold sold decreased 11% due to a delay in gold delivery.

However, our gold production in the first quarter of 2004 was 12% higher than in first quarter of 2003. This of course will be expressed in our second-quarter results. In terms of our production and operating costs, we have increased our equity production in gold by 11%, our silver production by 3 percent, lead production by 12%, and a decrease in our zinc production by 8 percent, mainly due to the fact that there was a lower recovery of zinc in our Brocal operation, mainly due to higher offside content in Europe (ph).

This has to do with the deposit and this is normal in this type of open pit in Brocal, and we expect it to be soft in the next few months, in the next quarter as well. In terms of our income from non-consolidated affiliates, in Yanacocha, the first quarter of 2004, gold production increased 26% to 803,558 ounces, of which 350,753 ounces are Buenaventura's share, compared with the same period of 2003.

The result was due to an increase in the gold recovery. Cash operating costs in Yanacocha was $144 per ounce of gold, a 7 percent increase compared to $134 per ounce for the first quarter of 2003. Net income in the first quarter of 2004 was $110.6 million, and operating cash flow was $193.2 million, compared to $43.6 million and $143.1 million respectively in the first quarter of 2003.

Yanacocha’s capital expenditure for the first quarter of 2004 was $44.6 million. This quarter, Buenaventura net income was $50.2 million, representing a decrease of 10% compared to first quarter of 2003. In the first quarter of 2003, a credit of 95 million soles or $27.4 million due to a provision for mark-to-market value variation was considered. On the other hand, during the first quarter of 2004, the corresponding credit was only 8.5 soles, but realized deferred income of 13.9 million soles, or $4 million.

Our earnings per share for the first quarter of 2004 were $.39 per share, a decrease of 10% compared to the first quarter of 2003, which was $.44 per share. Eliminating mark-to-market effect, net income in the first quarter of 2004 was $43.7 million, an increase in 54% when compared to the first quarter of 2003, $28.4 million. Likewise, our earnings per share increased 54% from $.22 in the first quarter of 2003, to $.34 in the first quarter of 2004.

During the quarter, the company reported a net loss of 45.7 million soles, or $13.2 million in derivative instruments, as a result of the execution of 41,000 ounces of gold, and 515,823 ounces of silver. In terms of our project, in Uchucchacua in the first quarter of 2004, the company started the engineering pilot for the construction of application flotation paling (ph) plan for treating (inaudible). This is a very important project, which will enable us to recover a substantial amount of the 25 million ounces that we have in paling right now, and, of course, recover additional ounces from the current palings of the operation of Uchucchacua. In terms of the consortion of Huancavelica during the first quarter of 2004, the company began construction of 104 kilometer transition lines running between the district of Calyani (ph) and Ares (ph) at 138 kilowatts, to improve the energy supply for Orcopampa, Shila and Paula, as well as in the future for Peraculta (ph).

Total investment has been estimated in $7 million. In terms of Latalha (ph), the project is progressing in terms of permitting and development. With this, I ask if you have any questions that we will be very happy in answering. Please go ahead.

Thank you very much. The question and answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing star one on your telephone keypad. Once again, that is star one. We will proceed in the order that you do signal us, and we'll take as many questions as time allows. If you are using a speakerphone, please ensure that your mute function is off so our equipment can receive your signal. We'll pause just one moment to assemble our roster. Our first question of the day will come from Alberto Arias with Goldman Sachs.

Yes, good morning, Roque, good morning, Alberto. A couple of questions. With regards to Yanacocha, you mentioned an increasing gold recovery during the quarter. If you could please elaborate what drove that change in recovery, and do you think that's something that we should expect in the following quarters as well?

(off mic).

Good morning.

The point is that rate (ph) in Yanacocha is lower as compared to the same quarter of (inaudible) from 492 (ph) to .72 grams per ton. And the treatment ratio went up from .44 to .64. And basically, the volume treated was also the same. So, by having the lower rate, higher treatment, the only result has increased the recovery. That's essentially the information.

In addition, may I add, today's the carbon columns in Yanacocha are fully in operation right now. As you know, we have full plant for recovering carbon columns and the recovery is being increased by this process.

OK, great. A second question with regards to your exploration project, we used to hear more from them in your previous press releases. Is there any interesting developments that we should be expecting in the near term, or if you could give us an update of recent results that might have been impacting your exploration programs?

I have to accept that Mr. Aubrey Paverd, our board member, mentioned the same thing that you're saying, Alberto. The fact of the matter is that we have mentioned in the past and Sensa Vidal (ph) is in agreement with it, that we will try to give a more expanded explanation of our exploration from time to time. But having explorations every single quarter may be a little bit too much.

But I can assure you that our expirations are doing very well. We continue actively exploring in Marcapunta in Brocal, We are actively exploring in Pulaculta (ph) where we are starting, drilling, drifting a tunnel to explore Pulaculta (ph). We continue drilling in Latanza, and we are certainly doing a lot of exploration in our own operations. So....

(off mic)

Well, then we have also, my father, Mr. Rotonelli (ph) was saying that we are also starting the ramp at Marcapunta which will enable us to explore in depth and underground, the Marcapunta ordering (ph) and certainly have a bulk sample to take to metallurgical testing. So in general, we continue being effective as always in exploration. We are very excited in many of these projects. We continue in Hatanorcul (ph) in Bampandino (ph).

As you remember in our previous conference call, we are spending more this year than in previous years in exploration, and we do expect to have some findings in the near future. One thing that may be relevant is that in Los Picos (ph), Meridian Gold decided to turn it back to us, so now we have full control of Los Picos (ph) and we are exploring by ourselves in Northern Peru. And we also expect to find high-grade gold ore from this exploration.

OK, just a final question with regards to the investments, the dimension of Uchucchacua, what is the size of the CapEx for the salines (ph) reprocessing, and how much silver production should we expect and at what cost?

At this point in time, we are talking in the order of $9 to $10 million. That is the order of magnitude. The thing is we are doing the studies, the, if you want, the final study, the, if you want, the final study for this plant. We will be recovering, you see, in Uchucchacua; we recover, as of today, with the flotation (ph) process, up to 75%. We expect to increase that by 10%. And if you consider that we produce 10 million ounces from Uchucchacua per year, we would be probably producing in excess of an additional million ounces from the current savings.

But then after the second stage, and that is included in the $10 million, the second stage will be to treat the old palings (ph) where we consider that we have an estimate that we have in excess of 25 million ounces of silver that were not recovered in the past. We believe that with these current silver prices, it is a very profitable investment.

All right, thank you.

Our next question will come from John Bridges with J.P. Morgan. Mr. Bridges, your line is open. Please go ahead with your question.

Hi Roque and Alberto. I don't know whether my calculator is a bit crazy, but I don't get 120,000 ounces for $10 million. Is the $10 million you are quoting for the costs for this period of the buyback for gold?

Will you please rephrase your question. I didn't get it.

You say that you bought back 120,000 ounces for $10 million under the hedge program.

Yes.

And, that implies that the price of that gold was $83 an ounce?

Well (off mic) the price of 415, and (inaudible).

Let me add (inaudible) to Fernando said. (off mic) Thank you, and how are you?

Good.

On top of what has been said, those 120,000 ounces were bought back in January. They account for maturities that were due both and during 2004 and 2005. So it is not only the stock price, but obviously the time value of those ounces. And in average, those are 120,000; we've had a hedging price in our existing group of around 350. But it certainly accounts for $10.4 million at the end.

So is $10.4 the amount that's allocated to this first quarter?

Right.

OK, can you give us some guidance as to how much will be allocated to future quarters?

Well, this was an extraordinary buyback, John. This was out of our maturities that were due in the quarter.

Right.

Pension (ph), 42,000 ounces, which were closed during the quarter. We are, in our financials including the extraordinary expense of that buyback which we don't foresee as becoming something normal, unless we have some sort of opportunistic approach on that, as we have stated in the past.

So it's 42,000 ounces for this first quarter?

Yes.

Is there a schedule of the ounces for the rest of this year and 2005?

There is no schedule whatsoever, John. This was something extraordinary, and that was it.

So you'll allocate these, how will you allocate the rest of the 120,000 ounces?

Let me rephrase it, John. What we did was we decided due to our cash position, and for one we decided to buy back 120,000 ounces that were due here in 2004 and 2005 (off mic). And that has been it for a single moment. That was accounted in January and obviously impacts our financials for the quarter, and that's it. Period.

OK.

John, perhaps if I may, the amount of $10.4 million is the difference between the price we used to buy back the gold location, and the price of the hedge we had for this position, OK? And this difference times the 120,000 ounces we bought back means the $10.4 million we charge in the first quarter.

OK, now I understand, that's fine. While I've got you there, Carlos, you're going to be doing a bit of line building going forward, I imagine, with things like Marcapunta. There wasn't an anomaly between Peruvian accounting and U.S. GAAP where some capital works were going through the income statement. Has that been rectified? Will we expect to see capital work go through in a U.S. form going forward?

Well as you know, we tried to be as close as we can to the U.S. GAAP following of course, Peruvian (off mic). And we are expending whatever we have to expend in terms of expiration, and in terms of this sort of matter. We only capitalize the development and the outcome present (ph).

Right, will there be anything from mine building that comes through the income statement?

No.

OK. What sort of capital number are you looking for at Yanacocha this year?

The CapEx in Yanacocha?

Yes.

It is $270 million.

OK, and part of that relates to that new mill that's going in, does it?

Well, this is the entire investment.

They started for this mill, and some of it is also for the development of pat (ph) and minoconta (ph) as well.

OK, great, OK, thanks a lot.

Jeff Stanley with BMO Nesbitt Burns is next.

Thank you very much, and good morning, gentlemen. A couple of questions for you. Firstly on the buyback of 120,000 ounces, do you have plans to continue that repurchase, and secondly, has that repurchase eliminated the negative impact or negative tax consequences of the position and part of the initial justification for restructuring your hedge book was driven by tax issues. I'm wondering if you can explain whether those negative influences have been eliminated and what your plans are going forward with (off mic)?

Well, the plan going forward is on an opportunistic basis, we have no schedule in terms of what we are going to do in the future. We are committed because we read what the market is saying, that we are to reduce our exposure, and in this respect, we have crystallized two-thirds of our hedge book also in this quarter. This is normal pace, and so as of today, we have one-third of our regional textbook with exposure to this. In terms of the tax implications, may I ask Carlos to answer that, please?

As you may remember, the main reason to change the regulative instruments into normal sales was basically this impact in terms of taxes. And as we explained during the last conference call, after converting to normal sales, we will report, and apply our capital returns following the price of our agreement and our contract.

I'm not having this difficulty we had by reporting sales at the market price, and then having as a separate a transaction derivative, because that implies (off mic). So now, reporting our sales, at the price of the agreement, of the sales contract, we have no problems in terms of income tax.

OK, great. And second question really relates to the Yanacocha recoveries again. Was there, and obviously being a (inaudible) operation, a lot of the recoveries are implied, was there a significant drawdown of inventory associated with that, or was there a genuine increase in recoveries that we might be able to forecast on an ongoing basis?

I think it's two sides. I think it is a reduction in inventory, and an increase in recovery. As you say, in a large operation like this, it is difficult to say that essentially, the carbon columns were put essentially to reduce inventory, but will also contribute to increasing recoveries.

Do you have an intuitive feel or some kind of forecast that you might be able to put on improved recoveries there? Are we going to see an extra 4 or 5 percent or something like that?

I don't have a figure for that, but let me get back to you with that figure.

That will be great, much appreciated. Thank you very much.

And next is Victor Flores with HSBC.

Thank you, good morning. First question, could you please clarify, because I didn't hear exactly what the grade was at Yanacocha in the first quarter?

The Yanacocha grade was .72 grams per ton, Victor.

Gracias, thanks. And the second question is, can you give us a quick, I know you don't want to give updates all the time, but just a quick update on the development of La Sanca (ph)?

Well, in La Sanca (ph), we are progressing in the permitting dealing with the communities. We have the full team in place, we continue drilling, we have already resurface rights, resurfaced property, and we do expect to start full speed production, I would say, in the second semester of this year. But it all depends in fact on the construction.

Yeah.

But we expect to have all the permitting in place, and this is something that always is difficult to predict. But we expect to be in production by 2005, probably the second half of 2005.

Excellent, thank you very much.

And next we hear from Tony Lesiak with UBS.

Hi, good morning. Just a couple more questions on Yanacocha. Can you tell me, I sense here the output is up about 20% quarter over quarter from the fourth quarter, and your equity income from Yanacocha is actually down about 5, 6 percent? Can you perhaps give us a little more color on what might have happened there?

Well, (off mic) explanation is the higher price cost per pound that we got due to these reductions in the grade, and increased in the (inaudible). And basically that is the main reason to increase in the production, have a lower, another big net income continuation.

OK, because the cash costs went up from $1.36 per ounce to $1.44 per ounce, but your production went up 20%. So just looking at the numbers, it would make sense that the cash cost increase was not enough to offset the increased amount of production you have from there. So I'm just wondering was there a timing issue in terms of sales, or are you having higher depreciation, or is there something not being captured in the cash costs that increased?

Well, basically, some sort of increase in depreciation and amortization explains the difference.

OK, what -- did you change the mine life assumption, or what was the depreciation per ounce, I guess this quarter versus last quarter?

Just to mention, to compare for instance, the difference between depreciation and amortization, first quarter of year 2003 and first quarter 2004. While we reported $31 million of depreciation in the first quarter of 2003, depreciation this year is $50.6 million. This is an important difference, which explains the higher total cost.

OK, so do you have the number as well for the fourth quarter?

The depreciation?

Yeah.

Well, it was $31 million last year.

Sorry, it was?

$31 million per quarter 2003. But $50.6 first quarter of 2004. On the other hand, we calculate the net income; you have to consider as well the income tax. And the income tax right now is basically 30% while it was lower the average income tax in Yanacocha, last year.

Sorry, the income tax is 30% now for the Yanacocha and before last year in the first quarter was what?

Well, to be precise, it's 29% right now.

OK.

But last year, it was lower than that.

OK, can you give us a sense of what to expect for the year and perhaps for next year in terms of taxes and depreciation levels? Is the new 29% level, is that realistic for going forward now?

Yes, the 29% is basically the result of the stability agreement that Yanacocha signed for Lakimo (ph) and the remainder of the former stability agreement. So this is the new income tax rate for Yanacocha.

OK.

May I expand on this, the stability contract is a benefit or an opportunities that companies have to have a stable tax scenario, as I may say. But, you have to accept to increase your income tax by 2 percent in order to access to this tax stability contract long term because these tax stability contracts are signed for 10 years. And it may cost a little bit more, but you are sure that you're not going to be changed in terms of your tax situation.

OK, in terms of the, I guess the mines that are directly owned by Buenaventura, if you look at the, you talked about the gold sales with some deferrals, perhaps into the second quarter. But if you look at the base metal as well, your sales were much higher than your production. Does that take into consideration I guess some carryover from the fourth quarter, or what can we expect in the second quarter of this year?

This is an ongoing operation, and I don't need to tell you that. But, sometimes it happens that production from the previous quarter goes into the quarter that we are discussing right now, and we cannot always have a delay and it will go to the next quarter. I think, in order to elevate the results, we will need to see it on a long-term basis.

Yeah, if I may add, the main difference comes in terms of silver sales and lead sales. And that is because in the first quarter of 2003, we delayed certain deliveries of concentrates from Uchucchacua, and today, we deliver, basically the proper production. So we have no delays. And that means that we are in excess of 1 million ounces of silver sold this quarter as compared to last year.

OK, so for the second quarter you'd expect production to be fairly consistent with sales then?

Yes, which is what normally happens, and that has to do with the deliveries or shipments of these sort of things.

OK, thanks very much.

At this time, there are no questions in the queue, but I would like to remind the audience, if you would like to ask a question, you can do so by pressing star one on your telephone keypad. And we'll pause just one moment to see if there are additional questions. And our next question will come from Roberto Ellinghaus with Bear Stearns.

Good morning. How much lower do you expect the cash costs to go in both in Orcopampa and Antapite? I know you had some reduction in the quarter.

I think it is important to mention that in Orcopampa, the cash cost for March was $115 and that was due mainly to the full sianidation (ph) process that we have in place right now. I think this deserves to be highlighted because it has been a very good investment for us. It is certainly increasing our recovery rate. We have had days in excess of 94% recovery rate at Orcopampa, and it's simply ratification that the investments have been very good for Orcopampa, for the cash costs, for the recovery, and for the company as a whole.

In Antapite, we continue operating normally. We expect essentially to maintain the cash costs in order of $150 per ounce. We don't foresee a substantial reduction in the cash costs, although we are finding important areas with the high-grade ore, and we are very confident and optimistic about Antapite. But as I say, we don't' expect to increase substantially the recovery rate, nor reduce substantially the cash costs, but this is an ongoing thing for us to look at our costs, and try to reduce as much as we can.

Thank you.

And next is John Bridges with J.P. Morgan with a follow-up.

Yes, sort of big picture question. With your mines like Antapite and Orcopampa, it's not really normal in the characteristic that they keep on increasing production, although, you had a great run with those mines. I just wondered where you would see that production level capping out? Are there other projects which are going to come through to add incremental ounces?

Well, as we have said many times, John, we never underestimate nature, and we will always be prepared to be surprised by nature. We keep finding a lot of ore both in Orcopampa and Antapite, and high-grade ore. The fact of the matter is that we have to continue exploring and investing in these underground mines in order to find new reserves. The same applies of course for Uchucchacua.

On the other hand, we continue with the exploration of areas like Peraculta (ph) that will add ounces to our production level. We continue in the area of Uchucchacua to explore in the area of Ossafriqua (ph) that will add returns in production to our silver production. In Antapite, in the surroundings of Antapite, we have had to non-core (ph) and as I may say, Pampandino (ph) that will also add ounces if we found ourselves successful in our exploration.

But the name of the game is continually exploring and looking for new ore. What is the cap of production? I think that is a speculative answer, and we prefer simply to show our record, and our record has been that we have continued increasing production and finding new ore in this underground vein, which we hope to continue doing in the future.

Roque, it's been a tremendous record. Peraculta (ph), when would you expect to see ounces coming out of that? Do you have any sort of land surface rights issues, those sort of things?

No. We have all the land that we need to develop the project at this point in time. We would like to have some more land, but we don't need more. We are starting these tunnels to explore underground, which, as I say, will enable us to have a clearer idea. We will continue drilling and we are committed to, if I may say, identify clearly the ore body or the deposit of Peraculta (ph).

And I would not be surprised that for 2006 or 2007, we may have this mine in production. As I say, I don't want to speculate. We have to have first the final results of the exploration, and you can be sure that we will do it sooner than later. But we prefer not to speculate on this respect.

OK, thanks. Well done Roque and Alberto. Thank you.

At this time, there are no further questions in the queue, but I would like to take this opportunity to remind the audience it is star one on your telephone keypad to ask a question. And we'll pause just one moment to see if there are additional questions. And at this time, we have no further questions in the queue; I would now like to turn the conference over to Mr. Roque Benavides for any closing or additional remarks.

Well, thank you again for your attention. It is always very good to have the opportunity to listen to your questions. Certainly we take all of them into account, and we add this to our management and to our operations. May I just close by saying that I personally will be attending the Prudential Securities conference in New York on Wednesday, the 28th. So in two days time, for those of you investors who want to join us, it will be a pleasure to see you there.

And then, Mr. Carlos Galvez will be attending New York Goldman Sachs Conference on 17th, 18th and 19th of May. And there is also an opportunity for investors that want to talk to us to have a personal and one-on-one conversation. So for now, thank you for your attention, and hope to you see you soon. Bye-bye.

And that concludes today's conference call. Thank you very much for joining us. You may now disconnect.