Compania de Minas Buenaventura SAA (BVN) 2006 Q2 法說會逐字稿

Good day, everyone. Welcome to the Minas Buenaventura Second Quarter Earnings Release conference call. [OPERATOR INSTRUCTIONS]. At this time, for opening remarks and introductions, I would like to turn the conference over to Pete Majeski, with i-Advize Corporate Communications. Mr. Majeski, please go ahead.

Thank you, Roque, and good morning everyone. Welcome to Compania de Minas Buenaventura's Second Quarter 2006 Earnings conference call. Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer, Mr. Carlos Galvez, Chief Financial Officer and other members of Buenaventura's Senior Management. They will be discussing Buenaventura's results for the press release distributed yesterday evening. If you've not yet received a copy, please call us in New York at 212-406-3694, and we will email it to you immediately.

Before we will 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. Mr. Benavides, you may begin.

Good morning and welcome to Compania de Minas Buenaventura quarterly conference call. This quarter has been a very good quarter for us. Total revenues accounted for $168m, 91% when compared to the same quarter in 2005. Operating income, $86m, 212% over the same period in 2005. EBITDA of our Direct Operations was close to $85m, 203% over the same period in 2005, and the EBITDA including Yanacocha and Cerro Verde accounted for $260m, 123% over the same period in 2005. Our net income totaled $138m, 79% when compared to the second quarter 2005. And earnings per share was $1.09, 79% over the same period in 2005.

In terms of our net sales, $140m in this quarter, 97% over the same period in 2005. And our average realized price of our own Direct Operations was $381, 5% over the same period in 2005. When we include Yanacocha our average realized price of gold was $561m, 36% over the same period in 2005. Our realized price of Silver was $12.14, 72% over the same period in 2005, and certainly we have had better prices for Lead and Zinc for this quarter.

In terms of our sales and content, we have produced from our own Direct Operations 117,000 ounces in this quarter, 27% higher than in the same quarter of 2005. We produced, including Yanacocha, 460,000 ounces in the quarter, 13% higher than the same quarter in 2005, and 4,400,000 ounces in this quarter of Silver, 25% higher than the same quarter in 2005.

Our cost and production have been in line. I would like to comment some highlights of some of our operations. In Orcopampa, production is going very well. We are, with costs under the -– in line with the budget, we are building a new crushing facility at Orcopampa that will enable us in time to increase somewhat the capacity of Orcopampa. We are also working on the increasing the capacity of tailing dam that, in order to have additional tailing capacity.

At Uchucchacua, it is -– and I am very pleased to inform that we have started producing silver bars, silver bullion, and that the expansion of the facility, the metallurgical facility is in place, and we expect to be at full capacity in this plant probably by September or October. But the fact of the matter is that we are doing all this testing and this testing is looking very well.

Just for clarification, these additional facilities will enable us to treat not only the cast tailings that we have in -– at the mine, but also some oxide that we have -– we did not have the capacity to treat previously. In addition to that we expect to treat the [current] tailings of the concentration plant.

In [Accoche chilca], where we have a 34.29% economic interest, production has been in line, we are having excellent results from Brocal and we expect that by the first week of October we will be producing copper at this mine from the copper ores that we are -– that we [come] with at Marcapunta at a rate of 90 tons per day of concentrate, running 18 to 20% copper.

In terms of our affiliate company, Yanacocha had an excellent quarter and an excellent first six months. We are still heading for 2.6, 2.7m ounces of production as of the end of the year, regardless of the fact that we have had an excellent first six months and that if you project that it would mean higher production. We are still looking for 2.6, 2.7m ounces at Yanacocha. It is important to mention that Yanacocha has successfully issued a bond issue of $100m in the local market, and this was released two days ago. The demand for these bonds was double that figure, so $200m. We are very pleased to say that we have had very good interest rates for this bond issue.

At Cerro Verde, the copper production in this quarter increased by 6% and this is still the oxides that are being exploited. We expect to have the expansion of Cerro Verde by October this year. The construction is in line with the project and we expect, as I say, and I repeat that production will be increased by October this year and it will be in operation.

We have had also some positive exploration results at La Zanja in the Turmalina prospect, at Los Pircos and at El Milagro, which is a new exploration. We have some diamond drilling results that we can share with you if needed. Cesar Vidal is not with us this time because he had to travel, but we can expand on this positive exploration.

May I just refer to the political situation for a second. Tomorrow, July 28, Mr. Garcia will become the new President of Peru. We believe, and there is a lot of excitement about that because the alternative was not the best one. So Mr. Garcia has become an opportunity, everything that he has said is right, we expect his government to perform correctly. All the messages that he has given are all right for the business community. He is certainly very worried about his legacy, considering that his first government was not the best government that we have had in Peru. But he is certainly mature, 20 years later we expect he will do a good government. He has insisted many, many times that we would like to get Peru to [investment grade], and to do that - you all understand – we will have to perform in terms of economic results, and certainly in terms of investment environment.

May I just mention that there is a minor mistake in Appendix number one, where we state that we 18.3% at Sociedad Minera Cerro Verde. In fact it is 18.5% that we own of Sociedad Minera at Cerro Verde and, as you all know, we equity account this participation.

With this, may I just turn to any questions and answers that you may have. Thank you.

[OPERATOR INSTRUCTIONS] First question will come from Andrea Weinberg with Merrill Lynch.

[I'd like to say] congratulations on these very good results in the quarter. I'd like to ask two questions. First on the political situation in Peru, what are the chances that you see Mr. Garcia increasing the royalties and taxes for the mining industry in the country?

And the second question will be that you have been having success in the exploration at La Zanja, do you think that is leading to any progress on getting back to [inaudible] at some point over the next year or so?

In reference to the royalties, I have to explain the current situation is that the largest producers in Peru, other than Southern Peru Copper, all of them have a stability contract, meaning that even the current royalties do not apply to them. This government has stated very clearly that they are going to respect all contracts, including the stability contract, [taxes] stability contracts. In that respect, it will be absurd to increase royalties because those larger producers will certainly not pay those royalties.

So, far from increasing the royalties, we have some information that both Del Castillo, that is considered to be the next Prime Minister, and Mr. Luis Caranza, that is considered to be the next Minister of Economy, have stated very clearly that they will like to change the Royalty Law and make it more technical because, today, royalties are paid on the base of sales. And, in Chile for instance, it's paid on the basis of profit, operating profit.

So to answer directly your question, we don't see any royalty increased in Peru. We may see some changes in the Royalty Law and we'll see what happens. In any event, it will be certainly more technical, as Mr. Luis Caranza, the future Minister of Economy, has stated.

In the case of La Zanja, yes we have been improving the situation there in terms of the social [lighterns], although I don't like the term 'social lighterns'. So, in terms of the relationship with the community, and we are back, we are drilling, we have some results of those drillings. And this will enable us to develop Cerro Quilish or not? This is another question. We think that the current situation is much better than the past situation of confrontation, and we will continue working as hard as we have been working. And of course contributing with Yanacocha in trying to get to areas that previously we were not able to do so. It is difficult to say that this will take us to develop Cerro Quilish at this point.

Thanks, Roque.

Thank you. We will now hear from Ankush Agarwal with JP Morgan.

Good morning. I have two questions. In -– the first one is in the Q2 2005 Release the total share in Affiliated Companies and dividends from Cerro Verde was PEN1.74m, but the share in the Affiliated -– Affiliates stated in the current Release is PEN1.46m and this reduces the [BF] in soles from 2.11, reported in 2005, to 1.97 now. Could you please explain the reason for this change?

And the second question is regarding the cost increases at Uchucchacua. The $0.65 increase due to higher treating charges seems very large. Could you please let us know what the treatment charges were, by how much they increased? And also whether the cost increases due to the contractor work was used in Huantajalla and [Cosa ditad Alta] areas should be coming down in the quarters going forward?

[inaudible] just to understand the -– well the first question, could you repeat again because we have a lot of details there?

In the first question, basically Q2 of 2005, the Release had a total of PEN174m for shares in Affiliated Companies and dividends from Cerro Verde, and EPS in soles was 2.11. But this quarter -– this quarterly release, when we look at Q2 '05 it seems to have changed to 1.97, the EPS, because of shares in Affiliates has been stated lower.

Well that -– you know that, unfortunately, this is new rules application as we now are equity accounting Cerro Verde and the year 2005, the second quarter 2005, we did not. The rules say that while reporting the equity accounting of a new company, now we have to restate the [rate] to present the result of this quarter as if we were -– have been reported in the past equity accounting. So this is just a different presentation. You know that before, been only an investment, we reported Cerro Verde only when receiving cash dividends, and we have to simulate the fact that we report in the past, the equity accounting, as we do now.

Okay.

So this is the explanation, just account rule.

In the case of the Uchucchacua cost and the treatment charge, you know that we have -– we report the cash cost on basis of the main production, which is Silver, but we have Zinc and Lead production and concentrate. And this Zinc content, the Zinc production is sold as a zinc concentrate, and the treatment charge includes [escalado's]. So when the price of zinc goes up we have to add important charges. That means go to $900,000 for this quarter. So that is an important variation.

In addition to the price, that we have had difficulties in our operation. We had, as you know, a sad accident this quarter. We stopped operation for three days. We are adding additional steel consumption to sustain the mining operations, besides the fact that we are exploring and developing the oxide areas in Uchucchacua. We will incorporate to be prepared to exploit this and to -– in our new facilities, metallurgical facilities, from September onwards.

Okay. And the increase due to the contractor workforce, would it be right to assume that this was because of a [captive] development and what should not happen, or come down in the quarters going forward?

Well we are just in preparation for this new operation, which is the oxides area, so we are doing a very important and perhaps doubling the effort until we get prepared. And whilst I expect from September onwards [where improve] exploration and developing in this area will be regular one.

Okay thank you.

Thank you. We will now hear from Victor Flores with HSBC.

Yes, thanks. Thank you, good morning. I was hoping that perhaps you could give us a little bit more color on how production at Yanacocha will evolve over the remainder of the year because, given what you've produced year-to-date, and given the guidance for the full year, we have to assume there's a pretty large drop in production for the second half. And I [don't] understand whether that is due to a lower amount of tonnage being placed on the pad to perhaps add capacity constraints, whether much lower grades have been put on the pads now so that you know production is coming, or whether this is material that for some reason has lower recoveries.

Yes, Victor, how are you? The plan is that we had -– we are focusing reduced grade for the second half of the year. We expect to get around 0.7 to 0.6 grams per ton, so, up until [with] 1.1, 1.2 that we produced during the first half of the year. This will finally deliver lower gold production and of course higher cash costs [inaudible].

Okay. And can you give us, at this point in time, a sense of where you think cash costs will be?

Well [we're very] in the first quarter, and the first one because we are going to -– we expect to reduce gradually this weight. The cash cost perhaps will be -- we are expecting to reuse gradually this weight. The cash cost perhaps will be something in excess of $200. That’s what we expect.

Great, thank you. Second question goes to, because some of the developments that you’ve reported with respect to Marcapunta and I was hoping that you could give us a bit of an update on not only the development that’s going on, but also this copper production that you’ve announced?

This copper production will come essentially from an area that has been known for many years. It is lower arsenic, although we will be getting some arsenic in the concentrate. It is a small concentration plant for 1,000 tons per day, and we consider this as a pilot plant, looking forward to the development of Marcapunta, and the ramp that continues as of today.

So the thing is, 1,000 tons per day is not a large concentration plant, and we believe that this will enable us to have a clear idea of the metallurgy of Marcapunta.

So this is in preparation of the eventual development of the main Marcapunta?

You can consider that in preparation, yes.

Great, thank you.

And then of course it continues with the very high copper price we think it is the right time to produce a little copper, no?

Agreed. A final question goes to what you’ve reported in your financial statements which is an investment in the [ETS], and I would suspect that you’ve done this, in a sense, to offset the hedge book, and I was hoping you could just clarify for us, if you will, that it is an investment in the gold ETS and if you could tell us also what the magnitude of that investment was in terms of [altus]?

Well, essentially, what we finally bought was in different [inaudible], 100,000 ounces of gold. And yes, it’s to offset the hedge book. We had a big discussion here internally whether we should buy back some of our positions or do it on a more market oriented way and buy some gold ETS.

We decided to start buying some gold ETS with the excess cash. We had stopped doing that in view of the fact that the price of gold didn’t continue going up, and it’s so difficult to deal with it. In fact, what we are doing with our hedge book is delivering to the hedge book, and in turn, we are reducing the hedge book. But yes, to answer your question, it’s gold ETS 100,000 ounces, and it was done to try to offset somewhat our hedge book.

Great. Thank you very, very much.

Thank you.

Thank you. Moving on we’ll hear from Katie Blacklock with Thames River Capital.

Thank you, but my question has just been addressed. Thank you.

Thank you.

Moving on, we’ll hear from Paul Rosenberg from Bear Stearns.

Hi, congratulations on the quarter.

Thank you.

I was wondering if you could possibly break out the contribution to revenues from the different metals, gold, silver and zinc, etc?

Yes, that’s a tough one! Well, no, the thing is, as I would say, and this is just an estimate, but I would say that we are still 75% or 80% gold and probably 10% silver, although copper has become more and more important. So it’s difficult to say. I don’t know, what do you think, Carlos?

Paul, unfortunately we don’t have this detail or this breakdown right now. We have to review this because the contribution comes in different ways, but those that we consolidated, those that we do not. So let me work on that, and I will publish this information as soon as we have it.

Okay. Thank you very much, and then one more question, do you have any kind of guidance for gold volumes for the full year, from Buenaventura’s own mines, not from Yanacocha?

It was in excess of 400,000 ounces.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. We’ll now hear from Terry Ortslan with TSO & Associates.

Yes, thanks. Could you [hazard] a guess where your ounce is going to be in your books by the end of the year from different properties, in the sector [exposure] program that was beginning so far, or where the biggest bounce is going to be?

The bigger increase, you mean?

Correct.

Well, the thing is, Orcopampa, we did produce in very close to 250,000 ounces. Antapite will be producing close to 110,000 ounces. Shila and Paula will be producing probably about 20,000, 25,000 ounces, and Ishihuinca will be producing about 25,000 ounces.

I was referring to the resource and reserve numbers.

Orcopampa will have a substantial increase, with the ramps that we are developing to develop the deeper parts of the mine. Antapite will probably be at the same level as this year. I would say that Ishihuinca, Shila and Paula, these are smaller mines, will maintain -- their reserves will be able to replace reserves. And in the case of Yanacocha, including some sulfite, will probably be flat similar to what we have been reporting in the last year.

Thanks. Actually, following the discussion on Yanacocha, could you tell me what your cost per ton number is in Yanacocha, and how it’s shaping out to be? Thank you.

Just a second. We are going to check that figure for you. Just a second.

And perhaps maybe in the meantime, we were looking at it earlier this week at a conference call at [Orpedas] in Peru, you stated that, subject to agreement, [inaudible] about the increases and it kind of irks maybe because although [inaudible]. The question really is, are there any other fiscal changes that you expect in Peru, either positive or negative? It doesn’t matter if it’s on the [inaudible] but first, how do you respond to these issues, and number two, any other fiscal changes in Peru? Thank you.

Well, first, I think the answer to that question of royalty changes, we don’t see those. That is very difficult because they are [inaudible] stability contracts, and I cannot see that. The other question was -- what was the last part?

Any other fiscal issues, depreciation or?

No, you see, let me answer it this way. The Peruvian government has had fiscal [super added] last year, and in fact, there is a big point in time, there is no reason for increasing taxes. So I don’t see that, going forward either.

Actually, where is the mindset from the government on mining policy in Peru, either coal mining, [mutual] mining or there specific issues that you want to address this on the mining policy?

I think that is why we had a responsibility, and in dealing with an industry that represents 65% of net exports, has to consider that industry as an important industry. So our feeling is that this new government will pro-business, in general, but will have certainly more leadership and more discipline, and that will contribute with the mining industry.

The [inaudible] numbers [inaudible]. Thank you.

Well, actually, and the figure is in dollars, $2.40 per mined ton.

Per mined ton?

Yes.

Thank you very much for your time.

Sorry, for ton mine, sorry.

Yes, I understand that. That’s for the year, right, or that’s for the first half?

Yes, well, this is the average of the quarter.

Okay. Thank you.

Thank you. We’ll now move on to Rafael Urquia from Citigroup.

Yes, thank you, good morning. I was wondering if you could please help me to understand better what’s the expected impact, either in terms of additional production or additional reserves from the products that you mentioned in your press release, namely, Uchucchacua, Orcompampa, or Marcapunta?

Well, in Uchucchacua, when the plant is operating at full capacity, we will be able to produce an additional 1m ounces of silver. In Orcopampa, as you know, we produced that year 230,000 ounces, and we expect to produce 250,000 ounces this year. And probably we would increase a little bit higher in the next couple of years.

And in Marcapunta, we will [inaudible] in general, we will continue producing the same amount of zinc, lead and -- silver has gone somewhat up, but we don’t control that because it depends on the area of the opened bit. In the case of Marcapunta, as I mentioned, we are going to produce 90 tons per day of copper concentrate, running 18% to 20% copper per ton, so that is the rate of production that we expect.

And just a follow-up, any update regarding the work at the [Minas Conga] area?

At Minas Conga, things are going fine. We continue drilling. We continue with the feasibility study. The relations with the local community are very good. We think that there, we have learned a number of lessons that again, a culture that we have applied to Minas Conga, and things are going on smoothly.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. We do have a question from Alonso Aramburu with Santander.

Yes, thank you. Good morning, Roque and Carlos. Just a quick question on Cerro Verde. You mentioned that the expansion was going to be completed by October of this year. Does that mean that you start production of 300,000 tons by the end of this year?

Well, I would say that probably full capacity will be started on January 1, I would say. But there is always some minor detail when you start a new plant. This is a large plant, to essentially process 200,000 tons of copper per year, and it requires some adjustments. The fact of the matter is that all the construction will be ready by October this year.

Okay, but full production of the 300,000 tons should start in ’07?

I would say so.

Okay, thank you.

We do have a follow-up from Victor Flores, HSBC.

Thank you, just hoping to take advantage of the time we have to ask you for an update on [Colquijirca]?

Colquijirca is -- we are developing the feasibility of that project. We are taking some oil samples to have a better and a clearer idea of the metallurgy. It’s obvious that there are some ores within Colquijirca that are very amenable to flotation and sanitation, and are very easy to treat, and others that may be somewhat more difficult. We are evaluating the possibility of [autoplace] but this is early stages.

We are essentially developing the project, and we are quite excited. You know by, if I remember correctly, by October or September, [Techominto] has to decide whether it continues with their 25% or they sell it to us, or they may also decide to claw back, if the mine shows that it would have a production of in excess of 300,000 ounces per year, which we don’t see at this point in time, but of course, it all depends on the decision of Techominto. At this point in time, we are managing the project. We have 75% of the project, and that is the current situation.

Great. Thank you very much.

Thank you. We’ll next hear from Terry Ortslan, TSO & Associates.

Actually, thanks. All your questions just seem to be the tradition of revenue from different metals. That’s a fair question, but in terms of cash-flow components, [inaudible] copper at $2, it’s like almost $800 gold. So what are the, if any, any special that you will have in cash-flow distribution of gold versus [inaudible] metals?

Well, let me just insist on the fact that the investment that we made at Cerro Verde, that is our main copper producer, has been really with all due modesty, of all the organization, a brilliant investment. It has been an excellent opportunity. We have a wonderful partner there with [Felzoch], and yes, copper should represent probably in the order of 20% or more of our revenues with these prices of copper.

We think that copper will continue at very good prices, and certainly it balances our production of gold and silver, and that, I think, is in the best interests of our shareholders. Carlos, do you want to add something?

Yes, well, basically, if we compare Yanacocha’s with Cerro Verde’s contribution, once Cerro Verde gets the maximum capacity, I would say that will be similar.

In terms of cash?

Of the contribution to Buenaventura’s profits, and of course, in terms of cash, at least free cash.

That’s interesting because I would go back and say that yes, Cerro Verde is a big project, very well conducted and all, but as the copper price [inaudible] $3 or $4 a ton, but if it does, then you’re going to be getting more than 20% of your cash-flow from copper?

Yes. That could be the case, yes. If you give us the price of metals, we can answer you further.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]. We’ll now move on to Thomas Pinto-Basto with AGF.

Hi, I was just wondering if you could maybe also provide us with an update. You had mentioned in the past that you were exploring some other prices in Latin America, including Argentina, Bolivia and Ecuador, and given what’s happened recently in Argentina, with some mining, I guess, legislation being pulled back or the attitude looking to change, I was wondering if you still have those, still looking to do some explorations [inaudible]?

We have essentially been looking at Argentina lately. We have attended to Raoul [inaudible] to his San Juan province conference. We think that San Juan province is very friendly to mining. That is where [Pasquo Lama] is located. We are looking for possibilities there.

In addition to that, we are looking for possibilities at the Santa Cruz province, where Mr. [inaudible] comes from. And there are a couple of claims that we still own in that area. The recent events at [Shabut] with what is the name of the deposit?

[Inaudible].

No, no, the other one, the lead/silver deposit in Argentina?

[Porasquel]?

Oh no, not [Asquel] the other one. Well, there has been a recent settlement between two Canadian companies, two settlements and that simply shows that there is a better attitude in Argentina, and it’s going to be interesting if they are able to develop that mine. Asquel is a more difficult problem, and we hope one day it will be solved. In general, we continue cautiously optimistic about Argentina, but really, we will have nothing in concrete in Argentina.

What about in the remainder of Peru? What I meant was [Newmont], they had mentioned that they were looking at some other properties there, and looking potentially to develop them with some partners. Have you had any further talks with them about other properties other than Yanacocha?

Well, we have [Steve Venders], the Chief Exploration Geologist of Newmont visiting us, and yes, we have been discussing different alternatives. But I will discuss with Newmont, we discussed with other senior producers, and of course, we have our own exploration targets. In Peru, we have certainly a lot of land, and we are working very hard. Most of our investment, certainly almost 100% of our investment in exploration is done in Peru.

Okay, thank you.

Thank you. There are no further questions at this time. I’ll turn it back over to our speakers for any additional or closing comments.

Well, thank you again for attending this conference call. We are very pleased at the results of Buenaventura. The economic results are very good. From an operational standpoint, we are also very pleased. So we hope to continue delivering value to the market and that the market joins us and continues having demand for our stock. Thank you very much and have a good day.

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