Compania de Minas Buenaventura SAA (BVN) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Buenaventura Conference Call. My name is Judith and I will be your conference operator. All lines have been placed on mute to prevent any background noise.

At this time, I will turn the call over to Pete Majeski of i-Advize for opening remarks and introductions. Please go ahead.

Thank you, Judith, and good morning everyone. Welcome to the Compania de Minas Buenaventura Second Quarter 2008 Conference Call. Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer and Mr. Carlos Galvez, Chief Financial Officer. In addition, two 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.

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 a disclaimer and 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 to all. Thank you for attending this conference call of Compania de Minas Buenaventura. Our net income for the second quarter '08 was $121.7 million or $0.48 per ADS which represents a significant increase when compared to the second quarter of '07, but in line with net income after adjusting for non-maturing expenses reported in 2007.

Our operating income in the second quarter was $92.7 million, in line with the figures reported in second quarter '07, while EBITDA from Buenaventura direct operations totaled $106.3 million, 4% lower than the figure achieved in the second quarter '07. This increase is explained by the higher calls reported at most of our company mines. Totally, the value in the second quarter increased 37% due to higher contribution from Yanacocha and Cerro Verde.

During the second quarter '08, our net sales were $204.3 million, a 13% increase when compared with $181.4 million reported in second quarter '07. Mainly due to higher volumes of silver and zinc sold, as well as an increase in the realized prices of gold and silver. It was partially offset by the decrease in the volume of lead sold as well as lower zinc prices. Royalties under the second quarter '08, total $12.1 million, a 90% increase when compared to $6.3 million reported in second quarter '07 and this was due to higher sales at Yanacocha.

Buenaventura's equity production during the second quarter '08 was 103,651 ounces of gold, 6% higher than 98,177 ounces recorded in the second quarter '07, and 3.9 million ounces of silver and 11% increase when compared to 3.5 million ounces reported in second quarter '07. Our equity production for the accumulated six months period was 212,000 ounces of gold and 7.8 million ounces of silver. This represented an increase of 5% in gold and 9% increase in silver production compared to '07.

We have a detailed explanation on why some of our costs at our different operations have increased and you can read this at your leisure. This is for Orcopampa, Uchucchacua, Antapite, and Colquijirca mine of El Brocal. Exploration costs at our non-operational mining site during the second quarter '08 were $15.7 million, a 38% increase to our -- to $11.4 million reported in the second quarter '07. We have with us, Cesar Vidal, our Vice President for Exploration for any questions that you may have on this front.

The main metals were focused at Marcapunta, $2.8 million, Mallay, $2.5 million, La Zanja, $2 million and La Llave within Brocal $1.3 million and these are the projects. Exploration costs at non-operating mines -- sites during the first half of '08 were $27.2 million, a 33% increase when compared to the same period in 2007.

It is important to mention that during this quarter, we have gone to the environmental impact studies and the hearings -- the public hearings on La Zanja and Mallay and we have gone successfully through those hearings which essentially opens the opportunity to develop these two projects in due time. At the Trapiche project, a new agreement was signed with the Mollebamba community, the local community. Mollebamba voted in favor of a long term lease agreement for 2,400 hectares in surface rights.

Exploration agreement will commence in August, hopefully before that if we can arrange for the machines to get there sooner to extend the project 30,000 meters into the southeast of the Trapiche porphyry and the Millocucho skarn and porphyry. At Tantahuatay and Pucagallo, we have done interesting results that we have mentioned in our press release which you can also have a look at it -- at those.

In terms of our share in affiliated companies during the second quarter '08, Buenaventura income from the non-consolidated affiliates was $98.6 million, an increase of 88% when compared to $52.4 million reported in the second quarter '07. This increase is explained by the $43.3 million contribution from Yanacocha and the $55.3 million contribution from Cerro Verde.

In the first quarter -- first half '08, income from non-consolidated affiliate was $244 million, an increase of 127% compared to the same period in 2007. At Yanacocha, in the second quarter '08, the gold production was 441,900 ounces of gold, an increase of 46% when compared to second quarter '07. Gold production for the six months of 2008 period was 942,000 ounces, an increase of 31% when compared to 720,000 ounces reported in the comparable period of 2007.

At Cerro Verde, the second quarter '08, copper production was 81,000 metric tons at 26% increase when compared to -- to the second quarter '07. Copper production in the first half '08, totaled 156,000 metric tons, 36% higher than the figure reported in the same period of 2007.

During 2008 -- during the second quarter '08, net income was $301 million, a 33% increase compared to second quarter '07. Best explained by higher sales revenues which increased 52% from $453 million in second quarter '07 to $687 million in the second quarter of '08.

We also have to report that this quarter, Buenaventura's net income was $121 million, representing $0.48 for ADS, a 571% increase when compared to the $18.2 million reported in the second quarter '07. Net income for the six months previous to '08 was $58.8 million, an increase of 7% when compared to the $54.8 million reported in the same period '07.

We should mention that this quarter, we have finally realized the fact of splitting our stock from one ADS becomes what, two ADS and two shares. So, the reason for the drop in the price of the stock, among others, of course has been the -- mainly the split of this stock.

We also are reporting some project developments at Uchucchacua where we are essentially deepening this Master shaft. And at Orcopampa, where we are also deepening the Prometida and Nazareno shaft. These are mines are getting deeper and we require this infrastructure in order to continue [excavation] at this mine.

With this, we are essentially open to any questions that you may have. Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Your first question is coming from Felipe Hirai of Merrill Lynch. Please go ahead.

Hi. Good morning, everyone. So Roque, could you comment a little bit on the cost side, because you saw some very high costs in your operations in this quarter, so what your expectation going forward. And second, could you comment a little bit more on your projects, how you are seeing your prediction for the next few years, depending on how you develop those projects? Thank you.

Thank you. It is obvious that the oil price, the steel price, and all these increases in industrial costs are impacting all operations around the world. When we talk to investors and analysts whenever we visit them, all of them are mentioning that it is not only Buenaventura, but most mining companies that are suffering of this cost increases. We are not an exception and we are trying to control, as much as we can, our costs.

With the drop in the oil price, we hope to certainly control the costs at least at the level at which we are right now. We expect even to reduce our costs. At this point in time, it's difficult to say, but we are feeling inflationary pressures in our cost that we are trying to control as much as we can.

Carlos wants to make an additional comment.

Yes, Felipe, perhaps it is important to share with you that in the second quarter, we completed the negotiation with the unions that have impact and from January and work, so we had to reimburse and we charge these to our operating costs.

In addition, when closing our negotiation with unions, immediately we transfer the increase in salaries to our competitors in order to maintain the same level of compensation to them. So, this is -- this has an important impact on our cash operating cost during this second quarter.

And of course, the reevaluation of the Peruvian sol has a substantial impact on the costs in Peru. So, the problem being is that the US dollar continues to depreciate and our costs are reported in sol. In terms of our project, I think we are quite optimistic after the La Zanja and Mallay audiences went successfully.

And, if I may mention, a project that is not ours, but is [Nechikai] and Nechikai went through an audience with the local community and this is Anglo-American and they were also successful. When I mention this it is because I have the feeling that in Peru, the social front is improving, people are realizing that we have to understand that mining contributes to the development, especially in the rural areas and in that way, decentralizing the country. We think that this may offer opportunities to other project in some other affiliated companies that we have and that we may have good news in the future.

Hello?

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

Hi, Carlos. I would like to expand a little bit more on cost. What is the Company doing right now in order to hold them? Following the previous question, what can we expect in the following quarters? And last but not least, if you can be more specific on La Zanja, when do you think we can start seeing some production?

Regarding the operating costs, well, the first issue I mentioned before regarding this double impact of the retroactive effect of paying back to our workers due to this negotiation is something that we will not have in the next two quarters. Of course, there is very few that we can do on that but improving productivity. And this is something that we are working on, just our operating vice president is working on, putting together some operations on the drifting and the developing activities for certain contractors in order to improve the productivity of the equipment and the team of supervisors and workers in different areas.

This will have a positive impact on our net cash operating cost. On the other hand, part of the impact on the cash operating cost is the lower production we had. It is important to share with you that we reduced some production of lead and zinc. For instance, in one of our operations in Colquijirca due to the fact that there was an accident at the end of March and then a strike in the second quarter. So, there were 10 days of not mining operation. To compensate that, we consume and stockpile with lower grades that impacted finally our cash operating cost in this operation.

On the other hand, some think that this is not directly related to the costs, but the operations performed, between quotes is the fact that we sold less than expected by the market. I want to share with you that we increased our inventory of gold to about 41,000 ounces when the -- June '07 inventory was about 26,000 ounces. 14,000 ounces increase -- difference.

And the questions is, that have you the low prices of gold that we had in June, we prefer not to sell at prices that were lower than [380] and finally, we sold, during the first week of July about 15,000 ounces and 150. This of course, doesn't explain the variation in costs, but the way of the performance of our operations.

In terms of La Zanja project, well, as Roque mentioned, we completed and we had this public hearing. We expect to complete our environmental impact study approval in six months and Cesar Vidal is over here and I would like to ask him to complete this answer.

Good morning.

Good morning, [Cesar].

This is Cesar Vidal trying to expand on La Zanja. We have a time table for environmental impact studies to be approved early next year. As Carlos mentioned, it will take about six months for the Ministry of Energy and Mines directly and indirectly, the Ministry of the Environment will review the entire project and come back with the positions or questions that need to be answered. If that crystallizes, we think that nine months to 12 months of construction will take us through to 2010, where we should start production, probably mid 2010.

The project has sufficient resources to produce five years at a rate of 100,000 ounces a year. It's a 15,000 ton per day open pit [head bleach] project and we believe that the cash calls will be in the order of $400 or $450 per ounce. This is as much as we can anticipate for La Zanja.

And the level of production of 100,000 ounces per year.

Excellent. Finally, on the first part of the answer, can you quantify how much was a labor extraordinary expense or increase in your expense related to the new salary adjustment?

The new salary adjustment was in the order of 7% cash cost, [including back], this is the monthly impact. If you consider that we had to charge this retroactively, well, the impact was about 14% of the labor costs. Being this in the other 40% of our cash operating costs.

Excellent. Thank you very much, gentlemen.

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

Thank you, good morning. I have three questions, the first one is with respect to the financials. There's a charge on the income statement of $9.7 million for the change in the fair value of gold certificates and I was hoping Carlos, you could explain that item.

It took me -- Victor, could you please.

Where is that? Victor, is that in the --

In the income statement.

Yes.

There's an item of $9.697 million gain on change in the fair value of gold certificates. Oh no, or is that interest expense? Okay, I think I may have misread the line.

Yes, no, that is interest. Interest expense.

Okay, apologies, then I don't have a question on that.

Okay.

You're off the hook. My second question goes to Poracota, if you could give us an update on how Poracota's going and what its contribution was during the quarter.

Yes, well, the contribution during the quarter was in excess of 10,000 ounces. We expect to produce from Poracota in excess of 40,000 ounces in the full year 2008, and increasing because we are deepening the mine and we are finding new reserves. So -- but this year, 2008, we expect to produce in excess of 40,000 ounces that will contribute to the overall production of Orcopampa.

Perhaps, it is interesting to add that in Poracota, we are finding interesting information when developed the structure. We consider initially that it was a vein of about four meters wide, and now, we are finding that the structure is about 10 meters wide. This will help our production, increasing the productivity and committing to reduce cash operating costs or [efficient].

Great. Thank you. I'm glad to see that Carlos is now answering some mining questions. And then, finally, since we have the pleasure of Cesar on the line, if I could just ask him, as I always do, to maybe talk about a couple of the top exploration projects.

Victor, good morning.

Hi, Cesar.

A pleasure to say hello to you.

Likewise.

And as you can read here, and Roque already mentioned, La Zanja and Mallay are projects that have very short term line of action to get the environmental permit and start construction. I've already discussed La Zanja. Mallay may sound new to you and others, it's a relatively small project, lead, zinc, silver, not far from Uchucchacua, but it needs its own mill.

Currently, we have 500 -- just over 500,000 tons of 7% zinc, 4% lead and I guess about five ounces per ton silver. And we have in mind the flotation mill, the design of a 400 ton per day flotation mill. The public hearing of Mallay was also successful and we are hoping to have the environmental impact study approved early next year and construct the mill next year.

At Tantahuatay, of course, there are two news that I included in this press release. Firstly, the environmental impact study has been presented, no public hearing yet, but we in any time -- probably in August, we have -- we are facing a bit more of a challenge than in La Zanja, because we haven't got the surface rights yet.

There are still 285 hectares that need to be acquired and it's not going to be very easy, so there's a higher risk there for completion of surface rights to construct heat [bleach pass], no. But we are positive about it and we're also finding some additional mineralized loans. I mentioned the new area that has the first 39 channels on [posted average] over half a gram gold, highly find it soluble, and we think we can use that for adding ounces to the project.

In fact, Tantahuatay and La Zanja as you know, are twin projects. They are very close to one another and in [Catamarka] and both of them are about 850,000 ounces of gold in [Situ] for open pit and heat bleach, no. This is as far as I have to report at the moment. Of course, Roque already mentioned Trapiche and Trapiche is a relatively new core free copper project we have in our portfolio that needs much more drilling. 20,000 meters of drilling sounds a lot, but it's really only a small fraction of what we need.

Since we have the agreement signed for the long term with Mollebamba and this has taken us a complete year and we have to bear in mind that communities have other time tables and other worries than we have in the Company. So, patience has given us a successful response from them. We now have the long term agreement and we're going to reinitiate drilling as soon as possible. This is a complete new deposit. It's 100% Buenaventura and we are positive that we are going to make it grow substantially to design a combined operation of acid bleach and flotations.

Just -- thank you. I have just one question on Trapiche, how much more drilling do you think you need to do and how long is that going to take?

We intend to do, in the next drilling campaign, 30 kilometers, 30,000 meters of drilling. Which would more than double our understanding of the system, in terms of meters real, but obviously, if that turns positive and I'm very optimistic about it, we will have to drill another 50,000 meters.

The minimum drilling that I can foresee for the next two drilling campaigns, or two years is 80,000 meters. This will take the pore free copper to a level of understanding in regard of the global size of the resource, the average grade, the types of ore and of course, the metallurgical responses.

Great, thank you. Thank you so much and good luck with your drilling.

Thank you, Victor.

Thank you. Your next questions is coming from Oscar Cabrera of Goldman Sachs. Please go ahead.

Good morning gentlemen. Actually, Carlos answered part of the question already with the cost and just in terms of your -- of your plans in Colquijirca. The -- you said that you operated there would stockpile, so are we to assume that for the balance of the year, you're expecting to go back to the -- reserve grades in the production?

Yes, of course, [orcha] that was just a temporary situation. Instead of stopping the flotation plant of treating, we decided to go ahead with the stockpile we had, which was a low grade stockpile. But we are getting back to our traditional grades from our mine and exploitation.

Great. So, how much silver do you think -- or how much silver are you budgeting for 2008?

This is a component that we believe is going to continue exploiting at the rate we are producing right now. Please don't get spoiled by the grades and silver production we had a year ago, which was completely abnormal. That was out of the range. As of today, we will continue producing in the order of perhaps twice what we produce -- what we have already reported. So, yes, it could be about -- close to 5 million ounces for the total year.

Okay, no, that helps. Thank you. Then, in terms of Yanacocha, you were -- the fact that the mill is completed and there is production there that's -- you've had to deliver in time and on budget, which is very good, but you just want to understand the -- for the next phase, in terms of the sulfites, I think during your recent trip, there was a comment where Minas Conga had or the Minas Conga feed will go into the new -- let me rephrase that, do you need the Minas Conga processing facility to process the sulfites at Yanacocha?

Well, the thing is, Minas Conga will have its own flotation plant and you have to bear in mind that next to Conga, we have other deposits not necessarily owned by us or by Yanacocha, that could use the same facility. So, we are discussing potential opportunities and synergies with other neighbors to develop a larger project. The sulfites at Yanacocha, I would doubt whether they will go all the way to Conga. It is a long distance, in any event, we will require another flotation plant in the area of Yanacocha. But this is early days to say, yes.

Yes, no, no, thanks, Roque. And then, along the same lines, your comments -- you sounded pretty optimistic in all the developments with the local communities, how do you view your -- the federal [kilish] within that context?

Well, I did suggest that we could develop other projects because of this positive social environment. We re not in a position to comment that. But we think that all the resources, mining resources in Peru have to be put in value and the project that you mentioned should not be an exception. So, you see, for many years the [Takamarca] region was number one in receiving the [canominero], meaning 50% of the income tax that mining companies pay. And so, it was a region that was receiving the most amount of money.

Today, the [harmarka] is number four or five, and this is something that is getting into the minds and into the pockets of original authorities. So, I think they are starting to reflect on this matter and that if they need resources for developing the region, they need to promote production.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS).

Your next question is coming from Carlos De-Alba of Morgan Stanley. Please go ahead.

Good morning, gentlemen. A quick question is, in March, when you're working in [here], you provide us guidance for gold direct operations productions as well as silver. I wonder if you could give us an update on those numbers that you chose at the time.

Well, essentially in Uchucchaqua, we continued to head to 12 million ounces of silver production. In Orcopampa, with this social problem that we had the last couple of weeks, we expect to reach 280,000 ounces of gold from Orcopampa, but we may be short of that figure.

And from Poracota, we expect to product the 40,000 ounces of gold. So all together, from the Orcopampa region, we could say 320,000, 330,000 ounces of gold. In the case of Antapite, we will be short of 70,000 ounces of gold and the remaining smaller operations will be on budget and as we mentioned in April.

Thank you, Roque. When you said you may be short on Antapite, do you have a new estimate?

This is Francois Muths, our Chief Operating Officer.

Sorry.

Good morning. We expect to produce around 48,000 ounces of gold in Antapite this year.

Okay, thank you very much. And I wondered if you could give us an idea of where your cash costs are going to go in your main operations?

Well, cost as Carlos made a comment, are going to be probably in the average of 25%, to 30% higher. That is our expectation, no.

Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS).

You have a follow up question coming from Carlos De-Alba of Morgan Stanley.

Yes, sorry. I forgot to ask, do you have the number of tons that -- of moly production at Cerro Verde in the second quarter that you could share with us?

I'm afraid not. I'm afraid not because that -- there have been some limitations in the production of moly because they have -- they have preferred to produce from our - well, we have a question here, Raul Benavides, if you hear me, you have an answer on the moly production at Cerro Verde. Raul?

Yes, the last quarter, Cerro Verde had a strike for 11 days. That had a block in the road. This they could keep on producing without any problem, but they were low from technical people to manage the floatation plant. So, they decided to privilege the recovery of copper and they let down the moly production because they are dealing with containing the problem.

Essentially, what I understand, is that they are -- they are milling as fine a they can to improve the copper recovery, but when they want to float the moly, this column cells don't work as well as they should and they are planning on changing some flotation cells that could generate some cheer between the particles and liberate and make more efficient the molecule basis.

Thank you.

Thank you. There appears to be no further questions. At this time, I would like to turn the call back over to Mr. Roque Benavides for any closing remarks.

Well, thank you very much for attending this conference call. I think we have to face the problems that we know how to face that are technical problems and I'm sure that we will be successful in that front. The good news is that this social problems, at least in my mind, were some problems that we were unable to control are becoming less of a problem and that gives us a lot of enthusiasm in terms of developing new projects.

We certainly intend to be in the States, the Denver Gold Conference in September and we are certainly always open to any questions that you may have, our e-mail addresses or by phone. So, thank you very much for attending this conference call and see you soon. Bye-bye.

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