Compania de Minas Buenaventura SAA (BVN) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen. My name is Pam and I will be your conference operator today. At this time, I would like to welcome everyone to the Buenaventura Fourth Quarter and Full Year 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Pete Majeski from i-advize. Sir, you may begin your conference.

Thank you and good morning everyone. Welcome to the Compania de Minas Buenaventura's Fourth 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 per the press release distributed yesterday evening. If you have 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 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 with us. Thank you for attending Buenaventura's conference call. This quarter, our operating income was $108 million, 328% higher than the same quarter of 2005. This increase was explained by higher sales revenues which partially offset the lower contribution from non-consolidated affiliates. Net income for the fourth quarter '06 was $78.8 million or $0.62 per ADS which represents a decrease of 19% when compared to the fourth quarter '05. EBITDA from Buenaventura's direct operations was $110 million, 190% higher than the figure achieved in the fourth quarter '05.

In terms of our operating revenues, our net sales for the quarter were $179 million, 122% increase when compared to $80.7 million reported in the first quarter '05, mainly due to higher volumes of silver, lead, zinc and gold sales as well as an increase in the realized price of zinc, silver and lead. The accumulated sales for 2006 were $548 million, a 93% increase compared to 2005. Accumulated royalty income was $48.5 million, 5% increase when compared with $46 million in 2005.

Buenaventura's equity production during the fourth quarter '06 was 100,000 ounces, 10% higher than the same period of '05. 4.1 million pounds of silver a 20% increase when compared to 3.4 million in the same period of '05. Equity production for the accumulated 12 months period was 405,000 ounces of gold and 15.4 million ounces of silver, representing an increase of 13% in gold production and 15% increase in silver production.

At Orcopampa, our gold production for the fourth quarter '06 was 65,600 ounces, an 11% increase when compared to '05, due essentially to higher grades. And the accumulated production for this mine was 254,600 ounces, a 9% increase when compared to 2005. The cash operating costs for the quarter was $155 per ounce.

At Uchucchacua, we essentially had similar production as for the quarter and for the year. Essentially our cash operating cost went up 52% from $3.65 per ounce of silver to $5.55 per ounce of silver, which is explained essentially because of higher contractor expenses for ventilation facilities in the Huantajalla area, which was completed in December 2006, higher reagent consumption for the new cyanidation plant and higher royalties paid to the government as well as lower silver content due to lower silver grade. Essentially, we have finished the building of the new facility, the processing plant that will give us a lot of flexibility towards the future to treat different kinds of ore of all the mines.

At Colquijirca, the zinc production was 17% higher in this quarter and in terms of silver, it was 95% higher than the same quarter of last year. For 2006, zinc -- total zinc production increased 15% and in the case of silver, increased 134%. Colquijirca had a very good quarter and I would say an excellent year.

In terms of our exploration cost in non-operational mining sites, operational cost were for the quarter $11.9 million, a 41% increase compared to $8.4 million reported in the fourth quarter '05. This essentially shows the interest of the company in exploring and of course, Cesar Vidal, is [accompanying] that and he will expand on our exploration with you, so ask for that.

In terms of our operating income, in the fourth quarter it was $108 million, 328% increase compared to $25.4 million reported in the fourth quarter '05. This result was mainly due to 92% increase in operating revenues, which largely offset the increase in the total cost of operations and operating expenses. For 2006, operating income was $317 million, a 218% increase when compared to $99.7 million reported in 2005.

We have, of course, an explanation on affiliated companies, essentially Yanacocha and Cerro Verde. Yanacocha, as expected, has reduced production and of course it will further do that in 2007. At Cerro Verde, there was essentially an expense of $40 million in the fourth quarter that impacted the results of the fourth quarter of 2006, but they have finished with the expansion, the investment in the expansion of that mine and we expect to have excellent results with the copper prices accompanying that at this mine.

In terms of our net income, this quarter Buenaventura's net income was $78 million, representing $0.62 per ADS, a 19% decrease when compared to 96.7 million reported in fourth quarter '05. This was mainly due to lower contribution from non-consolidated affiliates. This figure includes a provision of 1.8 million for the voluntary contribution for social responsibility. The accumulated net income for 2006 was $428 million, $3.36 per ADS, an increase of 48% when compared to 2005.

In terms of our explorations, greenfield and brownfield exploration expenditures during 2006 totaled $36.2 million, of which $10.2 was expense on the acquisition and maintenance of properties. Buenaventura directly controls 286,000 hectares, and through joint ventures or lease/option agreements an additional 119,000 hectares for a total of 406,000 hectares, excluding our own operations, Cerro Verde and Yanacocha. Exploration projects currently being licensed for start-up of new mining production in 2007 are Marcapunta by Soc. Minera El Brocal and Pozo Rico and Poracota by Buenaventura. Minera LaZanja has successfully concluded its exploration program and will complete its environmental impact study and seek permitting to construct two open pits, and a heap-leach facility in 2008 for the Pampa Verde and San Pedro Sur deposits.

During 2007 our exploration focus will be centered on the oxide gold prospects of Tantahuatay and Breapampa, the silver rich, base metal deposits of Hualgayoc, Mallay and El Milagro, and the copper molybdenum porphyry at Trapiche. Detailed programs and budgets await approval, but expenditures in the order of $20 million are anticipated.

We had a number of projects that we have been working during the year and certainly during the quarter. At Uchucchacua, as I mentioned, we are in the process of finalizing the details of -- the start up of the Uchucchacua processing plant that will give us a lot of facility and a lot of flexibility for the different types of ores that we have in this mine. At Orcopampa, we continued deepening the Prometida and Nazareno shaft that will enable us to get into higher grade areas and deeper areas which are those that are giving us as I mentioned the higher grade. And at Antapite, we continue with the expansion of the tailing dam that will give us additional capacity for the future.

Yesterday, we had our board meeting and it was -- we approved the financial statements as of December 31, 2006. We are calling for an annual shareholders meeting for March 28 at 11 o'clock in the morning and we will be proposing a cash dividend of $0.37 per share or ADS to be paid in US currency. Essentially this dividend payout, follows our policy, our dividend policy that we have been following for the last eight or nine years. With this, may I ask if any of you have any questions, we will be very happy to answer. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] Thank you. Your first question comes from Rafael Urquia from Citigroup. Please go ahead.

Yes, thank you. Good morning everyone. I have a couple of questions. The first one has to do with Uchucchacua. I was wondering if you could please update your guidance on the cash cost -- on the projected cash cost for this year, perhaps next year and for this many units, in the light of the completion of the -- completion of the work that you have been doing there? And my second question has to do with Colquijirca. We saw some very remarkable increase in production this quarter. So I was wondering if we should use fourth quarter levels as a proxy of what could be the recurring numbers for Colquijirca this year?

We have to explain that Colquijirca, we have finalized an expansion of 1,000 tons per day capacity, which is was expected to [meet activity] to process the copper ores. The fact of the matter is that we have not received the permits yet and we are using that facility to process additional lead, zinc, silver ores. That, of course, has meant that we have produced more zinc. In terms of zinc, I think you should use the figures of the last quarter as a normal production levels. In case of silver, we -- this has been an exceptional year for silver and we can almost assure that we will continue with this level of production for the first semester of 2007 but we cannot assure that this will continue in the second semester of 2007.

In terms of Uchucchacua's cash cost, essentially the adjustment of this new processing plant which is quite complex, that will as I mention will give us a lot of flexibility for the future. We believe that this adjustment will permit us to reduce the cash cost that we are reporting for the fourth quarter. We do not have yet a way to confirm what is going to be the cash cost for the future. It will certainly be less than the fourth quarter of 2006. I don't know if Mr. Carlos Galvez wants to expand on that.

Yes, well, just to add to the fact that the deeper we go in Uchucchacua mine, we are gaining zinc and on the other hand, we are getting much more complex mineralization basically [alalundite] that makes the metallurgical process much more complex than we expect. So our new Operational Vice President is planning to continue exploring in the areas of Carmen and Huantajalla which is to the southeast of Uchucchacua, getting in the higher levels of the mine more simple mineralization with higher silver content. And this is the way we expect to turn around this situation.

May I add that, as Carlos mentioned, the new Vice President for Operations, Mr. Francois Muths has replaced Mr. Mario Santillan. We sent a press release on that respect. Mario Santillan has retired from being 65. He has served for the company for 37 years. He was at a long time Buenaventura and of course he has the right to retire at 65 and we welcome Francois who is also an old-timer in Buenaventura and is well known within the organization.

Thank you. Your next question is coming from Victor Flores with HSBC. Please go ahead.

Yes, thank you. Good morning. Just coming back to Uchucchacua and the high cash costs in the fourth quarter, is there a way you could give us a sense of how much of that was due to some of the higher expenses that you note in the press release with respect to development? And how much of it was with respect to the changes that are being made to the plant there?

I do not have, Victor, the exact figure. I could do work on that specifically. But about $0.50 per [100 pounds] is due to this difficulty we have had in the metallurgical process due to additional consumption of cyanide and peroxide that we are consuming. And on the order of $0.30 is about, I have to give you the final and precise figure, is due to the additional expenses in the development that Roque mentioned.

Okay. I mean, that's a good figure. Thank you. Second question goes to the income statement and in the fourth quarter, there was an other expense of almost $12 million and I was hoping you could clarify what that was related to?

This is the income statement?

Yes.

Within other income? Other net.

Other net, yes.

Well, this is basically a miscellaneous of different issues that well, I will have to break it down but basically -- okay, okay. We have $9.4 million coming from our provision to shut down certain mines. You know that according to our new relation we have to make the provision. On basis of the reserves, we have and we [extend] 10% of the requisitions that we have for the area of [Ucani] that we now have to work on that. And additionally, we sold form the -- well basically debited some obsolete supplies that we had in our inventory. Basically, this is the figure, right?

Great, thank you Carlos. And then if I could just ask one question on project development. It sounds like you are getting much closer to moving ahead with the construction of La Zanja. Has Newmont indicated that it wishes to continue to participate in this project and can you give us some of the conceptual economics?

Well, they are supporting us. Newmont is actively and enthusiastically supporting us. They even suggested that they wanted to claw back and of course we said no. We think that we will go ahead with the 53/47% scheme. We are really pushing hard. We think that we -- if we get all the permits, we get the environmental impact study, we get the support of the authorities because essentially the social front is always a problem.

But we believe that we with 1 million ounces and resources that we have built, we are in the position to go ahead. Essentially, if this project will cost to develop, I would say in the order of 30 to $40 million. This is what has cost the normal smaller heap-leaching operations and I don't see any reason why it would cost much more to us.

Great. Thank you very much.

Thank you.

Thank you. Your next question is coming from Felipe Hirai from Merrill Lynch.

Hi, good morning everyone. So I just have one quick question on the CapEx. Could you, given all these new projects that you have, could you give us your CapEx estimate going forward for 2007 and the next year, I mean total CapEx?

Felipe, the CapEx that we consider for the future other than developing La Zanja, that Roque mentioned in the quarter, of 35 to $40 million, and for the sustaining CapEx in Buenaventura, is about 35 to $40 million for year '07. That's the main figure. That includes not only replacing equipment but completing deepening of the Prometida and Nazareno, the same area in Orcopampa and including the facilities we have in the area of Uchucchacua.

Okay, thanks Carlos. And another question on Antapite. I saw that there was a big cost increase in the operations in the fourth quarter. Should we expect costs to remain at these levels going forward?

Well, as we have mentioned in the past, we continued in an important effort of exploration and developing in Antapite. We basically, narrow vein, only one vein that we are exploring and developing. The exploration cost is pretty high. So due to the therefore, we are doing there, we are getting this cash cost of the order of 290. We expect once we complete the regular -- well, this extra effort of exploration to get lower cash costs. But for the time being, we cannot assure a reduction of this.

Okay. Thank you, Carlos.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Oscar Cabrera from Goldman Sachs.

Good morning gentlemen. Thanks very much for your explanations so far. Just looking at your proven and probable reserves for the year, both gold and silver saw a decline of about 9%. Just trying to reconcile this with in terms of the prices that you use for the calculations on the reserves, can you provide us with your assumptions for gold, silver and the other metals? That is the first question.

Well, basically other than the geological explanation that Cesar will expand later on, perhaps it is important to mention then in the case of our gold reserve calculation for Buenaventura's operation, we had to work with a price of gold of $446 per ounce. For silver, we have used $8.51 which are the main prices for us. In terms of Yanacocha, the calculation is based on the market price average of the last three years which is $486. In the case of [Morocal], Morocal reserves that is basically zinc, the price used is $1,443 per ton. This is the prices we used for calculation. Now I will pass to Cesar.

My only remark here is that certainly there is a decrease in the silver grade of Uchucchacua, as you compare 2005 and 2006. We hope with the exploration program concentrating on the highest portions of the Carmen mine and the southern extreme of Huantajalla, to reverse that and go back to higher grades of silver.

But it is also a fact that as we have been deepening the mine, there has been higher grades in lead and zinc that partially offset the lower rates of silver. If you look into the reserve Appendix number three, you will notice that there is a considerable increment in silver found in the zinc reported from Uchucchacua, 190,000 ounces to 4.6 million ounces of silver in zinc, which [north] of the mine. And, of course, there is also an increment in the zinc rich ores that we will hope to recover in the future by [inaudible - background noise] in a floatation scheme. We need to work more on the exploration higher up in the system to try to increase the silver grade of the mine and we will be focusing on that this year. But let's not neglect the lead and zinc values that this mine is bringing to us too.

Okay. Thanks, Cesar. And if I can just follow up on that. In terms of your plans for Yanacocha, I know that a lot of the reserves and the resource there is restricted not because you want to, but because of other reasons. What are the plans in exploration for that part of the company?

Well, we certainly interact and I personally interact with the exploration front of Yanacocha a lot as a partner and on a friendly basis. But it is really a different operation. So what I am going to tell you is just a personal perception. The exploration of Yanacocha has been in the last couple years pursuing a lot of porphyry copper, gold bearing porphyry copper prospects, because the offside gold, low grade close to surface prospects are basically exhausted with the exception of Cerro Quilish that we know isn't [whole].

And we need to focus the exploration also on the future, which is going to be higher grade deposits, blind with no surface expression and this is a task that we see ahead of us for the near future and we need to work a lot on that. In that respect, Newman has been working -- the operator of Yanacocha has been working hard on Chaquicocha which is a plus 5 million ounce deposit in sulfites with average weight of 8 to 9 grams and they are doing everything next to it, again drilling and large diameter drilling for sulfites.

[inaudible]

In addition, [Juan] Alberto Benavides reminds me that the Gold Mill project is going to be finalized this year and is going to be in production early next year and this is to process basically transitional ores. This is copper bearing, 0.1% copper, low grade [off site gold]. This is an additional facility that will give us flexibility to process more ores and hopefully to grow in reserves in Yanacocha.

Okay. Thanks very much, gentlemen. Looking forward to the presentation on Monday.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Alonso Aramburu with Santander.

Thank you, good morning Roque, Carlos, everybody. A couple of questions. The first one regarding Cerro Verde, can you give us a sense of how the production increase is going? And also, I understood that there was going to be a $50 million investment by the company in Arequipa and there is a $40 million of course this quarter. Does that mean that there is going to be $10 million more next year?

That is exactly the case. 40 million has been taken as I suppose a provision in the quarter, no? In terms of the production, as we understand as of today, they are at a level of 65% capacity and all the adjustments are being made and we expect that during this semester, hopefully during this quarter but certainly during this semester, we in the first half, we will have full production, meaning 200,000 tons of copper per year in sulfites, less 100,000 tons of sulfite meaning altogether 300,000 tons for the year, no? So I would say that this year we probably will be producing 250,000 tons of copper which is a substantial amount and of course the expansion is successful and has been the construction has been finished and as I said, all the adjustments are being made.

Okay, that's great. My second question is regarding your hedge for -- now that you have a little more flexibility in terms of selling and market prices for your direct operations, do you have a sense of how you are going to distribute those sales throughout the year?

No, the thing is what we have is we have -- we structure our hedge book. Essentially we have commitments this year 2007 for 150,000 pounds. Of course, we expect to maintain and even increase a little bit of the 400,000 ounces that we have produced from our own direct operations. We essentially have 650,000 ounces at 340, $350 per ounce and the remaining ounces are going to be sold at market price, no?

Okay, thanks.

Thank you. Your next question is coming from Victoria Santaella with Santander. Please go ahead.

Hi. Just as a follow up question with Alonso, what can we expect in terms of labor negotiations this year? Are there any key dates that we have for the special extension? My second question is a general comment on demand, especially for copper and silver in international markets.

The labor negotiations, we don't see any major disruptions, at least in our operations. What is happening in Peru is essentially that is at Congress, there is discussion for new labor laws. The committee that was in charge of this labor law came out with an incredibly negative proposal which was essentially deleted and today the unions and the business associations are negotiating some sort of more reasonable labor law, a labor law that will permit to formalize labor instead of promoting informal labor.

You have to bear in mind for those of you that are not Peruvians that currently between 15 and 20% of labor in Peru, only 15 to 20% of labor in Peru are formal jobs. The remaining is informal and what the law has to look at is to formalize those that are informal instead of giving more rights to those that are formal to date. What we want is to promote employment and not necessarily to have, I don't know, a group of people that have special rights that will make things more difficult for the future. And I think everybody understands this, certainly government and most of the Congress understands this.

In terms of copper and silver projections, I suppose you have better element to answer that question. But...

No, no. In terms of pricing predictions, we have some numbers in mind. But I want to have more a feeling of demand, clients, industry, things like that.

Well, the thing is silver continues to surprise me personally at least. But it seems that there are new clients for silver and that is of course very good. Copper and all the base metals have to do with demand and of course what we have delivered yesterday with this or day before with China Stock Exchange dropping has to do with demand in China and those developing economies, no? I really don't have much sense of what can happen there but we hope that the cycle will continue for longer. This has already been a long cycle. I don't know if Carlos, you want to expand on that.

Yes, well, perhaps the fact that silver production, basically 80% of the total supply comes as byproduct. So it is a very reduced the elasticity of price to -- the availability of silver to the price in terms of supply. So only to the extent that the price of copper goes up or zinc goes up or lead goes up, you will get additional silver supply. While just increasing the silver price, you are not going to get additional supply.

And as Roque mentioned, there are new ways -- new uses for silver that is expanding the demand. So we believe that since silver is perhaps the best -- one of the best alternatives in terms of the market metals nowadays, because some of the precious metals, silver and on the other side, the base metal behavior, increasing demand when there it is not easy to increase the supply.

Thank you very much.

Thank you. Your next question is coming from [Megan Dodson] from JPMorgan.

Hi, good morning. Very quickly I wanted to ask if you could give us an idea based on your ore reserve short tons for Uchucchacua and Orcopampa, the mine life for these two expected now?

Well, you have to understand that being an underground mine, it is difficult and not realistic to have a reserve for longer than three or four years. This is demonstrated in many mines. Of course there are exceptions to that rule. We have been operating Orcopampa since 1963 and always having three, four, even five years reserves ahead of us. We are producing currently 250,000 ounces and we have probably 850,000 ounces in reserves. So essentially we have reserves for something in excess of three years.

But the name of the game is to continue exploring and this is what we are doing and this is the reason why we are investing in exploration, especially when we have higher prices. That is the reason why we are deepening the shaft. That is the reason why I explained that we are funding all these higher grade investments and gives us the assurance that Orcopampa will accompany that with very good production, very competitive cash cost for a number of years to come.

Okay. Thank you.

Thank you. There appears to be no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Thank you very much to all of you to accompany us on this conference call. I just want to highlight something that has not been asked on the Breapampa project. Breapampa was an exploration by Newmont. We have got an option to acquire up to 60%. This is a deposit that has 600,000 ounces in resources and -- sorry, 400,000 ounces. I was extremely optimistic, okay? 400,000 ounces that have to be [inter drilled] and that are heap leachable that in addition to that, a number of [extras] that have potential for exploration. So we are quite excited about this project.

We are going to work very hard to develop this project. We have to invest $5 million this year and if we are not able to invest the $5 million, we will have to invest that money towards the future or reimburse Newmont. But it is a good deal for us. So that is a new project that we have to work very hard on developing.

And then, just to invite all of you again to our luncheon at the New York Stock Exchange on Monday, March 5 at 12:30 and the management team will be there and we hope to expand on any further questions that you may have. This is in line with trying to be as close to the market as we can and trying to be as close to all of you that invest in our company. With that, I want to thank you again in the name of all the team of Buenaventura and hope to see you soon. Thank you very much.

Thank you and this concludes today's Buenaventura Fourth Quarter and 2006 Earnings Conference Call. You may now disconnect and have a pleasant day.