Compania de Minas Buenaventura SAA (BVN) 2007 Q2 法說會逐字稿

Good morning, my name is Larry and I will be your conference operator today. At this time I would like to welcome everyone to the Buenaventura Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS]. Thank you. It is now my pleasure to turn the floor over to Pete Majeski of i-advize Corporate Communications. Sir, you may begin your conference.

Thank you Larry and good morning everyone. Welcome to the Compania de Minas Buenaventura's second quarter 2007 conference call. Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer, and Mr. Carlos Galvez, Chief Financial Officer. They will be discussing Buenaventura's results for the press release distributed on Friday morning. If you've not yet received the 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 in the last page of the Company's press release in the disclaimer; we ask that you refer to it for guidance. It is now my pleasure to turn the call over to Roque Benavides. Mr. Benavides, you may begin.

Good morning and thank you. Good morning to all. Due to the unwinding of our hedge positions 2007, 2009 as expected our net income for the second quarter '07 was $14.5 million or $0.11 per ADS, which represents a significant decrease when compared to the second quarter '06. This unwinding had a one-time negative net effect of $64.7 million. However operating income in this quarter was 9% higher than the second quarter '06, while the EBITDA from Buenaventura's direct operations totaled $110.9 million, 31% higher than the figure achieved in the second quarter '06.

In 2007 net sales were 100 -- in the second quarter '07 net sales were $181 million or 26% increase when compared to $143 million reported in the second quarter '06, mainly due to higher volumes of lead and zinc sold, as well as increase in the realized prices of gold and lead.

The net sales for the six-months period 2007 were $332 million, a 35% increase compared to the same period of 2006. And royalty income was $14.7 million, a 48% decrease when compared to $28.1 million in 2006.

Production and operating cost; Buenaventura's equity production during the second quarter '07 was 98,000 ounces of gold, 1% higher than the 97,250 ounces reported in second quarter '06; and 3,539,000 ounces of silver, an 8% decrease when compared to the 3,847,000 ounces compared to the second quarter '06.

Equity production for the accumulated six-month period was 192,000 ounces of gold and 7,244,000 ounces of silver. This represented an increase of 1% in gold production and a 1% increase in silver production to the same period 2006.

At Orcopampa, our total production in the second quarter '07 was 65,500 ounces, a 3% increase when compared to 63,900 ounces reported in the second quarter '06. The accumulated gold production was 128,000 ounces, a 2% increase when compared to the same period 2006.

In Uchucchacua, our silver production during the second quarter '07 was 2,167,000 ounces, an 11% decrease when compared to the second quarter '06, mainly due to 10 days strike in May and a lower recovery rate as compared to the June periods. The accumulated silver production was 4,174,000 ounces, a 9% decrease when compared to 2006 for the same reasons I mentioned for the quarter.

At Colquijirca, we -- the total zinc production was 20,000 metric tons in the second quarter of '07, a 26% increase when compared to 16,000 metric tons reported in the second quarter due to an increase in ore mined.

Total silver production during the second quarter '07 was 1,289,000 ounces, a 51% decrease when compared to 2,627,000 ounces reported in the second quarter due to a normal silver grade production; the previous one was higher.

In terms of exploration, Buenaventura continues having the same policy of exploring as much as we can and exploration costs in non-operational mining sites during the second quarter '07 were $11.4 million, a 65% increase compared to a 6.9 million reported in the second quarter '06.

The main efforts were focused at Marcapunta, Breapampa, El Milagro, Trapiche and Mallay projects. Exploration costs in non-operating mining sites during the first half of '07 were $20.4 million, a 30% increase when compared to a same period '06.

In terms of the shares in affiliated companies, during the second quarter '07 Buenaventura's income from non-consolidated affiliates was $48.8 million, a decrease of 56% when compared to the 111 million reported in the second quarter '06. This decrease is explained by the $5.9 million contribution from Yanacocha, 85.6 million in the second quarter '06, partially offset by 41.7 million contribution from Cerro Verde, $25.5 million in the second quarter '06. In the first half of '07 income from non-consolidated affiliates was $103.8 million, a decrease of 49% compared to 203.4 million reported in 2006.

Essentially, Yanacocha has had its lowest quarter ever -- we expect that from now on we will start increasing production and reducing cost. We expect that in 2008 we will be producing 1.8 million ounces, and in the starting 2009 2 million ounces, and then after we expect to maintain that level of production.

At Cerro Verde, essentially we have completed the expansion project and we are operating almost at full capacity. I don't -- if for the whole quarter, but essentially some days we have already reached installed capacity. We expect that for the second half of 2007, we will be at installed capacity for the whole half of that year.

As I may -- I mentioned that the CapEx in Cerro Verde in this second quarter of '07 was only $16.3 million, which essentially show that the expansion projects has been concluded.

In terms of the net income this quarter's Buenaventura's net income worth $14.5 million, representing $0.11 per ADS, a 90% decrease when compared to 139.8 million reported in the second quarter of '06. This decrease was explained mainly because of a 93% decrease in the contribution from Yanacocha, which was partially offset by 64% increase in the contribution from Cerro Verde, a total net effect of $64.7 million from the unwinding of 488,000 gold ounces as reported on May 24, 2007. The net income for the six months period 2007 was $51.1 million, a decrease of 81% when compared to this 266.3 million in the same period of 2006.

Essentially, in terms of our own direct operations, we have continued with some of our project developments and the main projects at Uchucchacua, the deepening of the Carmen and Socorro mines, which include the continuation or the construction of a number of runs and deepening the shaft.

At Orcopampa, the main project has been to continue the deepening of the Master Shaft located in the Nazareno mine. We have -- we are advanced as of 50% and we expect to develop the mine with this -- construction of this shaft.

We have continued with the expansion of the tailing dam at number 4, and we have continued with the detailed engineering study and purchasing order for the main equipment of the project of retreating the tailings from the older tailing dams.

Essentially, those are the projects that we have done during this quarter and we are open for any questions that you may have. Larry, please go ahead.

[OPERATOR INSTRUCTIONS]. Your first question comes from Felipe Hirai of Merrill Lynch.

Hi, good morning everyone. Good morning, Roque. My question is regarding Yanacocha. Could you discuss a little bit further what happened with the Yanacocha on the third quarter -- sorry, on the second quarter? And what are you expecting for the second half of the year?

Let me pass to Carlos Galvez to answer this question.

Yeah. Well, Felipe question is that Yanacocha's second quarter was a lowest level production during the -- the mining plan during these years. We expect to have a better third quarter this year and the best quarter during the year -- it should be the last one. So, by doing so we will continue expecting our 1.6 million ounces of production that was announced in due time and of course keeping the same average cash cost we announced in due time.

Okay. Thank you, and also if could also provide on what's you're view on your hedge book after 2010, because you still have some hedges in 2010, '11 and '12?

Yeah, we continue evaluating our position of this hedge book looking for the -- schedule time to continue unwinding. We decided not to unwind this positions right now due to the very high cost of the volatility that we had to pay if we decided to do so right now. But we will continue evaluating and making decisions [probably this year].

Okay. Thank you.

Your next question comes from John Bridges from JP Morgan.

Well, hi Roque, Carlos. Just wondered on Uchucchacua, is there any indication as to the strip ratio for the period. Was there an unusual amount to the stripping that was done or was it just the impact of the ounces?

Talking about, Uchucchacua is an underground mine.

Sorry, Yanacocha sorry, I am getting my...

Yanacocha, I'm sorry. Yes.

Well in Yanacocha production was mentioned well we were going to have a higher striping ratio and lowest grade during this quarter. As it was announced we expect to increase the grade in the following months and we've used [to arrive the] our stripping ratios. Once we begin the gold mill operation and during next year we should increase this rate reducing the impact of this stripping ratio.

May I ask Cesar to give us an explanation of the expectations that we have on Yanacocha. There are so many questions on Yanacocha. Cesar please, Cesar Vidal.

John good morning this is Cesar Vidal.

Hi Cesar how are doing?

Fine thank you. What I can add to that without reading it -- going in to further operational details is that the open pits of La Quinua and the new open pit of Chaquicocha are reaching in the case of La Quinua the basement deposit of El Tapado, which is going to give us hardrock that's much higher grade oxide material part of it for the gold middle of next year. And in the case of Chaquicocha in the pre-stripping upper benches there are some oxide appearances that were not in the reserve budget before and that will next year give substantial better grade for the heap leach operation. So forecast for 2008 is grade wise much better than 2007 in the leach part.

Okay. So which quarter do you expect the mill to kick in at Yanacocha?

First quarter.

February next year.

Okay. So if the mill is not kicking into the second half what is driving the improvement in the results in the second half?

Its higher grade from the La Quinua and Chaquicocha open pits.

Okay.

In oxide ounces.

Okay and do you have number for us in terms of the strip ratio in Q2?

I don't sorry.

Okay. Now Uchucchacua, the results from that were weaker, but you're actively tracing these new access points for the ore body. What do you expect the profile to be from Uchucchacua through the second half?

You know that essentially in Uchucchacua we have built a full processing plant that gives us a lot of flexibility. I am afraid that we have been adjusting these processing plants, we have now a clear view on what to do, and we expect that this embedment at Uchucchacua will help us to increase production and maintain the levels of [course] that we used to have in these mines. So, I think we are also leaving with a quarter or a period at Uchucchacua that is an adjustment period and that we will expect better times at this mine in the future. I don't know if Carlos wants to add to this.

Yeah, if I may add, the point is that we have had some [purlings] in the -- normally the grade, but the metallurgy of this ore material. And operations vice-president have been working hard on that and looking for the new areas of the operation, increasing the grade, increasing and improving the recovery and just to share with you the first five months of this year, Uchucchacua was producing something between 300,000 ounces to 700,000 ounces due to these problems. In June, after making those decisions, Uchucchacua produced 832,000 ounces. So after increasing the rate, improving the metallurgy and taking some measures.

Okay. And you were waiting on that improved metallurgy to go ahead with the tailings project is that...

We are not yet at the tailings processing, we are -- that we come then after.

Are you sufficiently confident of the metallurgy now that you're are going ahead with that?

Well, we want to deal with a different type of materials that we have within the mine. We have got to the conclusion that there are different types of ores in the mine and they require to be treated in different ways and that was affecting the recovery rate when we put all off these ores together. So, now that we have a clear path, we are working on that -- the tailings we come after this. Cesar, you want to...

John, if I may ask you that the recurrent flow sheet -- flotation flow sheet of Uchucchacua, case as usual for our first silver rich lead concentrate, but now it is -- and is continued by a manganese floatation circuits through alabandite, to avoid the interference with a third flotation product, which is the zinc concentrate.

The alabandite or manganese, the second concentrate, and after the zinc concentrate the pyrite concentrates first carry sliver and they feed after very fine grinding or regrinding, the cyanidation mill. And of course, this is a new flow sheet and the cyanidation is getting between 5%, sometimes 6%, 7% more silver recovery than before in the form of gold bars.

But, the floatation flow sheet has been a changed through better feed the cyanidation circuit and to improve a quality of a zinc concentrate. So, we are getting in to grips with that. And mineralogy and geology are essential components to get better blending and better mineralogical predictions to improve metallurgical recoveries. This is not an easy job and isn't everyday job.

Okay. Many thanks, Cesar. Good luck.

Thank you.

Your next question comes from Nawojka Wachowiak of BMO.

Good morning. This is Nawojka here. And I'm just wondering whether you can talk a bit more about Cerro Verde, now that the expansion is complete. May be you can give us a bit of guidance on the dividend distribution out of that JV?

Yeah. The Cerro Verde expansion, as you know has been -- has represented an investment of $850 million altogether. The construction process for all practical purposes was concluded in the first quarter '07. We have been in the testing of the -- all the installations and we essentially have reached in some specific days record productions and essentially a construction level or production level as the project was restated.

We expect to produce the 300,000 tons of copper per year, in an average, and we believe that in the second half of this year we will reach this rate of production. Altogether, I would say that Cerro Verde will produce this year in the order between 250,000 tons of copper in that average, so if not somewhat higher.

Okay. And if I understand it correctly there is some debt at the JV level. Is it the understanding that you would probably pay off that debt before you start distributing dividends followed that JV or whether the...

The decision is to pay debt or at least those debts that are required before paying any dividend to pay those debts before starting paying any dividend.

Therefore, depending Cerro Verde have decided to pay back the syndicated loans that they have got in the market, and we still were active in the bonds that issued last year. And the expectation is that after completing the reinvestment process, because you have to bear in mind that Cerro Verde has this tax stabilization agreement that obliges the Company to accumulate the $800 million reinvestment program before paying out cash dividend. So, in March the most probable decision will be to pay the excess of the $800 million profit.

Okay. Great. Second, if I ask one more question. Just wanted -- we haven't heard an update for long time on Minas Conga, I was wondering whether you can talk a bit about that project and give us a some bit of a guidance on a timeline and where you are in that decision process.

Conga is in the -- essentially in the feasibility stage. We continue drilling, we're expanding the resource and reserve base. We still have it for 2011, but -- to start production. We have changed a -- if I may say, the profile of Conga as opposed to Yanacocha trying to give -- to get to terms to the local community -- with the local communities and as usually we are optimistic that the project should be in production in 2011.

Okay. Great thank you so much.

Your next question comes from [inaudible].

Good morning I was wandering if you could gives us a bit more of a like in terms of Yanacocha's future cash costs. With this increment in production could we expect cash cost to drop down to $228 or $240 per ounce?

Difficult to say at this point in time that we expect production to level at 2 million ounces referring to '09 and cash cost to be in the order of $300 per ounce. We don't see cash cost going below 300, I think that is the best estimate that we can give at this point in time.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from [inaudible].

Hello. I just have a couple of questions, first of all in terms of the un-winded hedge book. Have we seen all of the cost associated with that now or we shouldn't expect any extra cost in the second half? And then second question is just on your own gold production, the production from your own mines. Can you give us some guidance on what you would expect in terms of production this year, just given the weakness that we've seen so far at Antapite? And then what kind of increase you can expect in 2008 when the Orcopampa expansion kicks in? Thank you.

Talking about the unwinding cost what -- when I include Antapite -- for this unwinding in this second quarter was $170 million. We have already provisioned $70 million, so what we report is the kind of percent of this impact, which is $100 million. However, we have some taxation this effect is $36 million about. So that's why we say that the net effect of the unwinding process in this quarter was $64.7 million. So there is nothing that we will charge for the future due to this transaction.

Okay, thanks.

Regarding our gold production...

One of the thing is we have mentioned that we expect to produce closer to 400,000 ounces this year, regardless of the fact that Antapite's production is weaker this year because of the lower grades and then difficult to find additional areas to exploit and -- but we continue exploring intensively. The fact of the matter is that we expect to be very close to 400,000 ounces altogether this year. We continue with the expectation that by 2009 to be closer to 500,000 ounces. We will be producing from Poracota this year a larger amount taking -- trucking this production to Orcopampa. And of course, we continue working on the Breapampa project which essentially would be heap leach operation. Then you ask for Orcopampa expansion and your last question -- can you repeat please?

Well, I was just wondering what kind of -- I think its called Breapampa, isn't it that comes on stream in 2008. I am just wondering what kind of increase in terms of ounces we can expect year-on-year as that project comes on line?

We expect to have Orcopampa in production, but we will have to continue with the exploration. May I pass to Cesar to explain that part?

Sure. Breapampa is an option deal with Newmont and we have a decision point after year one in April 2008. Our decision will be after analyzing declaration and the basic engineering, whether we decide -- whether Buenaventura decides to build rather open pit, heap leach operation. At the moment I cannot foresee why not, but we are still drilling, we're expecting to find more ounces to substantiate that deficient making.

And if you do decide to go ahead, how long would it take to -- to actually get that some into production?

I would say the next two years, 18 months to 24 months, because the permitting and the construction will take at least year and half to two years.

I will be more optimistic than anyone.

Thank you.

The Breapampa deal has also an upside in the big land package of 93,000 hectors and also at best from the Breapampa project that comes in higher grade sulfide, and we are in the process of starting these two additional subjects.

Okay. Thank you.

Your next question comes from Patrick Chidley of BJM.

Hi gentlemen. I just wanted to ask about Yanacocha's capital payments in terms of sustaining capital. How much would you be forecasting on a 100% basis for Yanacocha's outstanding cap position next year and 2009, excluding a Gold Mill?

As you know the total CapEx of Yanacocha for the year is $250 million per year. This is including the Gold Mill. Once we complete this Gold Mill project the sustaining CapEx will be in the order of 80 million to a $100 million.

And -- so of course excluding Congo and any other?

Yeah, of course, this is out of Congo.

Okay. So, the 80 million to 100 million would be for production level that you said 2 million ounces going forward?

Yes.

Right. Okay. Thanks very much.

[OPERATOR INSTRUCTIONS]. There are no questions at this time. I will turn the floor back over to Mr. Roque Benavides.

Thank you. Well, again we appreciate your taking the time to listen to our presentation. We continue working very hard on improving our operations and we expect to continue delivering value to our shareholders. Thank you very much and good morning.

This concludes today's Buenaventura conference call. You may now disconnect.