Compania de Minas Buenaventura SAA (BVN) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Minas Buenaventura first-quarter earnings release conference call. Just a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Maria Barona. Please go ahead, ma'am.

Thank you. Good morning, everyone. This is Maria Barona with i-advize Corporate Communications. Welcome to Compania de Minas Buenaventura first-quarter 2005 earnings conference call. Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer, and Mr. Carlos Galvez, Chief Financial Officer. They will be discussing Buenaventura's results as to the press release distributed yesterday. If you did not receive a copy, please call us in New York at 212-406-3690, and we will e-mail you one immediately.

Before we begin, I would 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, and we ask that you refer to it for guidance.

It is now my pleasure to turn the call over to Mr. Roque Benavides. Please begin.

Good morning to all. Thank you for attending this conference call. Buenaventura's net income was $63.3 million, including the effect on derivative instruments and non-recurring expenses of $6.2 million. Without considering this effect, net income for the first quarter '05 was $57 million. Operating income this quarter was $22 million, 3% lower than the first quarter '04.

Total EBITDA was $117.4 million which represented a 12% increase when compared to the first quarter '04, while EBITDA from Buenaventura's direct operations was $27.1 million, 82% higher than the first quarter '04.

We have had an increasing gold production from our own direct operations in Orcopampa 20%, in Antapite 12%, as well as an increase of 25% in gold sales. Our operating revenue was $77.4 million, an increase of 14% when compared to the $67.9 million in first quarter '04. This was mainly the result of 25% higher volumes of gold sold and higher realized prices of silver, lead and zinc.

In terms of production and operating costs, Buenaventura's equity production during the first quarter '05 was 88,367 ounces of gold, 18% higher than the first quarter '04 production which was 75,173 ounces and 3,288,099 ounces of silver, an increase of 10% when compared to the first quarter '04.

In Orcopampa total gold production in the first quarter '05 was 56,972 ounces, a 20% increase when compared to the first quarter '04. Our cash operating costs decreased 19% from $145 per ounce in the first quarter '04 to $118 in the first quarter '05. This reduction is explained by the higher gold production, as well as the positive effect of the cyanidation process.

In Uchucchacua total silver production in first quarter '05 was 2,536,761 ounces, an 8% increase when compared to first quarter '04 explained by 7% increase in ore milled. Silver cash operating costs in the first quarter '05 was $2.69 per ounce, a 10% increase compared with $3.00 in the first quarter of '04.

In Antapite total production during the first quarter '05 was 26,308 ounces of gold, a 12% increase compared to the first quarter '04. Gold cash operating costs in the first quarter '05 for this mine was $193 per ounce, a 25% increase when compared to $154 per ounce in the first quarter '05. $65 of this cash cost was explained by exploration expenses in Zorro Rojo, Antapite, Panpenita, Liliana and Reyna area where the Company achieved 3324 meters of drifting, 18% higher than in the first quarter '04, and 5685 meters of diamond drilling holes, 169% higher than the first quarter '04.

In Colquijirca within the Brocal Company total zinc production was 13,534 metric tons in first quarter '05, an increase of 2% compared to first quarter '04. Total silver production in the first quarter '05 was 831,728 ounces, a 15% increase compared to the first quarter '04. Total lead production in the first quarter '05 was 6894 metric tons, a 4% decrease compared to the first quarter '04.

Zinc cash operating cost decreased 18% from $867 per metric ton in the first quarter '04 to $711 per metric ton in the first quarter '05.

In terms of operating expenses, general and administrative expenses for the first quarter '05 were 21.8 million Soles, a 4% increase compared to the first quarter '04. Exploration costs in nonoperating areas during the first quarter '05 were 6 million, a 104% increase when compared to first quarter '05 -- of '04. This increase is mainly explained the $1.9 million non-recurring accounting effect from the consolidation of Minasnioc.

In terms of our operating income in first quarter '05, it was 71.9 million Soles, a 10% decrease compared to 80.3 million Soles in the first quarter '04.

In terms of income from nonconsolidated affiliates, Buenaventura's income from these affiliates mainly attributable to our participation in Yanacocha's net income was $48.5 million during the first quarter '05, similar to the one reported in the first quarter '04.

In Yanacocha for the first quarter '05, gold production was 795,917 ounces of gold, a slight decrease of 1% when compared to first quarter '04 production. Cash cost in Yanacocha during the first quarter '05 was $147 per ounce, which represented an increase of 2% when compared to the first quarter '04. One of the main drivers of this increase was the higher diesel fuel prices.

Net income in Yanacocha for this quarter was $112.6 million, a 2% increase compared to the first quarter of '04.

Reported EBITDA for the quarter was $207 million, an increase of 1% compared to the first quarter '04. Yanacocha's capital expenditures for the first quarter '05 was $46.2 million compared to $44.6 million in the first quarter '04.

In this quarter, Buenaventura's net income was $63.3 million, and this figure includes a gain of $8.1 million from change in the fair value of derivative instruments according with IAS39 for derivative instruments and a non-recurring accounting effect of $1.9 million from the consolidation of Minasnioc.

In terms of our operations, and we are here with Cesar Vidal that can answer any questions later on, we are pleased to report progress in the Poracota, Los Pircos, Santa Marina and Marcapunta project.

Poracota -- at Poracota 20 kilometers Northwest of our Orcopampa operation both adits at levels 4787 and 4720 meters above sea level respectively have intersected the gold bearing mineralization known as Manto Aguila. The upper-level has an advance of 571 meters and the lower-level an advance of 606 meters.

Samples for detailed metallurgical test word has been taken, and tests are in progress. The samples taken have assayed 6 to 10 grams per ton of gold, thus confirming the grades obtained by the previous drilling, which indicated thicknesses between 6 and 14 meters for the mineralized structure.

In Los Pircos we have signed a three-year contract with the surface owners, Asociacion Ganadera La Union, to initiate drifting of 2000 meters in the Diana and Marible gold and silver epithermal veins. The environmental assessment permit was recently granted for this project by the Ministry of Energy and Mines.

In Santa Marina in Spain, in Northern Spain, we are establishing the Minera Santa Marina del Norte Company as a legal vehicle to carry out the Rio Narcea Gold Mines - Minasnioc Minas Buenaventura joint venture. Permits for the road construction and underground decline access are underway, and we anticipate beginning the drifting and drilling during the second half of this year.

In Marcapunta, accumulated advances in the decline are approximately 572 meters remaining 240 meters more to achieve our objective, which is expected to be reached during the second quarter '05. During this quarter, total expenses were $670,000, while accumulated expenses were $3.6 million.

In terms of our project development in Orcopampa, the declines deepening project of the Nazareno and Prometida areas is 90% completed. This will allow access to 700,000 ounces of gold at lower levels of the Prosperidad, Lucy Piso, Prometida, and Nazareno veins. We estimate to complete this project in the second quarter '05 with a total investment of approximately $8.7 million.

Regarding the Brownfield exploration in the area of Orcopampa, during 2004 the total investment in Sausa Norte and Layo reached $200,000. Uchucchacua, regarding the construction of the cyanidation plant, the purchasing orders have been already placed for a total amount of $3.8 million. Basic engineering study has been completed. The budget for this project is $8.8 million, and completion is expected for December 2005.

Regarding the Brownfield exploration in the area of Uchucchacua, during the first quarter '04 the total investment in Huantajalla -- sorry, this should say the first quarter '05 -- the total investment in the Huantajalla and Pozo Rico area was $900,000.

In terms of other events, regarding Cerro Verde, during its shareholder meeting held on April the 18, the resolutions that allow an increasing capital for the mine expansion and an extraordinary cash dividend were passed. This will require an investment that we have explained to some investors in the order of $170 to $180 million from Buenaventura to acquire up to 20% of Cerro Verde.

On February 21st, Buenaventura executed the option to acquire 30% of Minera Minasnioc from Compania Minera Ares in exchange for a 2% royalty. To date, Buenaventura is consolidating Minasnioc in its financial statement. Likewise, on August 11th, '04 Minera ABX Exploraciones Barrick transferred the management of Minera Minasnioc to Buenaventura.

Since 2005 Peruvian companies do not have to adjust their financial statements to recognize the effect of inflation, essentially because inflation in Peru is quite under control in the order of 2 to 3%. All figures are stated in current Peruvian Soles, Peruvian Nuevos Soles for 2005.

For comparative purposes, the corresponding figures of first quarter '04 have been adjusted at prices of December '04, and for the convenience of the readers, the figures are stated in U.S. dollars as you can see in our statement.

With this, we are essentially open to any questions that you may have. Please go ahead.

(OPERATOR INSTRUCTIONS). Ambrose Arthur (ph), Goldman Sachs.

With regards to the Manto Aguila discovery at Poracota, given the information that you have so far, is there an estimate of the resource that you have at Manto Aguila and how we see it relative to the (technical difficulty)-- for Poracota?

Good morning. This is Cesar Vidal. We have hit the Manto Aguila, which is substantially the biggest one of the two that we have in Poracota. It is really a rediscovery. The original diamond drill holes that hit Aguila were the 1997 one (inaudible). We have followed up in 2003 with our own instant drilling at 100 meter center (ph), following up the high rate, and now we have hit at the 47/20 and 47/87 levels.

We have in total in Poracota 1.7 million tons of drilling indicated resources at 11 grams per ton. And Manto Aguila is the first one we have reached last week. We are drifting a profit as we speak.

Okay. So the information that you have provided today, does it provide an increment to that 1.7 million tons, or is it just more detail from the structure and characteristics of the ore body?

It is just the next page to have detailed information both sampling and for metallurgical work and also platforms for drilling deeper for additional metals. So keep your fingers crossed for additional discoveries from this position.

But the current position, as I said before, is a rediscovery and will firm up with 600,000 ounces that we had indicated before.

Okay, great. And maybe, Roque, if you could give us an update on La Zanja and maybe on Cerro Quilish as well?

Well, in La Zanja we have all geologies back as of April the 15th as I mentioned to some of you. We expect to start drilling probably by next month in May, mid-May, and we have taken on the stretch to have the security and the safety of all our people.

We have been certainly working with the local communities, and we have had a good reaction. We have also been working with all the people that have to do something with the basing that could be impacted by La Zanja, and we have been working with the authorities in Chiclayo and in the Rio Chancay basin. So we will see. We keep working and aim (inaudible), no?

In terms of Cerro Quilish, we have a new team led by Carolina Garcia (ph) and the other name Mr. Morrell (ph) I think in Yanacocha dealing with external affairs. We are working with the local community. We continue working on the water canals to improve this and to show the local community that we are committed to have a supply of workers for them, clean and in terms of the amount of water they will need, so we are working on that.

Cerro Quilish having had an impact, I think it had with demonstrations in Cajamarca may take somewhat longer. The fact of the matter is that the dialogue table was established in Cajamarca last week, and the mayor of the city of Cajamarca is working in this respect, and he is doing a fine work. And, of course, representatives of Yanacocha (inaudible) is sitting in this dialogue trying to reach agreement and consensus with the local community. And that is what we can report at this point in time in terms of Cerro Quilish.

Okay. And a final question, maybe back to Cesar. There has been a significant amount of exploration activity at Antapite. It seems to be much more ambitious than in previous years. What is driving this? It said an issue that you need to replace the reserves, or it is a follow-up of positive exploration development? And if you could give us of few hints of what the results of all that drilling has been so far?

In Antapite we have an operation that is eating the reserves, so it needs to be replenished. The main effort is to regenerate the reserve level and keep it at about 250,000 ounces to 300,000 ounces.

We are in a good ore finding mood, and the mine is developing nicely. But we are also drilling out more of the central Antapite area, and we have included the Castinordical (ph) prospect, and we have added 18,000 hectares on a lease to Emisu (ph) to be from Castinordical (ph) to be explored and to be developed as part of the Antapite operation.

So the Antapite area is growing to become a district, and we are spending and exploring vigorously outside the mine area, too. So it is both -- to replenish reserves and to make it grow with satellite deposits.

And the results are positive?

The results so far are encouraging, and we need to make and complete some deals with the communities, for example, LandAmerica to attack on two prospects that have not given us much joy so far. One of every (inaudible), no?

Victor Flores, HSBC.

Could you remind us what you expect to be the impact of the new plant in Uchucchacua in terms of cost and production?

Yes. The plant, the cyanidation plant will enable us to increase by 10% the -- sorry, by about 1 million ounces recovery of silver. Essentially we expect to increase from about 70% to 82, 84% the silver recovery at Uchucchacua.

This will be a cyanidation process that we are still discussing whether it is going to be at the end of the lead (inaudible), which is most likely, and this is what we are working in, and we expect to, as I say, to recover an additional million ounces in the first stage.

In the second stage, you have to bear in mind that we have 25 million ounces in tailings, which have we believe an average grade in the order of 5 ounces per ton, and we could also process this tailing and recover additional ounces. Altogether is we believe a great benefit for Uchucchacua and will enable us to reduce our cash flow.

Thank you, Roque. Do you have a sense of how much cost could come down?

This additional production, Victor, will be at a marginal cost of $2.00 per ounce.

Excellent. Thank you. And then if I could just ask an exploration question with respect to Uchucchacua. Perhaps Cesar could give us an update on the results in the Pozo Rico area?

The Pozo Rico area is part of the newly established Brownfield exploration around the district, around the mine operation in the Uchucchacua region. And Pozo Rico is the most advanced one. Last year we reported for the first time reserves, not just drilling but drifting and sub-levels and raisings.

There is one ore body found called Marsaries (ph). It is just over 250,000 tons and 18 ounces of silver and growing. It is open (inaudible). It has got low manganese and very good metallurgical features. So we are very encouraged with that new addition.

We plan to explore deeper. We are developing a crosscut 180 meters below the lowest level done so far. That shows how important we are and how courageous the program is to find the deeper extensions of ore. We believe it is a very shallow system, and whatever has been formed is preserved. So we are very encouraged with that.

There is also the Mayi (ph) prospect in the Brownfields of Uchucchacua. That is the limestone replacement basin of rich zinc and lead rich deposits. So you'll see more coming out of Pozo Rico for sure, and the Brownfield exercise both in (inaudible) and Orcopampa will add substantially in the longer run, of course, to the operating mine.

(OPERATOR INSTRUCTIONS). Karin Ortswan (ph), PSO & Associates.

Could you remind me and go over the Cerro Verde investment, what prices you use to come with the investments that you have? And update us on the project the way you perceive it in terms of returns and all?

In terms of the Cerro Verde project, really the study was carried out at a price of $0.90 per pound of copper. In terms of our evaluation as a Company at these low, low prices and linked to our direct investment, we expect to get higher than 13 to 15% IRR and at $0.90, no? And, of course, with higher prices, this project is rapid, no?

But you know basically what the investment is is in the order of $850 million to be carried out in the next two years, this year and finish in the year 2006. The project must be concluded at the end of the year 2006, have full capacity of this '05 secondary -- primary '05 operation should be 100% in operation that is supposed to meet year 2007. This is basically the main permitters of this project.

Are you protected in case of the higher cost in case of inflationary issues with respect to the counsel? Are you (inaudible) no matter what at the same rate?

We're not protected for higher cost. We are not protected for inflation. You know that basically the costs improved are mainly dollarized, so this is a natural hedge for our operations, no?

Just again a preamble question, a couple I think for given the circumstances in Peru and the uncertainty, is it a good time for you or are there other opportunities for you to pick up properties or assets with the ongoing, let's say, uncertainties that is going on in the mining and the Coldfield sector?

Well, the thing is we in Buenaventura regard ourselves as long-term investors, and we are in this business long-term. We do accept that they do maybe having a lack of authority and leadership. But in any event, this is still a very promising land for new discoveries, and we continue exploring, exploring Greenfields and exploring opportunities, not only in Peru but also in Latin America and recently even in Spain.

We believe that we have to be sensible and approachable in investing monies of our investors in the best possible way. We would be very very careful in which projects we invest.

Cerro Verde is a typical example where the reserve base is a substantial resource and reserve, and we believe that this gives us continuity in the long run to the Company and gives a lot of support to the future of Buenaventura, no?

One last question on Santa Marina. Cesar, maybe you want to talk about what exactly you are profiting on in there in terms of systems and (technical difficulty)--? And when will we expect some results if any, and then what is the potential that you perceived in Santa Marina?

Thank you for the question. This is really a different country for us, but not a different geology. In Santa Marina we're dealing with (inaudible) and veins that are fracture controlled and hosted in limestone irrespective of the age, but typically very similar to our Uchucchacua mine.

Rio Narcea Gold Mine has over the last eight or nine years I think mined close to 1 million ounces from an open pit, two open pits actually, small ones, and we believe the potential is there to find hopefully with good grades another million ounces.

Our initial program is to put a decline into an area which is 3.5 kilometers north northwest of their currently inactive open pit, and we are going for an area that has been drill-tested in the past and has got strong fractures, lots of ridges and cemented by higher upsides with some minor showings of high-grade gold in silica veinlets.

So we need to access that. It will take at least 10 or 12 months to get there with a decline, and we hope to start the decline when the permitting is done sometime maybe first of July. So if we are successful or if we're not successful, you will learn about it in July 2006. This is my best guess at the moment.

Daniel Altman, Bear Stearns.

Just two questions. One is on your hedging. You showed that for the quarter 3.3 million in a loss from the execution of, it says 41,000 ounces. I wonder if you can just walk us through a little bit how that happens and what your projection is for the full year?

The other question is, if you can give us an update on Yanacocha, what you think the cash cost will be, the production cost will be from a Buenaventura perspective? Thanks.

Well, in relation to the hedging results, we basically are delivering against the market price on a quarterly basis. So we have predicted prices really (inaudible) against what has happened in the quarter with the average price that we have taken and continue to have $410. That is where at the end we get the final results of $3 (ph) million against Buenaventura.

In the case of the cost, the breaking cost in Yanacocha, you know we foresaw that in the year 2005 we were going to repeat basically the average of the cost we achieved in the year 2004.

How you say that, the main driver as it was mentioned in the press release is diesel fuel cost, which is continually impacting our cost. Right now this is basically 17% component of our cash operating cost in Yanacocha.

The drivers, you know, it is a very difficult to relate very clearly the information we get from the volumes, grades and the stripping in the quarter compared to the final product we get in the operation due to the fact that the recovery is getting in excess of 60 days, close to 70 days.

So there is no direct relationship between the ore mineral development or for the ore mineral -- the grades with a final production. Normally this would affect the next quarter result.

Okay and just a follow-up on the physical delivery. When you show in your table 156,000 ounces at $340, is that for the remaining nine months of 2005, or is that a full-year number?

They are all right.

Certainly the remaining of the year.

Okay. Very good. Thanks, again.

At this, time are no further questions. Mr. Benavides, I will turn things back over to you for any additional or closing remarks.

Well, again, thank you for joining us in this conference call. We said initially this has been a good quarter compared to the first quarter '04, and we believe that these are strong results and strong results in exploration, and we hope to continue with this work.

Let me just inform to all of you that we will be attending the Merrill Lynch Conference in the Netherlands the first week of May and the Goldman Sachs conference in New York the second week of May. Mr. Carlos -- and that will be myself. And Mr. Carlos Galvez will be attending the Merrill Lynch Conference in Los Angeles, California, June the 7th and the 8th. This is part of our policy to try to be as close as we can with our investors and trying to keep you all informed as much as we can.

With this, again, thank you for attending this conference and see you soon.

That does conclude today's teleconference. Thank you. Have a great day, and you may now disconnect at this time.