Compania de Minas Buenaventura SAA (BVN) 2006 Q1 法說會逐字稿

Good day everyone. 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 Pete Majeski with I-Advize Corporate Communications. Mr. Majeski, please go ahead.

Thank you Erica. Good morning everyone. Welcome to Compania de Minas Buenaventura’s first quarter 2006 earnings conference call. Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer, Mr. Carlos E. Galvez, Chief Financial Officer and other members of Buenaventura’s senior management team. They will be discussing Buenaventura’s results per the press release distributed yesterday evening. If you’ve not yet received a copy please call us in New York at 212 406 3690 and we will email you a copy 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 the 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, you may begin.

Good morning to all of you. This quarter, Buenaventura’s net income was $125m or $0.98 per ADS which represents an increase of 89% when compared to first quarter ’05. This figure includes a negative effect in mark to market variation of $10.3m.

Operating income was $55.7m, 111% higher than the figure we quoted in the first quarter ’05, due mainly to higher silver production and higher prices of silver, zinc and lead that benefited all our operations. Total EBITDA was $190.8m, which represents a 62% increase when compared to first quarter ’05. EBITDA from Buenaventura’s direct operations was $50.6m, 87% higher than first quarter ’05.

In the first quarter ’06 net sales were $106.3m, a 58% increase when compared to $67.3m reported in the first quarter ’05, due to a 24% increase in silver sales as well as higher silver, lead and zinc prices. Royalty income during the first quarter ’06 totaled $13m, a 29% increase when compared to $10.1m reported in first quarter ’05. This was due to higher sales at Yanacocha.

Buenaventura’s equity production during the first quarter ’06 was 93,144 ounces of gold, 5% higher than the 88,367 ounces reported in the first quarter ’05, and 3,314,000 [sic - see presentation] of silver, a 1% increase when compared to 3,288,000 [sic - see presentation] ounces reported in the first quarter ’05.

At Orcopampa, total gold production in the first quarter ’06 was 61,751 ounces, an 8% increase when compared to 56,900 [sic - see presentation] ounces in the first quarter ’05.

At Uchucchacua, total silver production during the first quarter ’06 was 2,172,000 [sic - see presentation] ounces, a 14% decrease when compared to 2,536,000 [sic - see presentation] ounces in the first quarter ’05. For safety reasons, the Company temporarily decided to exploit in areas that reported lower silver grades and secondly, changed the drilling method, which prevented from maintaining regular tonnage. That is the reason for the decrease in our production. The reserves at Uchucchacua are still very, very strong but due to safety reasons we have decided to go this way.

At Antapite, total production during the first quarter of ’06 was 24,900 [sic - see presentation] ounces of gold, a 5% decrease when compared to 26,300 [sic - see presentation] produced in the first quarter ’05, due to a 6% decrease in the gold grade.

At Colquijirca, within the Brocal Company, total zinc production was 15,500 [sic - see presentation] metric tons in the first quarter ’06, a 15% increase when compared to 13,500 [sic - see presentation] metric tons in the first quarter, due to higher zinc grade. Total silver production during the first quarter ’06 was 1,997,000 [sic - see presentation] ounces, a 140% increase when compared to 831,000 [sic - see presentation] ounces in the first quarter ’05. This additional production was possible due to higher grade of silver in the area of the open pit under exploitation.

Buenaventura’s net income from non-consolidated affiliates was $92.3m during the first quarter ’06, an increase of 79% when compared to $51.5m reported in the first quarter ’05. This increase is explained by higher results obtained at Yanacocha and Cerro Verde. At Yanacocha, the first quarter ’06 total production -- total gold production was 800,000 [sic - see presentation] ounces of gold, an increase of 1% when compared to first quarter ’05 production. We continue to budget 2.6m ounces for the full year at Yanacocha.

At Cerro Verde the first quarter [’05] total copper production was 22,700 [sic - see presentation] metric tons, a 5% increase when compared to first quarter ’05. Capital expenditures at Cerro Verde for the first quarter ’06 were $162.6m, of which $160m was allocated to the construction of the Primary Sulfide Project. Regarding this project, engineering is nearly complete, while advances are ahead of schedule and within budget, despite increases in supply prices.

This quarter, Buenaventura’s net income was $125m [sic - see presentation], representing $0.98 per ADS, an 89% increase compared to the first quarter ’05. This figure includes a loss of $10.3m from a change in the fair value of derivative instruments. Without considering this effect, net income for the quarter was $135m, or $1.06 per ADS [of share].

In our hedging operations, on March 22, 2006, 340,000 ounces of gold were converted from derivatives to physical delivery commitments, with no cash effect for the Company. At the end of the first quarter ’06, the Company has all its gold commitments in physical delivery as shown in Exhibit 3.

In terms of the project developments, at Uchucchacua, the sulfide cyanidation plant project was completed in April according to budget and testing will begin in May. The complementary facilities to treat oxide ore is expected to be completed in the third quarter ’06 with an estimated investment of $3.6m additional. This quarter the Company started deepening the Master Shaft from the level of 4,060 meters to the level of 3,900, which will lead to deepening the Carmen and Socorro mines. The expected total investment for this project is $10.3m.

In Orcopampa, ramps at Nazareno and Prometida mines were extended 635 meters in the first quarter ’05, reaching the level 3,490. This project began in May 2004 and accumulated an investment of $19.8m as of March 31, 2006. We expect completion by the end of 2006. Likewise, an auxiliary shaft to improve ventilation and ore transportation will be constructed in the Prometida area.

Finally, in Marcapunta in the first quarter ’06, the main decline advanced 242 meters [sic - see presentation], accumulating up to date 1,222 meters. We expect an advance of 300 meters in the main ramp during the next quarter. In addition, in Marcapunta North, a pilot plant to treat 1,000 metric tons per day is expected to begin full operations in the third quarter ’06.

With this, and may I turn to question and answers and we are open to any questions you may have. Thank you very much.

Are you ready to take questions sir?

Yes, that’s what I said, yes.

I apologize. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We’ll hear first from Daniel Altman with Bear Stearns.

Hi, good morning and congratulations on the results. I just have two questions. One is, it looks like the difference -- there is a difference in reported volumes at Yanacocha from Newmont and Buenaventura. I’m just wondering if you’re showing it in a different way from Newmont.

The second question is in terms of your derivatives strategy, can you talk about the benefits of going to all physical as opposed to the old structure of having derivatives? I guess that’s the main thrust of that question, thanks.

Good morning Dan, Carlos [speaking]. Could you please expand on the difference of our presentation on Yanacocha?

The volumes --

The volumes in the production of Yanacocha was the difference you found?

Well I guess we can talk about it offline, it just seemed as if they showed a number more like 765 or so for Yanacocha and you are showing 800. I’m not sure if the difference is production versus shipments or is there any other differences in how you reconcile?

No, the difference is -- well, one is the gold produced, and you are comparing with the gold sold. The gold produced in Yanacocha was 769,000 ounces while the gold production was 800,000. This is the difference.

Okay.

[Inaudible] in production.

The first one is 669,000, was the gold sold. And the gold produced was 800,000 ounces, right?

Okay, so you showed the production number, okay.

Yes. Regarding the derivative instruments what we did is to convert our derivative instruments into physical delivery. The point is that we have explained before that, according to Peruvian regulations, derivative instruments are considered parallel operations carried out offshore or abroad. And due to these, if you make losses in derivative instruments, you do not have the right to deduct these losses for income tax purposes.

While working with physical delivery, what you do is to sell the gold and invoice at the price of your hedge position and, following this procedure, you have the right to deduct the losses, the difference in the price, for income tax purposes. That’s what we did. We converted 100% of our derivative instruments into physical delivery, and that’s why we, in our financial statements, are recognizing the credits of [technical difficulty] --

One moment. We’ve lost our speaker, just one moment. Mr. Altman, were you finished with your question?

I had a follow-up.

Okay, just one moment. Just one moment. Please stand by, we are re-connecting the speakers right now. And gentlemen, you are on.

Sorry, but we lost the call. Let me repeat, after confirming the difference in the production and sales of gold in Yanacocha we talked about the derivatives. And what we explained is that we decided to convert the 100% of our derivative instruments into physical delivery, due to this different treatment for income tax purposes.

Due to this, by converting these derivative instruments into physical delivery, we recognized and introduced in our financial statements a credit for our income tax and for the worker participation in profit. That’s why, in this quarter, we report a positive figure instead of a negative one. If you would like to expand on that we can share the details of the figures in an individual [conference table].

Okay, and just one follow-up, the motivation to move to physical delivery, you mentioned, was related to being able to take the tax benefit from the physical sales as opposed to derivative loss. I’m just wondering if the current price of gold had any impact on your decision.

Not at all, because we are basically modifying the prices that we got by converting now from derivative instruments to physical delivery. It’s exactly the same. We have no cash effect. The only effect is the fact that we can take the credit for income tax and worker participation in profit.

Okay, thanks very much.

You’re welcome Dan.

We’ll hear next from Terence Ortslan with TSO & Associates.

I think maybe -- how are you -- maybe this is a good time to discuss the [current] risk. There are so many conflicts of information down here about the [political] situation impact on the mining industry. Do you want to summarize of the leading issues so we can understand the risk elements involved in the equities? Thank you.

Well, it’s always speculation to discuss that sort of question. You see, you have to bear in mind that mining in Peru represents in excess of 50% of total exports of the country. Politicians during the campaigns may say a number of things, but certainly mining is the leading industry in the country. It certainly contributes to decentralization of the country and I wonder whether even the most leftist candidate saying that he’s going to control mining or anything like that, will do anything against an industry that contributes with more than 30% of total tax collection of the country -- of net income tax, no -- or income tax.

So we have the feeling that they may be saying some things that are probably more dramatic than what’s really going to happen. We essentially believe that we have to continue working and that we have to show all these candidates, as of today, and when any of them get to be President and, of course, may try to pass some laws, then we will have to explain what is real situation of the sector.

Having said that, it is very important to notice that in Congress there is no clear majority of any of the potential Presidents or the candidates that are heading the [parties], or the first round election. So we are, essentially, optimistic that things are going to get to terms and will be balanced by the time we have a new Government of July 28.

Okay. Is there any issue with respect to -- there’s quite a regressive regime happening in all South America in terms of -- towards mining, no question about it. And taking examples from other places, or [Bides], the one I’m thinking [writing] ownership and projects and everything else, what do you think is going to be the mitigating circumstances for this above -- or where it’s going to peak in terms of the negative issues?

Well, I don’t see Peru going through a nationalization process and this is a personal opinion. I think, today, different to what we had at the time of Mr. Velasco in the early ‘70s, where we had only two international companies in Peru, today we have the investment of international companies all over the world. All the international companies invested in Peru and I think this is an insurance policy for mining investment in the country. Buenaventura, being a Peruvian founded Company, certainly believes that the companies that have been founded in Peru have to be support as well. So I personally don’t see a dramatic change.

Thank you.

Next we’ll hear from Tony Lesiak with UBS.

Good morning. Carlos, perhaps you could just take us through the reconciliation of the capital costs forecast. You show $160m was spent in Q1. I’m assuming that’s a 100% basis for Cerro Verde?

Yes, of course, this is 100% of Cerro Verde. This is what Cerro Verde spent during the first quarter. You know that the total budget for this project is [$850m] around and what we reported is the amount spent during the quarter.

Okay. Yes, because it didn’t reconcile with your cash flow statement and the difference between what you’re taking in from your investments and what you’re getting in dividends.

Can you maybe give us a sense of where you think that number might be for the year in terms of your dividends versus how much income you’re taking in from your affiliated companies?

In terms of dividends to be paid by the Company?

To be taken out of the joint ventures.

Well, in the case of Cerro Verde, we do not foresee any cash dividends during this year and, perhaps, the next one. In the case of Yanacocha we should [inaudible] our equity participation, 44% around, in the order -- in excess of $200m.

Okay.

Just a clarification, these are not joint ventures, these are companies and we are shareholders.

My mistake. A quick question on the deferred tax impact, that was $0.18 in the quarter?

The royalty tax on --

$0.18 per share. So if I’m looking -- if I’m trying to get a clean number for the quarter, the $1.06 minus $0.18 which is the deferred tax impact, that gets you to about $0.88 for a clean number.

You are looking at your model and comparing with the impact we should get over here?

Well no, you got taxes back in the quarter. If you’re trying to look at your quarter on a non-recurring basis, if you look at the cash flow statement it looks like you had about $23m in deferred tax positive impact. So that’s about $0.18 a share. I just wanted to confirm that number.

Yes, well the total credit for taxes and worker participation is $36m, so you can convert it to per share and U.S. dollars [as well].

Okay. And finally, for Uchucchacua, can you give us the new 2006 production cost forecast?

The cash cost in Uchucchacua is -- we keep around $3.30 per ounce during this year. We are going to continue developing the new access to the [off-sites] area in preparation for the additional production we mentioned. We are working hard to that and it was mentioned in our project we have a $10m budget for this job, so this will impact our cash costs because we explained that.

And in terms of the number of silver ounces you plan to produce in 2006?

Well we keep to a budget with 11m ounces for the normal operation of Uchucchacua.

Okay, so you’re expecting the grades to recover and [you] still to meet your forecast for the year?

Right and increase the silver recovered by cyanidating the [payments of the] sulfides and adding the oxide production in the facility we are going to complete by September.

Can you remind me what the forecast was for 2007?

In Uchucchacua, in production of Uchucchacua?

Yes.

Well, we consider that -- the evolution was 10m ounces produced in ’05, 11m forecasted for year ’06 and we expect it to be close to 12m ounces in ’07.

Okay, with similar costs or lower costs.

Similar costs, because the marginal costs of the cyanidation process will be in the order of $3.00 per ounce.

Great, thank you so much.

You’re welcome.

Our next question will come from [Rafael Orkea] with Citigroup.

Yes, good morning. I have a couple of questions. The first one is related to cash costs at Yanacocha. We saw a 12% increase this quarter and I would like to have an idea of what kind of cash costs could we expect for the rest of the year?

The second question is related to income or losses from hedges or future sales. If the gold price were to remain at current levels throughout the year, what kind of impact should we expect to see in results?

In terms of the cash costs for year ’06, well, in Yanacocha we budget $193 per ounce, so we got $165 due to this reduction in production. During the next three quarters we’re going to increase these cash costs a little bit.

In terms of the impact of the hedge book, you go to our Exhibit where we show the hedge book which is Exhibit 3. You can observe that our commitment for the balance of the year ’06 is 291,000 ounces of gold at an average price of almost $339 per ounce. So the impact on our financial statement as a cost opportunity, well it’s easy, take your [600 or 340 loss] ounce you believe and times the number of ounces you have there.

Okay thanks. You said $193 for average cash costs for Yanacocha?

$193 as an average for the year in Yanacocha.

Okay. Do you have any estimate for ’07?

Not yet.

Okay, thank you very much.

You’re welcome.

Our next question will come from Geoff Stanley with BMO Nesbitt Burns.

Good morning gentlemen, how are you?

Fine.

A couple of questions. Silver production, overall, looks like production was at about 2.86m ounces from Uchucchacua and Colquijirca combined but you reported 3.1m. Was that an inventory situation or was that by-products that were used as credits against production costs at other projects. Can you explain the difference there for me?

Yes Geoff, our production, 100%, was 4.6m ounces, while our sales were 4m ounces. We increased the inventory in 300,000 ounces of silver, basically by just a question of a delivery of concentrates.

So, there’s no double-counting in there with respect to by-product credits being reported as production and also as a by-product credit?

No, not at all.

Okay, very good. Elsewhere, wondering if you can give us a handle on exactly when the think the expansion at Cerro Verde is going to be completed?

Initially, the schedule was to complete the project around November. It seems to be we are ahead of schedule. We could finish in October. So we are very enthusiastic about beginning certain production in Cerro Verde during the last quarter of this year.

Okay, and capital expenditure payments will then pretty much cease, or is there a CapEx that there will be going beyond that in a meaningful way?

No, in spite of the fact that certain prices for our supplies or equipment are pretty difficult, but we are within budget.

Okay, very good. Colquijirca - the higher grades still within anticipated, is that going to last very long?

Well, we are not sure. This is a [inaudible] an open pit and we designed the mining plant to produce certain volumes but you have to bear in mind that these deposits, in the past, was an underground operation. So we find that certain higher grades remain in certain areas. So this is not -- we cannot assure higher grades.

Okay, but so far you’ve been getting a reasonably positive reconciliation with reserves have you, so it’s not a particularly high grade area that you’re going through at the moment? Is it a reserve reconciliation issue or is it a higher grade area that was anticipated?

It is a higher grade area. Nothing wrong with the reconciliation. It’s an area that has given us higher grades at such a price that may last for another month or two, we don’t really know.

Alright, great. A couple of other quick questions. Marcapunta, can you remind me [inaudible] and also whether you expect it to be reported as a stand-alone operation or whether you’re going to combine it?

Marcapunta is an advanced exploration project. It will start, if you want, trial mining at 1,000 tons per day scale in the third quarter of this year from the northern part of the deposit, which was already accessible from the old smelter mine. The mill has been prepared for that, crushing, grinding and flotation. And, of course, we are pushing the Marcapunta West part of that development very hard and it will be part of the Sociedad Minera El Brocal activities, it will not be reported separately. It won’t be a stand-alone.

Are you reporting that as an economically viable entity at this stage? It’s just trial mining. It will, essentially, be a capital item almost?

This is my perception, trial mining, it will be economic. It will add to the economics of the Company but, certainly, in Marcapunta we have a much bigger animal to deal with and in the future we need to prove the feasibility of something in the order of 5,000 or 10,000 tons per day.

[And we’re interested in concentrates].

Okay, alright gentlemen that’s excellent. Thanks very much.

[OPERATOR INSTRUCTIONS]. We’ll take our next question from [Felipe Hiri] with Merrill Lynch.

Good morning gentlemen, it’s Felipe Hiri with Merrill Lynch. I have just two questions. The first one is, I wonder if you could give us an update on the development efforts -- the exploration efforts at [Poracotta] and La Zanja? Do you have any update on that and any specific timing of the beginning of the potential operations on this two projects?

And my second question is regarding the hedge strategy. I just wondered if there was any changes in the hedge strategy for the Group as whole or just for the changes of the derivatives to the physical deliveries?

In terms of the Poracotta and La Zanja projects, in Poracotta as you know, we have exercised our options for [25%] and we are working together with [Minco] our partner with 25% in the scoping study. And we intend to bring Poracotta into production early next year. For that we have to complete the scoping study and we have to take a decision to remain a shareholder or sell the position or even claw back. We don’t anticipate the latter because it’s only a small deposit for the scale of production that they are interested in, which is 300,000 ounces a year.

We anticipate producing 50,000 ounces in the year 2007 and scale it up to 100,000 ounces in 2008. Given the high commodity prices, we will also consider the possibility of doing autoclaving in Poracotta. That’s something we have not done before in the Company, nor in the country, so we’re going to carefully consider that.

We are doing, of course, an environmental impact study and all the social aspects relating to opening a new mine in Poracotta. The processing of Poracotta ore will be done in Orcopampa, so we don’t need any special permits for that.

Regarding La Zanja, we are working on the environmental impact study, to update it and present it again some time later this year, but we have to time the permitting of La Zanja’s operations with the elections in mid-year. So, hopefully -- we don’t have a firm date now but, hopefully, we will have the permits this year and we will be constructing the La Zanja off-site operations some time next year.

In terms of our strategy for our hedge, well, as you may know the Board of Directors of Buenaventura made a decision in the year 2004 of not continuing hedging additional production. So we just -- we scheduled our commitments in order to match with our production and with no problems and then to convert from derivative instruments to physical deliveries and that’s it. So we are not going to continue hedging.

So no changes on that at all?

Not at all.

Okay great. Thank you.

You’re welcome.

[OPERATOR INSTRUCTIONS]. We have no further questions at this time. I’ll turn the conference over to Mr. Benavides for additional or closing remarks.

Well, again, thank you for attending this conference call. We will be in touch with the investors in the course of the year. We are attending a number of conferences. We will be attending a conference hosted by Merrill Lynch in Miami and we will be as much in touch with our investor base as possible. Again, thank you for attending and have a good day.

That does conclude today’s conference. We thank you for your participation. Have a great day.