Compania de Minas Buenaventura SAA (BVN) 2008 Q3 法說會逐字稿

Good day, everyone. And welcome to the Buenaventura conference call. My name is Brandy, and I'll be your conference operator. All lines have been placed on mute to prevent any background noise.

At this time, I'll turn the floor over to Pete Majeski for opening remarks and introductions. Please go ahead.

Thank you, Brandy. And good morning, everyone. Welcome to the Compania de Minas Buenaventura third quarter 2008 earnings conference call. Joining us today from the Company are Mr. Roque Benavides, Chief Executive Officer, Mr. Carlos Galvez, Chief Financial Officer, in addition to other members of Buenaventura's senior management.

We will be discussing Buenaventura's press release -- excuse me -- results per the press release distributed yesterday. If you have not 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 the disclaimer. And we ask that you refer to it for guidance.

It's now my pleasure to turn the call over to Roque Benavides. Mr. Benavides, you may begin.

Thank you, Pete. Good morning to all. In this turbulent financial time, it is always difficult to present the results of any company. And Buenaventura is not an exception. We report this quarter, the third quarter '08, a net income of $100 million, $0.40 per ADS, in line with the figure reported in the third quarter '07.

Our operating income for the third quarter was $71 million, 20% lower than the figure reported in the third quarter '07, while EBITDA from Buenaventura direct operations totaled $91 million, 16% lower than the figure achieved in the third quarter '07.

This decrease is explained by higher costs reported at some of our company's mines, as well as a decrease in several metal prices. And that is no exception for Buenaventura. Yanacocha's better performance in terms of production and profit partially offset Buenaventura direct operations result as well as Cerro Verde lower contribution in the third quarter '08 explained by a decrease in copper price, resulting in a 5%(Sic-see press release) decrease -- decline in total EBITDA.

During the third quarter '08, our net sales were $195 million, a 4% increase when compared to $188 million reported in the third quarter '07, mainly due to 17% increase in the volume of gold sold, as well as 26% increase in the realized price of gold. This was partially offset by the decrease in the volume of silver and zinc sold as well as lower zinc and lead prices.

Royalty income during the third quarter totaled $12 million, 61% increase when compared to $7.6 million in third quarter '07. This was due to higher sales in Yanacocha.

Our net sales for the first nine months of 2008 were $611 million, 18% increase compared to the same period of 2007, while royalty income was $38 million, a 73% increase when compared to $22 million in the comparable period of 2007.

At Orcopampa, our total gold production for the third quarter was 73,300 ounces, a 5% increase when compared to 69,900 ounces reported in the third quarter '07. The accumulated gold production was 205,000 ounces, a 3% increase when compared to 2007.

Our cash operating cost in this mine during the third quarter '08 was $248 per ounce, 48% higher than if we compare to the third quarter '07. And this is explained among others by the exchange rate, the revaluation of the Peruvian sol, higher contractor expenses due to an increase in exploration, labor, and fees, and increasing the agent consumption for the new plant to treat old tailings.

And this is important to mention because with these higher prices in the time to retreat the tailings of the old Orcopampa tailings, and it may cost somewhat more. But it is the time to treat these ores. Higher energy prices were also a factor and a five-day stoppage due to road blockade in our mine.

Poracota produced 11,300 ounces at a cash cost of $621 per ounce. We expect this to be reduced in the next few months.

At Uchucchacua, our total silver production for the third quarter '08 was 2,500,000 ounces, a 4% decrease when compared to the third quarter '07, mainly due to 10% decrease in the ore grade despite a 7% increase in the recovery rate. Likewise, the zinc production increased 46%, while lead production increased 31%. The accumulated production for the nine months was 8,382,000 ounces of silver, 22% higher than 2007.

Our cash operating cost went to $8 per ounce, an 88% increase compared to the $4.29 per ounce in the third quarter '07, which is explained essentially by the same factors -- higher energy cost prices, the exchange rate, higher contract expenses, an increase in the diamond drilling -- and this is important in the long run -- and of course a lower lead and zinc byproduct contribution due to lower prices.

At Antapite, our total production in the third quarter '08 was 9,351 ounces of gold, a decrease of 43% compared to the third quarter '07, mainly due to 47% decrease in the gold grade. And the accumulated production was 33,759 ounces, a 37% decrease when compared to 2007.

We are doing a great effort in exploring additional areas in Antapite. And you have to bear in mind that in this mine we have narrow veins. And it is difficult. But we are doing our best in putting back up to speed this operation.

Our gold cash operating cost at this mine was $755 in the third quarter, a 75% increase compared to the same period of '07. And this is due essentially to lower gold content due to lower grades and an increase in the diamond drilling, which has to do with the long run.

At Colquijirca, the total zinc production was 18,000 metric tons, a 22% decrease when compared to 23,000 metric tons reported in the third quarter '07, due to 5% decrease in the ore grade and a 9% decrease in the ore mined. Total zinc production -- total silver production during the third quarter was 1,263,000 ounces, a 35% decrease when compared to 1,938,000 ounces in the same period '07.

In terms of our operating expenses, general and administrative expenses for the third quarter '08 were $3.4 million, a 75% decrease compared to $13.7 million reported in the third quarter '07, due to lower long-term compensation provision, a credit of $6.5 million. And this is due to the fact that the stock price has gone down. General and administrative expenses for the nine-month period 2008 were $40.6 million, a 16% increase when compared to $35 million reported in the same period '07.

Our exploration costs at nonoperational mining sites during the third quarter '08 were $40 million, a 28% increase compared to $10 million reported in the third quarter '07. The main efforts were focused on Marcapunta, Mallay, La Zanja, and El Milagro. Exploration costs at nonoperationg mine sites during the nine-month period were $41 million, a 31% increase when compared to the same period of 2007.

We will be monitoring these expenses very closely. And we will prioritize our explorations. And this is important to mention. With changing market conditions, we need to take measures. And this is something that we have discussed with Cesar Vidal that is here with us and that will be happy to answer questions later on.

Our operating income for the third quarter was $71 million, 20% decrease compared to $88 million in the third quarter '07, due to a previously mentioned increase in cost at the Company's mining operations. And the accumulated operating income was $266 million, a 2% increase when compared to $260 million reported in the same period 2007.

During the third quarter '08, Buenaventura's income from nonconsolidated affiliates was $75 million, an increase of 11% when compared to $67 million reported in the third quarter '07. This increase is explained by $43 million contribution from Yanacocha, $16.7 million in the third quarter '07 -- and that is a mistake -- and the $31 million contribution from Cerro Verde, $50 million in the third quarter '07. Accumulated income from nonconsolidated affiliates was $319 million, an increase of 82% compared to $175 million reported in the comparable period of 2007.

In the quarter, Yanacocha has had an excellent production with cash costs in line. And most of you have heard of this through the Newmont's conference call. And I don't think we need to get into further details.

At Cerro Verde -- and that probably has been heard from Freeport-McMoRan -- we own 18.68%. In the third quarter, copper production was 78,000 metric tons, 1% increase when compared to 77,600 metric tons in the third quarter '07. Copper production also increased from 235,000 tons from 193,000 tons. Essentially, what has impacted Cerro Verde has been the reduction in copper prices.

In terms of net income, this quarter Buenaventura net income $100 million, representing $0.40 per ADS, in line with figures reported in the third quarter '07. Net income for the nine months' period of 2008 $159 million, an increase of 3% when compared to $154 million in the same period of 2007.

We have been continue developing some projects. In Uchucchacua, we have been sinking these two shafts to integrate the whole mine, the Carmen Mine and the Socorro Mine. And we have finalized an expansion from 2,500 short metric tons to 3,000 short metric tons. Essentially, the increase was to treat the lead zinc ores. But as these zinc prices have dropped substantially, we have decided to reorient our production and essentially use this excess capacity to process silver, lead ores that we count with in the mine. So, we will be using this additional capacity to produce more silver in Uchucchacua.

In Orcopampa, we have also continued deepening the Nazareno Shaft. And we have invested during 2008 $3.5 million from an estimated investment of $4.5 million. The deepening of the Prometida Shaft, which is another shaft in the Orcopampa mine, from level 3,440 to level 3,290, commenced in October 2007 and is 63% completed, and accumulated investment of $2.3 million from a total investment of $3.8 million.

The construction of facilities to treat the old flotation tailings, as I mentioned, were permit to recover approximately 53,000 additional gold ounces. At these prices of gold, we believe it is the sensible thing to do.

And yesterday, for finishing, we had a board meeting. And we passed essentially -- we approved the financials for the third quarter. And we declared a dividend in line with our policy of $0.09 per share or ADS to be paid in US dollars as of November 26th to shareholders record as of November 18th. The ex-dividend date is November 14th. And essentially, it will be an amount in the order of $22 million altogether.

With this, we are open to questions. As I mentioned, we are together with Carlos Galvez, our Chief Financial Officer, Cesar Vidal, our Chief Exploration Officer, and Francois Muths, our Chief Operating Officer. So, with that, please go ahead with any questions that you may have. Thank you.

(Operator Instructions) Your first question comes from the line of Ankush Agarwal with J.P. Morgan.

Good morning, Roque, Carlos, everyone. I have two questions. One, you mentioned at Orcopampa the facilities for the old tailings treatment was completed in August. And at Uchucchacua, the plant expansion to 3,000 tons per day was completed in September. Could you please give us a better sense on how the production ramp up at these two places is expected to take place quarter over quarter so we can better model this ramp up?

Well, we expect to produce marginal additional production from the tailing at Orcopampa. As I mentioned, we have already produced 53,000 ounces in 2008 and 2009. That is what we will be producing as a yearly production. Maybe Francois may help me in this respect.

In addition to that, in the Uchucchacua Mine, we have -- we will be processing 500 additional tons. So, we may be producing something in the order of 10% to 15% additional silver ounces overall on a yearly basis. I don't know if Francois or Carlos wants to add something.

If I may add, just to [provide] in the case of Orcopampa facility to treat the old tailings, we are adding the order of 2,000 ounces per month that we are recovering for these tailings. The cash operating cost of these tailings is -- it was for the last quarter in the order of $320 per ounce, which is included in the average of the cash operating cost reported in Orcopampa. So, it's pretty higher than our traditional operation but, of course, is very competitive.

In the case of Uchucchacua with the 500 tons per day that we will produce from the traditional lead-silver materials, we can produce a final silver content of 160,000, 170,000 ounces of silver per month. This is something that we will adapt during November because we are just stopping our rig ores production to add to adequate our mining plan through these additional materials to these facilities.

So, you expect to reach full capacity by November?

We believe that in December we will be treating these ores. Meanwhile, we are going to add some ores that we have available in the stockpile. But we have pretty lower grades than the average, the average grade in Uchucchacua being in the order of 16, 16.5 ounces per ton. The ores we hold in the stockpile right now is in average 11 to 12 ounces per ton, per short ton. But we'll add values instead of destroying one.

May I just add that stopping the production from the zinc-bearing ores of the mine takes time and that we have essentially stopped the exploration in that area and concentrate on the areas of silver-lead-bearing ores. And that will take time until we are at full speed with the processing plant with additional 500 tons. So, I would agree that December will be the time. So, for 2009, we will have a full year of production of that type of ore.

Okay. That's great. And I have a second question, if I may. At Antapite, can you give us a sense of what sort of grades we should be looking at in Q4 and in 2009?

Grades have come down. And we expect to have something between 6 and 7, 8 grams per ton. The thing is, as we have mentioned in other conference calls, we have had some progress with some of the local communities that do not permit us to explore. The social front is always somewhat complicated, although we have to accept that things are improving and that we are getting to terms with those communities. So, in terms of grades, we expect 6 to 7 grams per ton. But in terms of the potential for exploration, I think that is the upside that we are looking for.

Thank you very much.

If I may add just to share some information, we have reported in excess of $700 per ounce cash cost in the area of Antapite. It is important to share with you that within this cash cost, about $150 per ounce is the exploration effort we are carrying out in Antapite. And within this exploration effort, we are getting the -- the intercepts and targets, they are getting grades in the order of 15 to 20 grams per ton. So, that encourages our efforts to continue doing investing in the different areas we are working on.

That's really useful. Thank you very much.

(Operator Instructions) Your next question comes from the line of Victor Flores with HSBC.

Yes, thank you. Good morning. A couple of questions with respect to longer-term corporate development -- Newmont has indicated that it's reviewing its thought process with respect to Conga. I think we expected a decision in the fourth quarter. And it sounds from their conference call like they may be taking more time to think about that. And Freeport had indicated that they were looking pretty seriously at a further expansion at Cerro Verde. And they've also indicated in their call that given the current situation they may be thinking a bit harder about that. And I was wondering if you could give us perhaps your sense of how you see those two projects evolving.

Well, in the case of Conga, we have done some initial figures. And the cash cost of this operation will be probably too high to go ahead in these conditions. Regardless of having said that, there are other two projects in the area, namely [Michiqueay] and [Galena], that are two important projects, Michiqueay a project in the hands of AngloAmerican and Galena in the hands of Jiangxi Mining and Minmetals -- China Minmetals. That could get together and add synergies to developing all of them together in terms of infrastructure.

What we need to do is to evaluate the possibility of sharing infrastructure among these three projects in addition to adding synergies in other aspects of cost reduction. The thing is some of these projects are very copper oriented, if I may say. And with prices of copper, as they have dropped now, are becoming noneconomical. So, I think that we need to evaluate very, very closely Conga before we go ahead. And I think we should continue discussions with AngloAmerican and with the Chinese in trying to share some of this infrastructure.

In the case of Cerro Verde, we are not surprised that (inaudible) has indicated that they will have to reevaluate the expansion, the between plants as they used to call it for the sulfites. It is obvious that the copper price at these levels has to require from companies to reevaluate any expansion projects. So, those are the comments that we have at this point in time.

Great. Thank you. And if I can just ask a similar follow up with respect to La Zanja, has anything changed there with respect to your thinking about developing this project?

No. No. We are going ahead. We should have our environmental impact study in the next weeks. And we are going ahead with La Zanja. It is a small project, as you know, Victor, that it is a profitable one. And it is an emblematic project, if I may say, in [Tahamarka]. And we are going for it.

Great. Thank you. And if I could just allow one exploration question, is there anything to report on the exploration in the area of Hualgayoc?

Cesar?

Victor, good morning. There is nothing to report. As you know, we have consolidated Hualgayoc. It is an association between Goldfields and Colquirrumi, 50% either side. They are operators. And we are trying to get our permits for drilling the [Quitana Arrive] copper-gold (inaudible). But we are finding it a much slower process. And we're basically just timing it differently. We'll probably be drilling it next year, so nothing to report.

Great. Thank you very much.

Our next question comes from the line of Alonso Aramburu with Santander.

Yes, good morning. A couple of questions -- first, just follow up on the previous question -- are you [receiving] any of your CapEx program for next year at the direct operations? And second, if you can comment on cost a little bit, are you seeing at the beginning of the fourth quarter any declines on your cost? And what do you expect for next year?

Let me answer the first part. You mentioned CapEx? That's the world you used?

CapEx, sorry.

Sorry. What was it?

CapEx, capital expenditure.

CapEx -- Carlos, why don't you go with that question, please?

Well, perhaps whether we have to share it that we are going to have to hold our planned meaning in two or three weeks' time. So, we are going to review this CapEx because with the new scenario of prices, we have to control and review it. You can be sure that we will control and evaluate seriously this new CapEx. So, we will come up with new figures at the end of November, new guidance of production because we are going to review as well what production we are going to carry out and what -- different and specific decisions in different operating [areas].

May I add that our strategy at this point in time is essentially to manage for cash. And in this respect, we are going to freeze any hiring that we may have been thinking about. And we are going to prioritize CapEx very tightly and exploration very tightly. So, we will be following essentially our operations on a cash basis very, very closely.

Thank you. And the second question was on costs, where you're seeing some declines on the level of cost in the fourth quarter.

Well, again, when reviewing our operations in terms of what to produce, how to produce, and for instance, we are going -- we have already made several decisions. For instance, in Uchucchacua, we are going to stop our [evaluation] process because at these low prices, this process doesn't contribute. So, this is one. On the other hand, in the case of the lead-zinc operations, we are going to stop this exploitation and improvement. And we are moving through this lead-silver operation on exploitation. So, that will mean a different structure of costs.

In Orcopampa, we find that we are performing well. In the case of Poracota, we are working with our contractors in order to define and distribute the tasks well in order to increase the productivity of the equipment and reduce our cash operating cost. We are stopping the exploitation of ores in the area of (inaudible) so that we'll reduce our cost -- our total cost.

Our cost looking forward will be impacted by lower energy cost, will be also impacted by lower supply cost, and will be also impacted strongly by devaluation of the Peruvian sol. So, let's think in terms of future. And we believe that we will be seeing reduction in costs from these external factors, if I may say.

Great. Thank you, Roque, Carlos.

(Operator Instructions) At this time, there are no further questions. I would like to turn the call back to Mr. Benavides for any closing remarks.

Thank you very much for attending in these very difficult times. I can tell you that many times investors ask us what keeps us awake at night. And one thing that has kept me awake at night in this last week was this conference call because the price of the stock has not been performing as we would like. But in this respect, I think we should mention, as the Minister of Economy of Peru was mentioning the other day, that the Lima Stock Exchange has dropped the second greatest drop in the world after the Russian Stock Exchange.

And this, of course, has impacted the stock of Buenaventura some way. But we believe that the fundamentals of the Company are still very strong. And we will continue working very hard, the human team in Buenaventura will continue working very hard to perform and to add value and to show results to all of our investors. With this, I want to thank you for your time and your patience and hope to see you soon. Thank you very much.

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