Compania de Minas Buenaventura SAA (BVN) 2007 Q1 法說會逐字稿

Good morning ladies and gentlemen. At this time, I would like to welcome everyone to the Buenaventura First Quarter Earnings Call.

[OPERATOR INSTRUCTIONS]

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

Thank you and good morning everyone. Welcome to the Compania de Minas Buenaventura First Quarter 2007 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've not yet received a copy, please call us in New York at 212-406-3694 and we will e-mail 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 on 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 and thank you for attending Buenaventura's conference call. Net income in the first quarter '07 was $36.7 million or $0.29 per ADS which represents a decrease of 71% when compared to first quarter '06. The unwinding of 483,000 ounces of gold from our hedge book in March had one time negative net effect of $55 million. The operating income for the first quarter '07 was $78.2 million, a 38% increase when compared to first quarter '06. The EBITDA from Buenaventura's direct operations was $85.8 million, 64% higher than the figure achieved in first quarter '06.

In terms of our operating revenues in the first quarter '07, net sales were $150 million, a 47% increase when compared to $102 million reported in first quarter '06, mainly due to higher volumes of lead and zinc sold as well as an increase in the realized price of gold, silver, zinc and lead.

Buenaventura's equity production during the first quarter '07 was 94,349 ounces of gold, 1% higher than the 93,144 ounces reported in first quarter '06 and 3.359 million ounces of silver, a 1% increase when compared to 3.314 million ounces of gold -- of silver reported in the first quarter of '06. Our own direct operations did very well during the first quarter '07 and I would refer to those.

At Orcopampa, the gold production in the first quarter '07 was 63,200 ounces, a 2% increase when compared to 61,700 ounces reported in first quarter '06. Cash operating cost during the first quarter '07 was $139 per ounce, 7% higher when compared to the first quarter '06 and this was due essentially to an increase in exploration expenses, higher reagent consumption and prices of cyanide, higher royalties paid to government due to higher realized gold prices.

In Uchucchacua, total silver production during '07 -- first quarter '07 was 2.006 million ounce an 8% decrease when compared to first quarter '06. The cash operating cost in first quarter '07 increased 59% to $3.57 per ounce of silver. This was best explained essentially -- sorry, it was increased 59% from $3.57 to $5.69 per ounce. This was explained essentially for a 13% increase in ore treated, a 9% reduction in silver grade and a 10% lower recovery explained by higher clay and manganese from the Socorro mine and oxide ore from the Huantajalla mine, higher expenses in support supplies and higher reagent consumption due to the previously mentioned metallurgical difficulties. Essentially, it has had to do with the adjustment of the new facilities that we have built for Uchucchacua. In the future, we believe this adjustment will show a better recovery rate and we will have very much better results from Uchucchacua.

At Antapite, total production in the first quarter '07 was 18,600 ounces of gold, a decrease of 25% when compared to first quarter '06, mainly due to a 44% decrease in the gold grade from 0.59 ounces per short ton to 0.33 ounces per short ton as well as 2% reduction in recoveries. Gold cash operating cost was $347 per ounce and the royalties paid to the government by Antapite were $130,000.

At Colquijirca, total zinc production was 18,900 metric tons in the first quarter of '07, a 22% increase when compared to first quarter '06 due essentially to higher tonnage treated. Total silver production during the first quarter '07 was 2.074 million ounces, a 4% increase when compared to first quarter '06. Zinc cash operating cost in the first quarter '07 was $261 per metric ton, a 149% increase when compared to $105 per metric ton in the first quarter '06 due to higher smelting charges. Total royalties paid by Colquijirca in the first quarter were $550,000.

In terms of our affiliated companies, Buenaventura's income from non-consolidated affiliates was $55 million in the first quarter '07, a decrease of 40% when compared to the $92.4 million reported in the first quarter '06. This decrease is explained by the lower contribution from Yanacocha, $27.2 million in first quarter '07, while Cerro Verde increased the contribution from $13.7 million in the first quarter '06 to $27.2 million in the first quarter '07.

At Yanacocha, in the first quarter '07, gold production was 418,000 ounces of gold, a decrease of 48% when compared to the figure of first quarter '06. This was mainly due to lower ore grade and a higher stripping ratio. Cash cost at Yanacocha during the first quarter '07 was $319 per ounce, which represented a 90% increase compared to first quarter '06. This is explained by the decrease in the gold production.

At Cerro Verde, in the first quarter '07 copper production was 50,800 metric tons, a 124% increase when compared to first quarter '06. In the first quarter '07, net income reached $148 million, a 93% increase when compared with first quarter '06. Net sales at Cerro Verde increased 240% from $93.5 million in '07 to 300 -- to $317 million -- sorry, $93 million in '06 compared to $317 million in '07, mainly due to higher volumes of copper sold.

This quarter, Buenaventura's net income was $36.7 million, representing $0.29 per ADS, a 71% decrease when compared to $126 million reported in the same quarter of '06. The decrease was explained -- a decrease of 65% in the contribution from Yanacocha, which was partially offset by a 99% increase in the contribution from Cerro Verde and a total expense of $55 million from the unwinding of 483,000 ounces of gold reported in March 9, 2007.

In our own direct operations, we have been very active in terms of projects and we have mentioned in our press release projects at Uchucchacua, essentially the deepening of the Carmen and Socorro mines, which include a number of -- building a number of infrastructures that we were requiring. And during the first quarter '07, total investment was $800,000, accumulated $3.9 million out of a budget of $10.3 million in all these projects.

At the Mallay project, which is an exploration project in the surroundings of Uchucchacua, exploration work in the Isguiz and Fortuna areas reported a total of 2,500 meters drifted and 7,400 meters drilled. Resources reported in this project account for 317,000 dry short tons with 5.63 ounces of silver, 7.58% zinc and 4.88% of lead.

At Orcopampa, we have work in a number of projects in connecting the Prometida and the Nazareno mines; the expansion of the tailing dam number four which is very important for the development of the mine. A project to retreat tailings from the older tailing dam number three has been approved and we are working on that project as well. And during the first quarter '07, new facilities at the Orcopampa treatment plants were tested, treating 4,200 dry short tons of Poracota ore material concentrate with positive results and producing 408 dry short tons of gold silver concentrate. So we have already started production at Poracota.

At Antapite, the expansion of the tailing dam to increase capacity is 80% completed and is expected to be in full capacity by the end of 2007. During the first quarter '07, the investment totaled $1.2 million out of a budget of $3.5 million. With this, may I turn back to you. So if you have any questions, we will be very happy to answer. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Felipe Hirai with Merrill Lynch.

Good morning everyone. Roque, I have just a few questions here. First, could you comment a little bit what we can expect on the grade at Antapite and Colquijirca and that we saw as a decline here in the first quarter and also on the recovery rate at Uchucchacua?

And also, could you comment a little bit on your hedge strategy going forward, if you are still looking to reduce more your hedges or decreasing your gold exposure? Thank you.

You mentioned the grades at Antapite and did you mention Colquijirca as well? No.

Yes.

No. Okay. The grades at Antapite, the only way to get back to higher grades is to continue exploring. At this point in time, we expect to maintain this levels of grades at Antapite and we are doing our best in finding ores that are higher grade. We cannot comment further on that.

At Uchucchacua, the grade -- the recovery at the plant, as I mentioned during the presentation, have to do with the adjustments at this new facility. Really, this new facility is going to give us for the future a lot of flexibility. One thing that we have found is that we need to separate the ores coming from different areas of the mine. We cannot mix all the ores and try to treat all of them together. This is a learning process. This is a new facility and we expect to increase the recoveries at Uchucchacua. We have currently in town or in the mine some advisors and consultants that are helping us in solving this minor detail.

In terms of our hedge strategy going forward, we have mentioned to a number of investors that we will be looking to reduce our hedge position as much as we can, of course, at a reasonable cost. And yes, we react to the comment of some of our investors that prefer not having a company with a hedge book such as the one that Buenaventura has and we are working on reducing our hedge book as much as we can.

Okay, good. Thank you.

Thank you. Your next question comes from Alonso Aramburu with Santander.

Yes, good morning. Roque, I was wondering if you can give us an update on the potential strike that is scheduled for this coming Monday down in Peru? And also, you mentioned Poracota has started production. Do you have a sense of how much they can produce this year?

The national strike called by the national union of miners is as I say, a national strike. We understand that we may have some strikers of some of our operations and namely Uchucchacua. Hopefully, we will get to terms with the -- with our own union and make them work or try to convince them to continue working on Monday. Monday is the date the strike has been called for.

So the thing is, we really are in the middle of -- I don't know if I can call it political strike. It has to do with the drug traffickers or the coca leaf growers in the jungle because it seems that it is somewhat mixed with that, or if it is a purely labor strike, I wonder. So there is very little we can do in this respect and we are certainly monitoring whatever happens.

In terms of Poracota, we have continued exploring. We certainly will not have filled all the permits to develop the mine but some of this development ore are being tested at Orcopampa with the results that I mentioned that are very good results and very promising results. We expect to have all the permits in place in the next few weeks and be able to start producing at a higher level from Poracota.

As you understand, Poracota is only 30 kilometers from Orcopampa. We are planning on using the metallurgical facilities at Orcopampa to process these ores, which means that the cost, the capital cost of developing Poracota will be very low. We are excited because we have intersect some areas, some additional feeders in the Poracota operation and certainly Cesar Vidal, who is with me here, can expand on that. I think it's promising results and we are very happy that we are expanding the resource base at Poracota.

Okay, thank you. And just finally, will you have also a one-time expense in second quarter because of the unwinding of the hedge book?

No. The unwinding of the 480,000 ounces was a one shot expense in the first quarter. If we do more in terms of reducing our hedge book, we may have an additional expense. But this will depend on whether we are able or not to reduce our hedge book.

Thank you.

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

Thank you, good morning. Could we possibly get Cesar to give us an update on Marcapunta and La Zanca, please?

Sure. That's what you like, yes.

You know I was going to ask that.

Yes, yes Victor. Thank you.

Victor, good morning. My pleasure to update you on what is happening in some of our more promising and advanced projects. In the case of Marcapunta, as you know we are getting the final permit for tailings disposal that will enable to start the final production of 1000 tons a day from the northern area of Marcapunta. It is being tested and it's being permitted both for the mine and for the expansion of the mill. But the tailings in this important area is still requesting for permits.

On the western area of Marcapunta, we are seeing a better hydrogeological model, that there is less water coming out from the flooded panel and we will start pumping in any time now. We are continuing with the inter drilling and also doing the engineering work to monitor the water influx and volumes and we will start pumping to de-water, the western decline in the next two days.

Regarding La Zanca, as you know we have expanded the resource with the interim drilling and extension, step out drilling from San Pedro Sur to the south and we have announced that we are currently finalizing the new model. The bottle roll test and the column test of the extension of San Pedro Sur are very positive. The last batch out of five that we have tested arrived yesterday on my desk, so the model is now metallurgically complete. We are adding at least 250,000 ounces to the San Pedro Sur open pit and we shall model that into the new column and have an official figure soon.

Allowing parallel lines, we are doing all we can to finalize the environmental impact study and present it as soon as possible. We have had meetings with the government officials about this and we are certain to have their support to get the environmental impact study permitted and then start construction later on this year.

May I just add that the Colquijirca, the Marcapunta development we cannot -- that we cannot treat this as ores from Marcapunta has also an opportunity to Colquijirca and to [Rocal] because we are using that facility, that concentration plant, 1,000 tons per day concentration plant, to process additional lead and silver ores. That is the reason why Rocal has shown additional production in this respect.

Great, thank you. If I could just ask a follow up on Yanacocha, you obviously had the bulk of your production coming through during this first quarter. Can you give us a sense of how production will evolve over the rest of the year? Especially because you have put fewer tons on the pad during this quarter at a lower grade, so obviously that gold comes out over the next two quarters. So I was hoping you would just give us the sequence of events for the next few quarters.

The target production is 1.6 million ounces. That is the target for 2007. Quarterly basis, I -- we don't have those specific figures. I am sure you have asked that at the Newman conference call.

Well, I just wanted your opinion.

No, our opinion is exactly the same as Newman's. We expect 1.6, 1.7 million ounces and then of course quarterly we will be able to increase production and reaching at some point -- at some point in time 2 million ounces. And that will be in our mind the right level of production long term for Yanacocha.

Great. Thank you very much.

Thank you. Your next question is coming from Oscar Cabrera with Goldman Sachs.

Good morning. Good morning, gentlemen. I just have a couple questions here. In terms of your zinc treatment charges, could you please comment on the level of benchmarks and the basis that you are using or that you negotiated with -- I don't know if you can share that with us? In the industry, we've seen the benchmark go up to $300 with the basis about 3,000 and this is dollars per ton. I don't know if you could comment on that and then I will follow up with another question.

Unfortunately, I don't have the smelting charges, the specific zinc contract. But I believe that you are asking specifically for Colquijirca zinc.

The thing is, our experience is that when prices of zinc go higher, there is an escalator and probably that has been the case. Really, we can get back to you with that specific answer later on.

I appreciate that, Roque. Thanks very much. Now, the -- if I can just follow up with one more question and this is with regard to Yanacocha, what sort of life of mine following -- life of mine grade and throughput should we expect for the mine following the completion of the mill? I know that you -- you mentioned you want to go to 2 million ounces a year production. What sort of like timeframe should we expect for ramp up and what type of grades and so forth? That is it, thanks.

Regarding the new gold mill which will start production in January or February 2008, the projections are to treat 2.5 grams per ton for the first year, first two years actually and then gradually move up to 5, 5.5 grams per ton in years 3, 4, 5. But this is given the resource and reserve understanding today. Of course, we are looking for higher grade ores to bring this to a better level. But this is the gold mill projections for 2008, 2.5 grams per ton and climbing to 5.5 grams by the year 2010 or 2011.

Thanks very much, Hector. That is great.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Rafael Urquia with Citigroup.

Thank you, good morning. Just a clarification on your hedging strategy, I was wondering under what circumstances would you both consider making some additional unwinding of your positions such as the ones we saw this quarter?

If I understood correctly your question, what is going to be the strategy of unwinding our hedged positions? As I mentioned earlier, we would love to reduce our hedge book as much as we can and have as much exposure to the gold market as possible. And we are working on different alternatives. It is a question of cost, it is a question of opportunity and we evaluate the hedge position on a permanent basis. We discussed this at board levels, at board meetings and we, as I said, we are evaluating the possibility of reducing further. But at this point in time, it would be speculation to give you any specifics.

Okay. Thank you.

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

Hi, Mr. Roque, good morning. I have two questions. The first one is if you can give us an update on your acquisitions plans, which we discussed here the possibility in New York in our last meeting. The second is, has there been any changes in your expansion plans, given the bottlenecks created in the industry because of a lack of technicians, spare parts, machinery and things like that which is affecting mining companies worldwide and we're starting to see some delays in plans all over the map.

In terms of our acquisition strategy, it continues to be the same. We give priority to finding new deposits, developing new deposits. That is the way we believe we add value to our shareholders. That does not mean that we are not prepared to look for opportunities of acquisitions. Last year, we did a couple of small acquisitions, mainly 25% of Poracota and 22% of [Eminchur]. We are not the type of company that we go for a hostile takeover. We believe that friendly acquisitions are much better for everybody and we continue looking for alternatives. We are almost finished in a deal to explore a property in Argentina but these are again minor events and we will keep you informed.

In terms of our expansion projects and the lack of technicians and human resources, Peru is in a very peculiar situation. As we understand, many international companies are hiring Peruvians to work in their operations abroad. So far from having a lack of technicians, we do have a good bunch of universities preparing and giving us the human resources that we require in our operation. We have not had a shortage of people for our operations but of course we continue investing in preparing, educating and promoting people to help us in the development of the mine too.

And you don't have any shortage of spare parts or tools, machinery that could jeopardize your growth plans?

Not really, not really. Not that we have heard recently. There was a shortage of tires at some point in time but that has been solved and at this point at time, we don't have any shortage of any supplies.

Thank you very much.

Thank you.

Thank you. Your next question is coming from [John Tumas] with Prudential.

Good morning, Roque. My question already was asked but maybe I could ask it again. About the national strike Monday, it is very ironic because the mining industry has been such a wonderful engine of economic growth in Peru. And your comment that it is instigated by coca growers or drug dealers is interesting because such a strike that could frighten off foreign investors would damage the country but benefit someone whose agenda is not the welfare of the country. How much is the opposition to mining in Chile -- excuse me, in Peru and the environmental opposition or people who just don't like economic growth and want to be left alone?

Well, your comment is perfectly in line with what Mr. [Alan Garcia] has said, no? Who are those that want the development of the country and who are those who want to isolate the country, no? And in this aspect, I think there is -- there is a lot of political aspect to this strike. I wonder whether they are going to be successful. I don't think it is all that bad. You see, the effect of reducing the coca leaf plantations is something that many people don't like and those are essentially very strong people.

So we believe that at the end, the government will have to fight these people and try to reduce the areas where the coca leaf is grown. And but that will have some sort of conflict and then they could of course be in touch with other people that have a different political agenda. But it is all very difficult to explain but the fact of the matter is that whatever strike we have in Peru will have an impact on metal prices and benefit some other countries and some other productions. And in that respect, people should be very aware of that, no? And we can lose markets and that sort of thing, no?

Roque, what is the literacy rate in Peru and is the government or private spending for elementary and secondary education increasing?

I understand that the literacy rate in Peru is well over 90%. 90% literacy, literacy, literacy. Not illiteracy. Literacy. So the illiteracy would be less than 10%. The -- certainly the mining companies in the private sector contribute a lot in improving the educational system in the country. There is a big discussion at government level whether the government of Peru is spending enough resources in education. But it is a national policy to increase the spending in education. It is typical of a developing country that we do not have the best education system but I think there are clear efforts that are being done in improving the education system.

Well, the literacy is the most important thing in dealing with the issues surrounding the strike next Monday.

I am sorry?

I was just encouraging you that the literacy is the most important thing in combating these issues.

Yes. I fully agree with that and we as a company, I can assure you that we do invest in schools and promoting people going to universities in Peru, no, and health care.

Thank you.

[Operator Instructions] Our next question is coming from Michael Holme with Altima.

Good morning. Would appreciate an update on Cerro Verde. Thank you.

Cerro Verde is -- certainly has finished construction of its expansion. As I understand, we have -- we expect to before the end of the -- before the end of June, we should be at full capacity. There have been some minor adjustments that have been made being at full capacity. Having said that, we have reached full capacity in some specific date, not on a permanent basis and that simply shows that the adjustment has taken a little bit longer than expected. The operation is doing very well. The grades of the ore have been a little bit higher than expected and we are very pleased with the development of Cerro Verde.

And then of course, the molybdenum plant should be ready in the next couple of weeks or so and that is an important addition to the revenues of Cerro Verde.

Thank you.

Thank you and at this time, there appear to be no further questions. I would like to turn the floor back over to management for any closing remarks.

As always, we appreciate very much you attending this conference call. The best thing we have received as a comment from an investor is that you will always receive all the truth of our operations and we want to be as transparent and pass all the information we can to all of you. And you can be sure that we will always be here to answer any additional questions that you may have. Thank you very much and have a good day.

Thank you. This does conclude today's Buenaventura conference call. You may now disconnect and have a wonderful day.