Compania de Minas Buenaventura SAA (BVN) 2005 Q2 法說會逐字稿

Good day everyone. Welcome to the Buenaventura second quarter earnings release conference call. As a reminder, today's call is being recorded. At this time I would like to turn the conference over to Maria Barona, for opening remarks. Please go ahead.

Thank you. Good morning everyone. This is Maria Barona with i-advize Corporate Communications. Welcome to Compania de Minas Buenaventura's second 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'll be discussing Buenaventura's results, as per the press release distributed last night. If you did not receive a copy, please call us in New York at 212-406-3690, so that we may send you one immediately.

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

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

Thank you. Good morning to all of you. This quarter, Buenaventura's net income was $82.6m and our operating income was $27.8m, 2% higher than in the second quarter of 2004. While our EBITDA was $106.8m, which represented a 22% increase, when compared to the second quarter of 2004.

These positive results were mainly driven by higher production in Orcopampa, solid quarter for Yanacocha, and the benefit of our participation in Cerro Verde.

In the second quarter, net sales were PEN232m, in line with the PEN234m obtained in the second quarter of 2004. The accumulated net sales for the first six months of 2005 were $138.8m, a 10% increase compared to 2004.

Buenaventura's equity production during the second quarter of 2005 was 88,399 ounces of gold, 14% higher than in the second quarter of 2004 and 3,305,095 ounces of silver, a 5% increase when compared to the 3,159,000 ounces in the second quarter of 2004.

In Orcopampa, total gold production in the second quarter of 2005 was 57,129 ounces of gold, a 15% increase when compared to the 49,500 ounces in the second quarter of 2004, due to higher tonnage and recovery.

The cash operating costs increased 18%, from $118 per ounce in the second quarter of 2004, to $139 per ounce in the second quarter of 2005. This increase is explained by higher energy consumption, used for pumping and ventilation in the deepest levels of the mine, as well as higher labor costs from a 5% payroll increase as per the union agreement, and the retroactive reimbursement for the first quarter of 2005 period.

In Uchucchacua, our total silver production in the second quarter of 2005 was 2,534,704 ounces of silver, a 2% increase when compared to 2,474,516 ounces in the second quarter of 2004.

In spite of a 5% increase in labor cost, silver cash operating cost in the second quarter of 2005 was $2.47 per ounce of silver, a 14% decrease compared to the $2.87 per ounces in the second quarter of 2004. This was mainly due to higher by-product credit contributions and the lower impact of deductions and sales expenses due to higher concentrate grades.

In Antapite, where we have a participation of 78.04%, total production during the second quarter of 2005 was 25,772 ounces of gold, a 12% increase when compared to the 22,926 ounces in the second quarter of 2004, due to higher ore grade.

Gold cash operating cost in the second quarter of 2005 was $210 per ounce, a 22% increase when compared to the $172 per ounce in the second quarter of 2004. This was due to an increase of 42% in exploration and development costs. Diamond drilling work increased 120%, from 2,532 meters on the second quarter of 2004 to 5,562 meters in the second quarter of 2005, while mine exploration drifting increased 19%.

You have to bear in mind that in Antapite we had to increase our exploration budget and all of that is expense.

In Colquijirca, within the Sociedad Minera El Brocal company, where we have a 32.78% participation, total zinc production was 12,929 metric tons in the second quarter of 2005, a decrease of 13% compared to the 14,873 metric tons in the second quarter of 2004.

Zinc cash operating costs increased 39%, from $667 per metric ton in the second quarter of 2004 to $928 per metric ton in the second quarter of 2005. As it was mentioned, the temporary lower mineral ore quality (oxides) brought additional plant reagent consumption and lower recovery rate, which impacted the concentration cost.

In terms of our operating expenses, general and administrative expenses during the second quarter of 2005 were PEN17.9m, a 2% increase compared to the second quarter of 2004. When expressed in U.S. dollars, general and administrative expenses for the second quarter of 2005 were $5.5m, a 9% increase compared to the second quarter of 2004. Accumulated general and administrative expenses for the first six-month period were $12.2m, a 10% increase compared to the $11.1m for the same period of 2004.

Exploration costs in the non-operating areas during the second quarter of 2005 were $6.6m, a 10% increased compared to the second quarter of 2004.

Operating income in the second quarter of 2005 was PEN90.4m, a 4% decrease compared to PEN94.3m in the second quarter of 2004. When comparing U.S. dollar figures, operating income in the second quarter of 2005 was $27.8m, a 2% increase compared to the $27.1m for the second quarter of 2004.

For the first six-month period, operating income was $54.3m, which represented a 2% increase compared to 2004.

Buenaventura's income from non-consolidated affiliates, mainly attributed to our participation in Yanacocha's net income, was $40m during the second quarter of 2005, an increase of 47% when compared to the $27.2m reported in the second quarter of 2004.

In Yanacocha, where we have a 43.65% participation, the second quarter '05 gold production was 709,185 ounces of gold, an increase of 16% when compared to the second quarter of 2004, due to an increase of 35% in the gold grade, from 0.72 grams per metric ton to 0.97 grams per metric ton.

Gold cash cost in Yanacocha during the second quarter of 2005 was $159 per ounce, which represented no variation when compared with the second quarter of 2004.

During the second quarter of 2005, Buenaventura received a cash divided of $13.5m from its affiliate Sociedad Minera Cerro Verde, sociedad anonima.

This quarter, Buenaventura's net income was $82.6m, representing $0.65 per share, a 25% increase compared to the second quarter of 2004. This figure includes a loss of $1.2m, from "change in the fair value of derivative instruments", in accordance with IAS39 for derivative instruments, and a $3.2m impact due to the change in accounting principles applied by our subsidiary, Sociedad Minera El Brocal, for the total of the remaining stripping costs.

For the first six-month period of 2005, net income was $146m, an increase of 25% when compared to $117m in 2004.

In terms of our explorations, we have with us Cesar Vidal, that can answer any questions. But may I report that at the Chipmo Mine, a crosscut southwest of Veta Prometida, some 400 meters below surface, has discovered a new mineralized structure called Esperanza vein. So far, we have drifted along strike for 44 meters, with an average thickness and grade of 1.45 meters and 67.3 grams per metric ton of gold, meaning 1.96 ounces per dry short ton of gold.

In the Poracota project, underground infill diamond drilling of the Manto Aguila has been initiated, in line with our expectations. And we have presented in our press release the grades and the thicknesses that we have intercepted in this Manto Aguila. Metallurgical testwork at Orcopampa and the Plenge laboratories on bulk samples is currently in progress on this project of the Poracota prospect.

In the Layo prospect, four diamond drill holes have intercepted bonanza-grade gold in a newly discovered set of quartz veins, which are summarized in a chart in our press release as well.

In terms of project development, in Uchucchacua, regarding the construction of the cyanidation plant, basic engineering study has been completed and detailed engineering is 90% completed. During June, the installation of the main equipment started, as well as the main facilities. The budget for this project is $8.8m and completion is expected by the end of this year.

The deepening of the Master Shaft to level 3,900, with a total investment of $2.3m, is expected to be concluded during the first semester of 2006. The project is at 45% completed.

And in Marcapunta, the copper project of Sociedad Minera El Brocal, at the end of this quarter, the advance in the main decline was 731 meters, 89% completed, and the exploration decline was 172 meters, 68% completed. We expect to place diamond drilling equipment in six months. Total investment was $1.5m for this semester.

With this, may I pass to the Q&A section, and we will be very pleased to answer any questions that you may have. Thank you.

[OPERATOR INSTRUCTIONS]. Our first question today will come from Alberto Arias with Goldman Sachs.

Yes. Good morning Roque. I just have a couple of questions. The first one is with regard to the tax rate in the second quarter. It seems that you had a tax credit and if you could elaborate on what are the reasons why you had that tax credit on the quarter?

Carlos Valvez will answer that.

Good morning Alberto. The point is that in the process of converting our derivatives into normal sales, we explained, we have been explaining several times, the fact that derivative instruments contracted abroad of the country are not tax-deductible, while the normal trades are. So converting the ounces of gold from these derivative instruments to normal sales, we recognized $53m expenses that were not considered due for a tax deduction. And today, the impact on the income tax from worker participation means $18.8m tax effect.

So for this quarter, as we converted these positions during the second quarter, we recognized these deductions, the tax effect that implies a net credit that we report in our financial statements.

Okay. Because according to the numbers, it seems that it's a pretty significant number. You have a $5m, almost $6m, tax credit on income before profit of $80m.

Right.

Okay. Alright. Second question, with regard to Yanacocha, there was a reference saying that costs were flat year over year, $159. However, you also make a reference that ore grades have increased significantly. Could you explain what's the reason why costs didn't come down, if the ore grades were so much higher than what it was last year?

You have to bear in mind, Alberto, the impact of diesel fuel. This has increased 25% this year compared to last year. So while in the second quarter '04, diesel fuel impact was 15% of our cash operating costs, today it's close to 19%. This is a tremendous increase that did not permit to reduce our cash operating costs, in spite of the fact that we increased the grade.

Okay. And a final question. Any update with regard to Cerro Quilish and [Lazanza] and the social tensions there?

It seems that the situation is much better but on the specific of Cerro Quilish, I think we have nothing to report at this point in time. I'm afraid that we will have to wait somewhat more.

And on [Lazanza]?

On [Lanzanza], we are back. We are doing some geophysics. We are doing some mapping. We have not started drilling yet. We have already a police base next to the mine and things are quite calm. But we have not started drilling yet.

Okay. Okay, thank you.

Next we hear from Daniel Altman at Bear Stearns.

Hi, good morning. Two questions. Firstly, on the dividend. I see that -- I'm trying to reconcile what you actually received in cash during the quarter. I know you mentioned the funds from Cerro Quilish, I'm sorry, from Cerro Verde, and also from Yanacocha. But on your cash flow statement, we see a number of about $27m for dividends received. I just want to make sure I'm reading that number correctly.

In the case of the Cerro Verde dividend, you know that Cerro Verde declared in May a cash dividend on the basis of their financial statement as of March. There was a total dividend of $147m, when it was received and declared, and payout just finished in June. And the difference between the dividend reported in our cash flow statement is the sum of Cerro Verde's cash dividend and Yanacoch's cash dividend.

The big difference is that while in Yanacocha we follow equity accounting, and of course there is no -- any special report in our P&L when paying dividends, in the case of Cerro Verde it's just an [adjustment] and we only report when collecting this cash dividend.

How much was the cash dividend, then, from Yanacocha in the second quarter?

Well, the complementary figure is $13.4m.

Okay. Is that a -- does that signify a lower payout or is that something you were expecting?

No. It was -- you know that we put in it internally [indiscernible] in every single quarter.

Yes. Okay. Then the other question I had was just on the volumes at Yanacocha. Is it -- are you still planning for a 3m ounce year at Yanacocha this year?

Yes. Well, basically, the thought that we are working is on a basis of 2.9m ounces.

Okay. But 2.9m as opposed to 3m?

2.94m. So it's very close to 3m. It's still close to 3m.

Okay. Perfect. Thanks a lot.

Our next question will come from Victor Flores with HSBC.

Thank you. Good morning. I was hoping we could have a few words from Cesar on some of these new exploration results, and perhaps to give us a sense of where this new Esperanza vein is located relative to the current operations. And also, the same information regarding Layo.

Good morning Victor.

Hi Cesar.

Well, fine. There's very good news from the Chipmo Mine. We have to pay credit to [Julio Mesa], our new Chief Mining Geologist in charge, and [Luco Amarra], who is a Mining Geologist.

This is not part of my personal duties, but it's a pleasure to report that the new vein testing found in the middle of the operation, close to the Prometida vein system. And as you can read there, it's a very good grade. Certainly the average width is 1.5 meters, but it pinches and swells and this is only the beginning. So we believe this is going to give us more and better grade ore for replenish the reserves of Orcopampa again.

The significance of this discovery, this mine exploration discovery, is that it's within the infrastructure of the mine and it's going to impact directly to the operation.

Your second question, regarding Layo. Layo is a prospect northeast of Orcopampa, where we have been readdressing exploration as part of a brownfield effort at Orcopampa since last year. And in fact, the four holes that we've mentioned here are giving us narrow widths of 0.5 meter to 1 meter, with very high grades, multi-ounce per ton [indiscernible] that are really outstanding. What we don't have is a good surface expression of this northern part of Layo, to prove continuity of this intercept, which are 100 meters away from one another.

So we have a second-stage program that we are confirming to you now, to drift into this and open up in the near future. We haven't done any metallurgical work on Layo yet but we believe that it's going to fit into some of the Orcopampa flotation or cyanization flow sheets. There are some good silver grades in Layo too but it's early stage brownfield exploration discovery. We're excited about it and you will hear more of it.

Great. If I could ask a couple of follow ups. Do you expect to have a revised resource figure for Poracota at some point in time in the near future, or is that a year-end figure?

Absolutely. But this is going to be at the year-end because we are currently drifting our underground tunnels and drilling from underground. This is an exercise that's going to take for the rest of the year. We are into drilling and getting results in line with expectations, as the intersects of 2 to 4 meters in general of plus 10 grams per ton material.

However, because you ask, I can tell you too that there is a -- these intersects of high-grade material are probably much larger - 10 to 30 meter wide mineralized structures, with average grades of 6 to 8 grams per ton. But we will have a new resource presented to you by year-end, with a normal 5 gram per ton cutoff. But also, what seems to be a natural cutoff of a mineralization, 3 grams per ton.

May I just add that it's important to mention that Chipmo is certainly in the Orcopampa Mine, but Poracota and Layo are not far away from our Orcopampa Mine. And we have all the infrastructure in place to develop this prospect when and if we decide to develop this. And certainly, we are very excited and I think that this whole area has a lot of potential.

And then, just finally, if I can just abuse a bit and ask a question on Marcapunta. Have you learned anything, as you advance the decline, that's worth talking about?

Nothing really of economic geology relevance. The ground is quite heavy and we need to reinforce it every meter. So it's an expensive tunneling cost. Getting better while we get closer.

And have you resolved any of the issues with respect to surface drilling?

In the case of Marcapunta, we're doing no surface drilling at the moment.

We have shifted gears to the underground, drifting and drilling later on.

Great. Thank you very much.

Next we'll hear from Tony Lesiak with UBS.

Yes. Just wanted to talk to you a bit about the remainder of the year for Yanacocha. Looks like you're well on your way to hitting your targets there for production. Can you comment on the grade profile for the next couple of quarters?

The expectation for the next couple of quarters is to maintain a pretty high grade, so around 1 gram per ton. This is our forecast. So we expect to maintain and fulfill our objective this year.

Would you characterize your cash costs in the quarter as representative?

Well, if there is no important variation in the diesel fuel cost, we should keep working in the order of $150 per ounce.

And finally, on exploration expense. Can you comment how much you guide expense over '05 and '06?

Well, the figure is in the order of $25m per year. And we expect to continue working at Yanacocha. And we expect to continue working at this rate, basically to continue finding additional minerals. There is nothing special.

Okay. Well, thank you very much.

You're welcome.

Tony, it's important also to mention that in Yanacocha we continue working on the gold mill that will help certainly the exploration or the - if I may say - the returns at Yanacocha, because it will enable us to consider reserves that currently are not considered as such because there is no feasibility still. So the gold mill is under -- in process and we expect to have some additional information in the next month or next year.

Our next question will come from John [Majos] with Prudential.

You say in your release that 345,000 ounces were converted in the quarter, from derivatives to normal sales. In the quarter, you sold 92,078 ounces from your own operations, for $362. Should we assume that about half of those 92,000 ounces were sold at spot and half of them were delivered into the sales agreements? Could you just talk about the mechanics of how you're going about extinguishing gradually, through deliveries, the hedge position?

John, the conversion from derivative instruments to normal sales has nothing to do with the sales on the report in our -- in this quarter. We distribute the impact along the life of this hedge book that matures in the year 2012. So the ounces we converted will be distributed, according to the activity you have in the appendix we reported.

So the only thing we are reporting right now is the effect of modifying the permission we created when we accounted the first time the mark-to-market variation of these derivative instruments, with no tax effect. Then, when converting to normal sales, we have to recognize the tax effect of this transaction. So those are the information.

Could you explain the $362 gold realization that occurred?

Yes. Well, that is the price that we received for our normal -- our transactions that were at fixed price. And the difference is the recognition of our - as we call them here, in the second line of our P&L - called the realized income from the sale of future production. So we are incorporating gradually, to the extent we sell, this price that we -- the position we charge when converting in the normal sales transactions.

How many of the 92,078 ounces were sold at spot?

Nothing. Of our direct sales, nothing. 100% was at the street price, according to our hedge book. And the difference is the recognition of this permission that we created, when we contracted the normal future sales.

And just to make sure I understand, the Yanacocha 43.75% interest is completely not affected by this?

Absolutely. It's not hedged. It's not affected. And just to round the figures and complete the information, you can go to our cash flow statement and you are in the reconciliation, you'll get the information exactly about this recognition of the future sales impact. So you can identify what is not cash is impact in our P&L.

Yes. Well, thank you very much. I'm sorry if I asked too many simple questions.

No, no. No need to be sorry.

Terence Ortslan with TSO & Associates has a question.

Thanks. Could you just remind me what the CapEx for Yanacocha is for the year? You spent -- gross spend $60m for the quarter. How much more will you have to spend on the leach pad on the second half?

The CapEx for the total year is in the order of $250m. And the CapEx of this quarter is -- yes, was in the quarter $62m, basically in the preparation of a leach pad. And then the concern is for the Carachugo transition ore.

And is there a number of next year, which is pending, given the continuity of the CapEx requirement, roughly?

Yes. What we expect to have in year 2006 is CapEx in the order of -- we believe that it will be in the order of $290m. This is our expectation.

That's fair enough. Thank you very much.

Welcome.

[OPERATOR INSTRUCTIONS]. Next we'll hear from Felipe Reis with Merrill Lynch.

Morning gentlemen. [Inaudible].

Can you speak louder please?

[Inaudible].

Hello?

Mr. Reis, if you could -- if you're speaking into a speakerphone, if you press your mute button or get closer to the speakerphone. Mr. Reis?

Can you hear me now? Yes? Okay. Yes, I would like to just have further details on Poracota. If you could give us more details on the mining, on the production and to have some guidance on the cash costs?

This is Cesar Vidal and I'm pleased to report that in Poracota we have embarked in the second stage of ore reserve generation, with infill drilling at 50 meter centers, from underground drifting. And at the same time, with advanced metallurgical testwork. By year-end, we should have a new statement of resources and reserves, and we are aiming for the first million ounces.

We have announced last year, in our annual report, 1.7m tons at a grade just shy of 11 grams per ton. We have inferred, in addition to that, 1.5m tons, so this is a 3.2m ton 10-gram or plus per-ton grade proposal that we are confirming with the infill drilling.

This second semester, we are going to start with a scoping study. We are going to engage [indiscernible] in this and we're going to have some figures regarding costs, future costs, when we have all the reserve resource statement and the metallurgical testwork in place. So at the moment, all I can tell you is that we're infill drilling and results are in line with our expectations.

Okay, thank you.

At this time, we have no further questions in the queue. I will now turn the conference back over to Mr. Roque Benavides for closing or additional remarks.

Well, thank you again for joining us in this conference call. As we always used to inform, we will be attending the Morgan Stanley conference in London in September and then we will be visiting some investors in Edinburgh in September as well. And we'll try to keep in touch with all of you. Our appreciation for your time and hope this has been useful for you, in terms of the information on the Company.

Thank you very much and good morning for those of you in New York, and good afternoon for those of you in London.

And that does conclude our conference call. Thank you very much for joining us today.