Compania de Minas Buenaventura SAA (BVN) 2005 Q3 法說會逐字稿

Good day, everyone and welcome to the Minas Buenaventura Third Quarter Earnings Release Conference Call. Just as 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 Mr. Pete Majeski. Please go ahead, sir.

Thank you, Maria and good morning everyone. Welcome to Compania de Minas Buenaventura's Third Quarter 2005 Earnings Conference Call. Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer. He will be discussing Buenaventura's results for the press release distributed yesterday. If you've not yet received a copy, please call us in New York at (212) 406-3690 and we will e-mail it to you 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 Roque Benavides. Mr. Benavides, you may begin.

Thank you. Good morning to all of you and thank you for attending our conference call. All of our operations including (inaudible) have had an excellent quarter. This quarter Buenaventura's net income was $40.7 million, or $0.32 per ADS, including the effect of the derivative instruments and non-recurring expenses of $40.9 million. Without considering these effects, the net income for the third quarter 2005 was $55.6 million, or $0.44 per ADS, which represents an increase of 29% when compared with the third quarter of 2004.

Operating income this quarter was $19.8 million, 11% higher than in the figure recorded in the third quarter of 2004. While EBITDA was $114.2 million, which represented a 21% increase when compared to third quarter of 2004. EBITDA for Buenaventura's direct operations was $22.9 million, 26% higher than third quarter 2004.

In the third quarter '05, net sales were $62.7 million, a 5% increase when compared with $59.9 million in the third quarter of '04. In terms of our production in operating costs, Buenaventura equity production during the third quarter '05 was 92,065 ounces of gold, 6% higher than the 86,909 ounces reported in third quarter '04. And 3,410,000 ounces of silver, a 4% increase, when compared to 3,259,000 ounces of same (ph) in the third quarter '04.

At Orcopampa, just on gold production in the third quarter '05 was 60,133 ounces, a 7% increase compared to 66,447 ounces in third quarter '04 due to higher ore milled Cash operating costs increased 8% in Orcopampa from $124 per ounce in the third quarter 2004, to $134 per ounce in third quarter '05. This explained by the increase in energy consumption and relative state to the government. You have to bear in mind that the country (ph) costs at the Orcopampa mine are coming up, and that is the reason additional energy consumption.

At Uchucchacua, total silver production for the third quarter 2005 was 2,628,000 ounces, a 4% increase, when compared to 2,528,000 ounces in the third quarter '04. Cash operating costs in the third quarter '05 decreased 14% from $2.97 per ounce in the third quarter '04, to $2.64 per ounce. Higher by-product credit contributions and a lower impact of deductions in sales and expenses, this explains this decrease. Certainly, the zinc and the lead (ph) produced at the Uchucchacua mines have contributed as by-products, and by doing that reducing the cash costs at Uchucchacua, and probably is one of the most competitive silver mines in the world as of today.

At Antapite, total production for the third quarter '05 was 26,065 ounces of gold, a 5% increase, when compared to 24,935 ounces in third quarter '04. Gold price operating costs in the third quarter '05 was $216 per ounce, a 20% increase when compared to $180 per ounce in third quarter '04. This was due to an increase of 22% in exploration and development costs. Diamond drilling works increased 52% from an average of 1,316 meters in third quarter '04 to 1,998 meters in third quarter '05.

As I have explained to many of our investors, in Antapite there is a (inaudible) deposit. We need to explore more, and certainly we follow the Security and Exchange Commission regulation and we extend all the exploration that we do in this mine, and this is the reason for the increase in Antapite. At Colquijirca, within the (inaudible), total silver production was 14,540 metric tons in third quarter '05, a 3% increase (ph), when compared to 15,020 metric tons in third quarter '04.

Total silver production during the third quarter '05 was 1,073,000 ounces, an 18% increase, when compared to 960,000 ounces in third quarter '04. The silver grade at the Colquijirca is very difficult to quantify, and that is the reason why we have had higher rates of silver in this quarter and this of course is good news for us.

Since cash costs, or cash operating costs increased 10% from $709 per metric ton in third quarter '04 to $777 per metric ton in third quarter '05. This was due to higher grants in agent consumption and higher plant reagent consumption and higher milling and grinding supplies costs, not a major increase in cost. It is under control, and we continue having great expectations in this operation.

In terms of operating expenses, general and administrative expenses for third quarter '05 were $12.1 million, an 82% increase when compared to $5.5 million in the third quarter '04. This increase was mainly due to a $4.3 million prohibition for the company's long-term compensation and does not represent any cash disbursement. Exploration costs in non-operating areas during the third quarter '05 were $6.7 million, a 41% decrease compared to third quarter '04, when it was $11.3 million. This decrease was mainly due an extraordinary exploration expense in La Zanja project reported in third quarter '04.

In terms of our operating income, in the third quarter '05 was $19.8 million, an 11% increase compared to third quarter '04, when it was $17.9 million due to a higher operating revenue offsetting the increase in the cost of operations and operating expenses. In terms of income and dividends from non-consolidated affiliates, Buenaventura's income from non-consolidated affiliates, mainly attributed to our participation in Yanacocha, was $46.8 million during the third quarter '05, an increase of 29% when compared to $36.2 million reported in the third quarter '04.

At Yanacocha, in the third quarter '05, gold production was 753,660 ounces of gold, an increase of 1% when compared to third quarter '04 production that was 754,473 ounces. Gold cash costs at the Yanacocha during the third quarter '05 was $148 per ounce, which represented a 1% decrease, when compared with the gold cash costs of $150 in the third quarter '05.

U.S. income at Yanacocha during the third quarter '05 was $114.4 million, a 37% increase, when compared to third quarter '04 figures that was $83.4 million, due to higher sales and lower cash operating costs. In the third quarter '05, EBITDA was $209 million, an increase of 20% compared to the third quarter '04, $174 million in that quarter.

This decrease was due to highly realized gold price increasing from $400 per ounce in third quarter to $439 per ounce in the third quarter '05. In terms of our net income, this quarter Buenaventura's year income was $40.7 million, representing $0.32 per ADS, a 41% increase compared to third quarter '04.

Regarding our project development at Uchucchacua, the construction of the cyanidation plant, the project is 65% completed, while detailed engineering is 94% completed. The plant is expected to be completed during the first quarter 2006 with an estimated total investment of $8.8 million and probably an additional one million ounces recovery from this plant.

Marcapunta, at the end of this quarter, the advance of the year decline was 842 meters, 35.6% of total length. And exploration decline was 350 meters, 77.2% of the total length we expect to finalize. We expect to place diamond drilling equipment by first quarter 2006 and total investments have been up to now $2.95 million.

Yesterday, we had our board of directors meeting and most of the financial statements were approved. And it was approved a cash dividend of $0.18 of dollars per share, or ADS, to be paid in U.S. dollars from November 28, 2005 to shareholders of record on November 16, 2005 who purchase shares until November 11, 2005.

With this, in the area (ph) after question and answers, not before telling you that Carlos Galvez, our Chief Financial Officer, is currently at the Advanced Management Program at Harvard University and César Vidal, our Chief Exploration Strategist, is the Advanced Management Program at Hofstra University. So now, we have two academics within management. We expect them to be back by early November and we expect to benefit from the experience and the knowledge they are gaining from this new process.

Please let's go to questions and answers, please.

(Operator Instructions)

And your first question will come from Andrea Weinberg.

Hi Roque. How are you? Quick question on Yanacocha. You gave guidance yesterday on the production for Yanacocha being almost a million ounces in the fourth (ph) quarter of the year. I understand that, from your results, that Yanacocha's grades were actually higher in the third quarter and the (inaudible) ratio lower. I just want to understand how they are going to be able to achieve 28% higher production in the fourth quarter, and what would change in 2006 to decline production that much?

Well, essentially, as we understand from numerous of our (ph) operators (ph) and from their own press release, it is this additional allowances that are coming from inventory. And we really expect the production at Yanacocha to decline in the order of 10 to 20% next year. We really don't have a specific figure, but essentially production will reduce next (ph) year.

Okay and if I can ask a second question on Poracota . I understand that you are taking facing some metallurgical challenges in the project. Just wanted to understand the progress that you made in the third quarter in that project, and if you are still expecting it to produce 100,000 ounces of gold by 2008?

We -- I think that there is not one single day that we are not exposed to metallurgical problems in Buenaventura. And Poracota is one more of those. We have noted that there are different layers, different mantles that have different recovery. And yes, Poracota has really posed us some metallurgical problems. But also the ground, it can be somewhat, not very stable. So, we are working on that. And with whole (ph) enthusiasm, and we think we are going to solve those problems. We expect to continue the development. We have already exercised part of the option with Southwestern, and we will probably exercise immediately the option with Teck Cominco and acquire up to 75% and then after, we will develop the project of course.

I have a comment here that Dorado -- the Manto Dorado, is very good from a metallurgical standpoint, and Aguila is somewhat more difficult. But yes, it is a question of different layers that have different metallurgical solutions, and we are working on that very, very intensively.

Okay, thanks Roque.

Very well then. We will go on to the next question, and it will come from Daniel Altman of Bear Stearns.

Hi, good morning. Just wondering on the -- there was a, I guess, kind of a newswire type story saying that your production at your own mines would help to compensate for reduced output at Yanacocha. I am just wondering if you have a view in terms of what the potential increased production could be at your own mines in 2006. The second question I had was obviously a lot of noise on Yanacocha in the media, New York Times, and I think a documentary. Do you feel like people are portraying this story unfairly or, do you feel that the media reports have been fairly accurate? Thanks.

There are two parts to your question, no? Yes, at the (inaudible) Conference we said that the -- our own operations were going to compensate partially the decline at Yanacocha. And, we are quite excited about the surroundings of Orcopampa, with Acota (ph) being one, and Layo being the other part that is not far away from the Orcopampa concentration and generation (ph) plant. And, we will be in a position by developing the Layo property to take the ore directly to the plants at Orcopampa. You have to bear in mind that we have all the infrastructure there to develop.

Then, this is over Poracota and Layo, and we are also probably going to increase slightly the production at Antapite and otherwise we are going to be able to freely compensate the decline in Yanacocha. But we are going to do our best to produce more from our direct operations, but are quite competitive in terms of cash costs. In terms of the New York Times -- it is a subject that, of course, we do not like. The motivations for the New York Times to come out with this subject at this point in time, a subject that was discussed some years ago with an executive of Newmont having a lot to say in this report.

It is something that we attempt to understand as a problem, as an internal problem that has to be solved. In our case, and probably you have seen what they have asked me, because I was interviewed by the TV crew that came to Peru. We did not know of Mr. Kurlander going to talk to Mr. Montesinos. We understand, and you have to bear in mind that when there is a main advisor to the president, that if someone goes to talk to the main advisor, it is not all that wrong, no?

Certainly, we would have not suggested him going to talk, but essentially Mr. Montesinos was an advisor to Mr. Fujimori. We have reviewed the tape of what was spoken at that point in time, and really, if you ask me, I do not see anything wrong with (inaudible) doing in that respect. I think it is news that goes against the gold mining industry as a whole.

It goes probably against the premiere mining company of the world, that is Newmont, and certainly it has an impact on that, and that is the reason why we attempted to talk to these journalists. We assumed that we had said our piece, and that is the whole truth. We are quite relaxed in this respect, but of course we have to face that the media is talking about us.

Okay. Well, thank you very much.

(Operator Instructions)

And your next question will come from Victor Flores of HSBC.

Yes, thank you. Good morning, Roque. I was hoping you could just spend a couple of minutes talking about the progress on two of the development projects, one being La Zanja and the other being Cerro Verde.

Sure. Victor, permit me to just add to my previous answer on the New York Times report. Also, please do not forget that we were at that time under tremendous pressure from the French government. The French president sent a letter to Mr. Fujimori putting pressure on the judiciary of Peru. But, Mr. Kurlander who had (inaudible) requested from the government was a level field, that is having the same conditions for everybody. We never asked for any special favors. Sometimes people judge a situation out of time, if I may say.

This happened for five or six years, from '93 to '98 or '99, and now there is a report coming again talking about this same subject. Please bear in mind that we were under heavy pressure from the French government. And, you all know what I mean when I say that. La Zanja and Cerro Verde are certainly two projects that keep our excitement quite high. La Zanja we are already drilling again. We started drilling in October. We have had no major problems with the local community.

I have to praise Raul Benavides that has been working with a team of people, with the local communities, not only with the surrounding communities to the mine, but also in the whole basin of La Zanja (inaudible). This has been called the Grupa Norte, or the North Group, meaning that Yanacocha, La Zanja, Tantahuatay goes with all of the mining companies working together, trying to impart the message that we are there to help the development of the region. This has permitted us to start drilling, and we expect to report some results from La Zanja in the near future.

In the case of Cerro Verde, I must say that I have just seen some pictures of the building of the new concentration plant and it is quite impressive. The (inaudible) are very advanced. We are still thinking in terms of probably the end of 2006, or early 2007 to be at full production. Our investment in Cerro Verde has shown to be a very good decision. We have not reached the 20%, but we will do so at some point in time. We are not prepared to pay more than that has to be paid, and we are looking after that. La Cerro Verde is reporting substantial profits. It is due for (inaudible) and certainly it is a big investment for us.

Thank you, Roque.

(Operator Instructions)

And your next question is from Tony Lesiak of UBS.

Good morning, Roque. Can you comment on the cost structure and capital requirements at Yanacocha over the next few years?

Well, Yanacocha after the question of (inaudible) that will have to wait, I would say. I hope that that will be developed sometime in the future, and that is part of the substantial oxide reserves of Yanacocha. We will continue of course producing from the oxide, we still have seven to eight years reserved (ph) in oxide, but depends for huge oxide discoveries I think are over. And we are heading for a gold mill that will enable us to process the transitional ores at Yanacocha. And certainly the development of (inaudible) more towards 2010, 2011, 2012, will contribute to maintaining the level of production at Yanacocha.

This will require certainly intensive capital investment, and I would say that we have to invest in the gold mill -- I do not have the exact figure -- they tell me 250 million of the gold mill, plus of course leach pads, and the good news is that we are finding some higher-grade ores in the Yanacocha district. In the area of Chaticocha (ph) and different ore bodies that will permit us probably to exploit higher-grade ores, and by that maintaining the cash cost of the operation.

In addition to that, there is some copper within the transitional ores and certainly in Minas Conga that (inaudible) will permit to reduce the cash cost. I would say overall cash cost will come up, but not substantially higher than what we have seen. Probably, I bet in the order of $160-$170 per ounce.

And would you see that coming through in 2006?

I would say that 2006 will have more or less the same cash costs as in 2005. I think we are going to concentrate, and this is what I have discussed with the management of Yanacocha, we are going to concentrate on cost reduction. And I think that is very, very important, because Yanacocha has been an operation that we have seen the production so far has been growing every single year. A compound growth rate of 30% per year.

That is very difficult for any operation, for any individual, for any group of people, no, to check on cost. Now that we are more in the mature time, we are going to concentrate more in cost reduction, and I would expect, and this is the plan to maintain the order of cash cost for next year.

You mentioned 250 million for the gold mill project. Does that include anything for some of the underground development for some of the projects that you are looking to bring in and replace Cerro Quilish in the short term?

No. No. No. That does not include any of the underground work that has not been planned yet. We know that there is ore in depth (ph). We have been discussing how to mine those ores. Certainly, there has been these important discoveries, big discoveries in the area of Yanacocha and (inaudible), but that again is a different topic. In terms of the deeper ores, I think we will have to evaluate the possibility of exploiting those underground. At this point in time, we do not have a plan for that.

Okay. Do you expect production to remain at the 2.7, 2.8 million ounce level for the next few years?

The plan at this point in time is to reduce next year to the order of 2.7, and probably going to 2007, probably to 2.5 million ounces. It is not that we are going to maintain 2.7 for many years, but then after it may come up with the installation of the gold mill and the development of Minas Conga, and all of the other projects that we are in the process of exploration.

Just on that exploration, can you mention what the joint venture at Yanacocha is spending on exploration, and maybe comment on some of the most recent successes that you might have had?

Well, Yanacocha all together if I am correct, it is investing at the order of $38-$35 million per year in exploration. It is not a joint venture, it is a company as you know. So it is Yanacocha the company, the corporation that is investing in exploration. All around the current property, we have increased our land package. We have the Debora Corridor (ph) that is quite an exciting target of mineralization exploration.

As I mentioned (inaudible) seems to be -- some people say even that it is another (inaudible). Of course it is not gold, but we have to think that this is the early stages and we have to be very careful in what we say. We have some deeper targets in the area of Yanacocha, and of course all the transitional ores are underneath the ores that we have been exploiting for these last few years.

Thank you, very much Roque.

(Operator Instructions)

And your next question will come from John Bridges of JP Morgan.

Hi Roque, good morning. I was reading in the FT the other day that Mr. Fujimori is thinking of coming back into politics, or at least he has got some supporters there. With the presidential election coming up in April, or first round, I wonder if you could us a bit of a rundown as to what the latest is there, and how that would impact a investment decision at Yanacocha?

I think that more than the coming election, but that is important, and this is a personal comment, because we executives of companies are clearly not the best to comment on politics, but this is my personal comment. I think more important than the politics (inaudible) this free trade agreement negotiation with the U.S. If we reach a free trade agreement, this will have the impact of getting at the framework for investment in Peru, and that would certainly help the investment environment in Peru.

But specifically in terms of the election, yes there is a lot of talking on Mr. Fujimori coming back, if he is able to come back or not. It is a big discussion here in Peru. When Alan Garcia left Peru, everybody said that he would never come back, and he is back. So, I am prepared to be surprised in the explorations of Buenaventura, I am prepared to be surprised in terms of politics of Peru.

The heart of the matter is that today's polls give Miss Lourdes Flores, the right-to-center candidate, the first place with close to 28% intention of votes. Fujimori has also an important support, and APRA has important support. My impression is that Parliament composition is going to be in the order of 20 to 25% APRA, 20 to 25% Fujimori followers and probably 20% the followers of Lourdes Flores. This is so much better than what we have today in terms of Parliament, that I am optimistic of what will happen after July 28th next year.

Having said all of this, I think that in Peru we have learned that investment is the only way to fight poverty, to generate wealth, and to develop the country. I think there are a number of aspects. And well, you have to understand that I am a Peruvian and that I will stay in Peru regardless of whatever happens, but we are quite optimistic and certainly Buenaventura will continue investing in all of our projects.

This is what we know how to do. This is what we are paid by the market to do. And we will certainly look after some possibilities abroad. But Peru still offers a lot of opportunities. I think we have to be optimistic regarding the Peruvian politics, and certainly the indefinite environment of Peru.

That is encouraging, Roque. How long do you think it would take after the first round of the election in April to get to the resolution that you are thinking of?

The resolution of who will be the President, you mean?

Yes, yes.

Well, the thing is the first round is, as I understand March, and hopefully by May, early May, we will have the run off. And we will have the President. (Inaudible) not, it is something that I really, really don't know.

Okay, okay. Okay, thank you very much and the best of luck.

Thank you.

And at this time, I see no further questions in queue. And I would like to turn it back over to Mr. Benavides.

Well again, thank you very much. We have -- I think I want just to inform you that I will be in London this December to attend a (inaudible) conference board meeting and probably I will be calling on some of our investors in London. And then, we will be attending the Cancun (inaudible) Conference the investment conference, (inaudible) Cancun which is still alive (ph) totally (ph) in January. And then of course the Merrill Lynch conference in May, that this year is going to be in Miami for most places.

At this point in time, these are the conferences that we have committed to attend. And then again (ph) on March 6, this is a Monday. We have been invited by the New York Stock Exchange to ring the bell again, the closing bell, celebrating our 10th anniversary of listing at the New York Stock Exchange. Ten years since Buenaventura was listed and certainly, all of you will be receiving an invitation for a luncheon at the New York Stock Exchange on Monday the 6th, 2006.

With this, I want to thank you for your patience, and for your questions and for your understanding that things are not necessarily as easy as they -- as we would like them to be, but we are working very hard to maintain the value of your investments. Thank you, very much.