Compania de Minas Buenaventura SAA (BVN) 2008 Q4 法說會逐字稿

Good morning. My name is Laurie and I will be your conference operator. At this time, I would like to welcome everyone to the Buenaventura Fourth Quarter 2008 Earnings Conference Call. Thank you. I will now turn the conference over to Pete Majeski of i-advize Corporate Communications. Please go ahead, sir.

Thank you, Laurie, and good morning, everyone. Welcome to the Compania de Minas Buenaventura Fourth Quarter 2008 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. They will be discussing Buenaventura's results for the press release distributed yesterday. 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 Mr. Roque Benavides. Mr. Benavides, you may begin.

Thank you, Pete, and welcome to this Buenaventura conference call. Obviously, the fourth quarter '08 was a very difficult one for the mining industry and that specifically the months of October -- where most of the metal prices fall in a dramatic way, if I may say. This has represented that Buenaventura had a loss of $6.1 million in the first quarter, or $0.02 per ADS. Our operating in come in the fourth quarter was $16.9 million, 84% lower than the figure reported in the fourth quarter '07. These results are explained by silver and lower base metal prices, which reduced not only the byproduct contribution of the Company's direct operations, but also had a significant negative effect at Cerro Verde.

May I call your attention that in the fourth quarter, the mark-to-market of the Cerro Verde Company was $247 million negative. And that has had an impact on our results. During the fourth quarter '08 our net sales were $155 million, a 32% decrease when compared to $226 million reporting in the fourth quarter '07, mainly due to significant decreases in price of silver and base metals.

In terms of our production and operating costs, Buenaventura's equity production, that includes 100% of our operating unit CEDIMIN and 35.78% of El Brocal, was 113,000 ounces of gold, 4% higher than the 109,000 ounces reported in the fourth quarter '07. And four million ounces of silver, a 5% decrease when compared to 4,200,000 ounces reported in the fourth quarter '07. Regardless of that, in the accumulated 12-month period, our gold production was 422,000 ounces and 15,500,000 ounces of silver. This represents an increase of 5% in our gold production and 5% in our silver production comparing 2008 to 2007.

At Orcopampa, total gold production in the fourth quarter '08 was 78,400 ounces of gold, a 13% increase when compared to the fourth quarter '07. This production includes 8,300 ounces from an old tailings treatment. And this is very important because we are recovering ounces from the old tailings of Orcopampa. The accumulated gold production for the 12-month period '08 was 284,000 ounces, a 6% increase when compared to 2007.

Cash operating cost during the fourth quarter '08 were $263 per ounce, 41% higher when compared to fourth quarter '07. This is explained by a 30% increase in exploration and development which is essential for the long term of the mine, a 24% increase in contractor's fee due to lower rock quality, and higher consumption of mine support supplies and higher steel prices. This is very important for safety within the mine and we are not going to reduce our costs on behalf of putting in risk any of our people. Our cash operating costs for 2008 were $244, 49% higher than the same period in 2007.

At Poracota, our gold production in the fourth quarter '08 was 13,700 ounces while the cash operating cost was $571 per ounce. The accumulated gold production for the 12 months was 46,000 ounces while the cash cost was $623 per ounce. We expect to increase our production from Poracota in 2009.

At Uchucchacua, our total silver production was three million ounces. This is our record quarter for Uchucchacua in its own -- all its history. This means in excess of one million ounces per month from the Uchucchacua mine and we have to praise those that are working -- those of our colleagues working in Uchucchacua. The zinc production decreased, essentially, because of the grade.

The accumulated production for the 12 months period 2008 was 11,400,000 ounces of silver, 16% higher than 2007. Our cash operating cost in Uchucchacua for the fourth quarter '08 was $7.25 per ounce, 118% increase compared to $3.32 per ounce in the fourth quarter '07. And this is best explained by the fact that we have had lower lead and zinc byproduct contributions due to lower production and realized price. This explains the $4.50 per ounce increase considering that the fourth quarter '08, this contribution was $2.31 per ounce versus $6.81 per ounce in the fourth quarter '07. This was partially offset by the decrease in treatment charges. And secondly, an increase in contractor expenses due to 22% increase in tonnage exploited and the 41% increase in diamond drilling works.

But this also has to do with the exploration and the long term life of the mine. It is important to mention that in October 2008 the Company has opted the following decisions in order to adjust its operations to new market conditions. We have ceased exploitation and treatment of the zinc, lead and low silver grades, switched the new concentrating circuit, 500 short dry tons, to treat conventional ore, and ceased the cyanidation process until we get better results from our metallurgical research. As a consequence, silver cash operating costs decreased from $7.92 per ounce in October to $6.98 per ounce in December. And we expect to continue in that way.

In terms of our exploration cost in non-operational mining sites -- and this has been a question that I have been asked in the recent BMO conference by many investors -- our exploration costs in non-operational mining sites during the fourth quarter '08 were $14.1 million, a 7% decrease compared to $15.1 million reported in the fourth quarter '07. The main efforts were focused at the Marcapunta, Mallay, Chucapaca, La Zanja and El Milagro projects. Exploration costs of non-operating mine sites during the 12-month period 2008 were $55 million, a 19% increase when compared to 2007.

Looking forward, we expect to reduce this budget by prioritizing our explorations and Cesar Vidal is here with us to answer any questions that you may have. Operating income for the fourth quarter '08 was $16.9 million, an 84% decrease compared to $105 million reported in the fourth quarter '07. This result mainly explained by lower sales due to a decrease in silver and base metal prices as well as higher costs at the Company's direct operations. The provision for impairment for long-term assets also negatively impacted operating income by $18.6 million. The accumulated operating income for 2008 was $283 million, a 23% decrease when compared to $366 million reported in 2007.

In terms of our share in affiliated companies, at Yanacocha, the fourth quarter '08 gold production was 419,000 ounces gold, a decrease of 11% when compared to the same period in '07. Gold production for the 12-month period 2008 was 1.8 million ounces, an increase of 16% compared to 1.5 million ounces reported in 2007.

Cost applicable to sales at Yanacocha during the fourth quarter '08 were $356 per ounce, 17% higher than the figure reported in the fourth quarter '07. The accumulated cost applicable to sales for 2008 was $358 per ounce, in line with the figure reported last year. Net income at Yanacocha during the fourth quarter '08 was $90 million, an 8% decrease when compared to the fourth quarter '07. Accumulated net income for 2008 was $475 million, 115% higher than 2007.

At Cerro Verde -- and may I just mention that this has been the first full year of production. In the fourth quarter -- after the expansion, I mean. The fourth quarter '08 copper production was 79,000 metric tons, a 4% increase when compared to fourth quarter '07. And this is important. Copper production in 2008 totaled 315,000 metric tons, 17% higher than the figure reported in 2007. This means that the expansion project is at full speed, 317,000 metric tons is more than the 300,000 tons that we expected to produce from Cerro Verde. We are very pleased with the operating results at Cerro Verde and, of course, this, in the last quarter of 2008, was not accompanied by the metal prices that we enjoyed during the first three quarters.

In terms of our net income, this quarter, Buenaventura's net loss was $6.1 million, representing a negative $0.02 per share, compared to $120 million in net income during the fourth quarter '07. This was explained mainly by 84% decrease in operating income and 71% decrease in contributions from affiliates. Our project at Uchucchacua, we are very pleased to mention that the integration of the Carmen and Socorro mines at level 3990 concluded in the fourth quarter '08 as scheduled. In the Carmen Mine, the Master Shaft facilities at level 3920 were completed in December 2008. The Ramp 760, currently at level 3980, will continue deepening to reach level 3920 in the fourth quarter '09.

In the Sororro Mine, a pilot chimney connected level 4060 with level 3990 at the Luz Shaft in December '08. The construction of the ramp 626 reached level 3960 and is expected to deepen until level 3920 by the end of 2009. During 2008, total investment in those two projects amounted $4.8 million. That is the required infrastructure to develop this important silver producing mine.

At Orcopampa, as of December 2008, the deepening of the Nazareno Shaft reached level 3230 and will continue to reach level 3170 by the end of this year. The accumulated investment during the 2008 year was $4.4 million. The deepening of the Prometida Shaft reached level 3340 in December 2008. Work for 2009 includes deepening the shaft to reach level 3290 and raising the shaft to communicate with surface, which means 175 meters additional. The accumulated investment during 2008 was $1 million. You are to bear in mind that we have very good diamond drill intersects in that -- in the Orcopampa Mine and we need to develop additional infrastructure to exploit those ores in the future.

Yesterday we had our board meeting and we -- the board approved the following resolutions. To call for the annual shareholders meeting to be held in Lima on March 27, 2009, to approve the financial statements as of December 31, 2008, to approve the 2008 Annual Report, to approve the appointment of Medina, Zaldivar, Paredes & Asociados Sociedad Civil, Member of Ernst & Young Global, as external auditors for 2009 and to approve a cash dividend of $0.02 per share or ADS to be paid in US currency. And this dividend is in line with the policy that we implemented more than ten years ago, meaning that we will distribute at least 20% of net income of the year per year. With this, may I turn this conference for question and answers and thanking all of you for being present. Please go ahead.

(Operator Instructions) Your first question comes from the line of Felipe Hirai of Merrill Lynch.

Hi. Good morning, everyone. So Roque, I have two questions. The first one is related to La Zanja and Tantahuatay. When do you expect to start construction on this project? And so just if you could give us an update on how the projects and the getting of the environmental licenses are going on. And my second question to you is how are you thinking of spending your $550 million in cash that you have in your balance sheet? Thank you. Bye-bye.

We were joking yesterday at the board meeting that we are not going to mess around with the $500 million or whatever cash we have. The name of the game, as you all know, especially in the financial sector, is that we have to be very, very careful with how we use our cash. And Buenaventura and Buenaventura's management will be as careful as possible and we will invest this money in the best possible way. Let me just give you a couple of things that we are doing and we came out with a press release last Friday saying that we had acquired an additional 20% of El Brocal, accumulating for Buenaventura close to 46% of the equity of Brocal.

For purchase in this 10% from Teck Cominco, we are going to invest $35 million of that cash that you were mentioning. In addition, you were asking about La Zanja and Tantahuatay and we have given guidance that we expect to be in production in La Zanja by the first semester '10 and in Tantahuatay by the first semester '11. Both projects are similar in size, similar in production. We expect to invest in the order of $60 million in each of the projects. In the case of La Zanja, we will have to put up for 53%, which is our equity participation. And in the case of La Zanja, we will have to put up for 56% -- sorry, Tantahuatay for 56%. So we expect to be in production at 100,000 ounces per year production in La Zanja by 2010 and in Tantahuatay by 2011.

If I may add, we have in [Brocal] the expansion product that will demand $150 million to be invested in the next 18 months. Yes, the [Manual] follows our consolidated cash.

Yes, that's important to mention. The cash, as shown in our segment, is the consolidation with El Brocal and Brocal itself has $200 million in cash. And of those $200 million in cash, it most likely that Brocal will use $150 million for its own expansion project.

Thank, Roque.

Your next question comes from the line of Victor Flores of HSBC.

Thank you. Good morning. I have several questions. The first question goes to the financial statement. Could you tell us what the impairment was -- the $18.6 million was? What was that related to?

Basically, this $18 million are $10 million due to [Antapite] because considering that we are not replacing the reserves, we decided to account this in terms, $10 million. And then we have close to $8 million in [Colquijirca], which is an operation that we have in [Juan Colquijirca] that is devoted to explore, basically, the and we prefer to account these impairments.

Next question goes to the operations at Yanacocha. And I'm hoping you can comment on the performance of the mill during its first six months and what the processing cost per ton was and what you expect from the mill for 2009.

Well, the gold mill was an excellent decision by Yanacocha. We in Buenaventura have been insisting that was a need for the operations to keep the -- to take out the insistence for the geologists that they need more time for exploring. And these were all that were not being -- were not able to be treated by the [Heplich] operation, the normal one, our higher grade [ores] and this requires some millions. The mill is operating and it's producing in access of 300,000 ounces of gold per year. And this is contributing to the overall production at Yanacocha. I'm afraid that we cannot -- we don't have the guidance for costs specifically at the mill and think the Company prefers to give guidance on the cash cost of the overall operation.

Great. Thank you. And then if I could just ask one final question and perhaps we could get a few words from Cesar Vidal on the exploration outlook for '09.

Sure. You always ask me the same question and we are very pleased that you do.

I'm pretty predictable.

Yes.

Good morning, Victor.

Hi, Cesar.

In terms of exploration, you see a figure of $55 million expense for the year 2008. I need to clarify that 25% is greenfield declaration, our personal responsibility. And the rest is brownfield exploration form operations, about 30%, and 45% is really money that goes to projects like La Zanja and Tantahuatay and also in El Brocal, in the case the El Brocal and Marcapunta.

In terms of the greenfield exploration, we are having a positive result in two projects, two relatively new projects -- Breapampa, which is a joint venture together with [Numa]. We have an all reserve of 200,000 ounces and we are aiming to double that with additional drilling. This has been at [Pampa] and [El Cucho]. And we also have some positive results that we will, in due time put in a present lease in the Chucapaca project with brownfield, where we've having intersects in the order of one to five grams per ton growth over long stretches, 100 to 200 meters. And this, of course, is something that is all in sulfite and has got about 50 to 100 meters of overburden, but it's a new deposit all together.

Great. Thanks.

That's all for the time being.

Excellent. Thank you very much.

(Operator Instructions) Your next question comes from the line of [Mandy LaGrange] of Nomura.

Hi, everybody. And I'm wanting to ask, just with regards to Antapite. I know you've answered the question on the impairment. And are we to assume then from basically 2010 that Antapite will not be operating anymore?

We hope that we will continue to be operating. The main problem at Antapite has been that there are some area where we have mining claims that the local communities have not permitted us until now to explore and to diamond drill. We are working on the social front as much as we can in order to get into those areas and explore. In addition to that, part of the higher cash cost at Antapite is the effort that we are doing in exploring the loan areas of the mines in the underground. We are a company that was founded 55 years ago and we know that mines always get [field] prices. Some not necessarily all the time good ones. But we are not prepared to give up in Antapite and we will continue exploring as much as we can and I hope we can get back to you with positive news in Antapite in the near future.

Okay. Thanks. Then just on El Brocal, someone asked the question because, in 2008, production was based on new grades of 6.1% of zinc, 2.8% of lead and [3.4] ounce per dry short ton of silver. Now I see in your reserves your grade of zinc is reduced down to 2.70%, delayed down to 0.09% and silver down to 1.3 ounce per dry short ton. And does this mean that we're going -- we should be expecting much lower production from the asset going forward and can you potentially give us some guidance as to what we can expect it to be delivering on for free metals?

This is true. This is Cesar Vidal trying to answer your question. This is an acute observation of yours and the lower grade -- materially lower grade for Brocal are there because of the new project that calls for a 15,000 ton per day mill -- new mill. And there is a feasibility study in place and we think that although the lower rates will be -- lower value will be offset by the higher tonnage. On the other side, the infrastructure is all in place. This is new era of Brocal.

And then, of course, if I may add to this, the potential of the Brocal district -- because this is part of the Cerro de Pasco district. This is only eight kilometers out of Cerro de Pasco. That is the flagship of mining in Peru and a very, very mineralized area in terms of Peru. We believe that there is still a lot of potential to explore in Brocal. It is difficult to assure you that we are going to find higher grade.

But in the current pit, we plan to expand and there will be probably lower grade. But then you have to bear in mind that in Brocal you have Marcapunta and you have San Gregorio, that is a deposit that, regardless of the fact that as of today we are not able to get in and to explore because of community issues, we do expect that in the future there will come the time when the sensible people in their community will accept that to explore and to develop something that has to be put in value in favor, not only of the Company, the country and of course, their own community.

Going back to our current operation in Brocal, it is important to mention that the first project we worked in Brocal was to complete the facilities to separate the lead concentrate from copper concentrate. So we hope and get several ores where we did not treat, waiting for this final solution -- metallurgical solution. So we will add some of this higher silver grades ores in the process during this year and we'll increase this grade and the values of the silver ventures.

Okay. Can I just ask furthermore to this? Are you going to be giving us a better breakdown as to what's -- well, basically guidance on production going forward, considering that we've got these different grade parts of the mine coming into being? And -- because, at the moment, we don't have much guidance in terms of how that's all going to come together. And just in particular for 2009, are you -- what are you expecting for your metal production, zinc, lead and silver?

Well, in terms of silver, we're expecting an increase about 50%, the grade of silver, for year 2009. That means from March or April onwards. In terms of our [grade] we will continue working the grades that we have been exploiting during the last quarter.

Okay. Thank you very much.

Your next question comes from the line of Carlos de Alba of Morgan Stanley.

Good morning, gentlemen. Thank you for taking the call. My first question is related to guidance for CapEx and exploration expenses in 2009, if that would be possible. It's a key area that I think is receiving a lot of focus today. The second question would be, if you could comment, what are the cash costs of Marcapunta, that would be great. Thank you.

Well, in the case of Marcapunta, you know that we have been -- what -- we have been working on a pilot operation, which is just a 1,000-ton to the capacity. The cash cost there is in the order of $3,400 per ton. Question is that being this a pilot, just as sure that we hedged this production for this year to be sure that we're -- production was going to be economically feasible at $7,700 per ton of copper. So we are just working on this just to be sure that we are going to get samples big enough to try, on the final metallurgical solution for [link] of these ores.

The second question --.

CapEx and exploration expenses.

Yes, the CapEx in our internal operations, just the sustaining CapEx is at about $40 million other than the CapEx of the new projects we have. La Zanja and Tantahuatay, so Roque mentioned, means 55 to 60 number of each to be carried out as soon as we get the final approval of the [Marento] and [Vase] study. On the other hand, in the it's -- we have, in several area --.

$70 million.

$70 million of maintain -- yes, yes, sustaining CapEx. And in Yanacocha in the order of $100 million.

Exploration expenses --.

We had a budget in place, it's not been approved yet, for $15 million for the year.

$15 million.

$15 million -- 1-5.

That is substantially reduced and prioritized from last year.

Thank you, Mr. Galvez. If you could repeat, please, what is the hedge at which the Marcapunta production was covered for this year?

Yes, the Marcapunta production is hedged at $7,700 per ton of copper.

Thank you very much.

You're welcome.

Your next question comes from the line of John Bridges of JPMorgan.

Good morning, everybody. Just wondered if you could give a little bit more detail on this [JV] that you're doing with gold fields, the one with the one to five grams that you're picking up?

Thank you, John, for the question. We did mention, after a question that was asked to answer at the BMO conference that someone asked us about the results of the diamond drilling at Chucapaca in Southern Peru. And this is a joint venture that we started a couple of years ago -- one year ago. And we have had some interesting intersects, some of them in excess of five grams per ton. But most of this is in the order of one gram per ton, one to two grams per ton.

And it's early days to say that we have pursued the explorations and gold fields has a throwback clause that they may exercise, after we exercise our first option, to acquire 51% and we will retain 49%. I think it's early stages and we as a more long-term company prefer not to brag about one diamond drill hole, but to give you guidance when we have a clear figure of the drilling in that area. But I can anticipate that we are excited about the project and we hope this will become a project that may grow into production.

Okay. Great. And I'd like to reiterate the question on Brocal. If we could get a little bit more detail on that. It's a bit of black box at the moment.

Well, it is a black box because people don't pay attention to some of the assets of Buenaventura, but we take very much into consideration what you are saying and we should put some more information in our web page and certainly we'll be preparing in the next conference call to give more information on Brocal.

Excellent. Thank you.

Your next question comes from the line of Alonso Aramburu of Santander.

Yes, hi. Good morning. A couple of questions, just to follow up on the guidance of production. Can you give us the [guidance] for gold and silver for your direction operations in '09? My second question would be what you're seeing in terms of operating costs in the first couple of months of this year, whether you're seeing a downtrend on those.

Well, in terms of the guidance, of our guidance operations production in terms of gold will be 450,000 ounces for year 2009. We expect to use in the order of [12 million] ounces from our -- of silver from our direct operations. So on our -- sorry --.

No, no, no, no, no.

17 million -- 12 million is [Chatone] and 17 million ounces in total. And then, well, in terms of the cost demand, could you repeat your question?

Yes, I wondering if you've seen declines in operating costs in the first couple of months of '09 related to the last quarter of '08.

Yes, well, we haven't had to -- an additional cutting costs during the first two months of this year, other that those that were reported in this [list] in Chatone. However, we have to share with you that we are working with our suppliers in terms of reducing the price of our supplies, especially, and still we are reducing costs in the order of 30% to 40% -- in tires, we are reducing close to 20%. And we need in the order of 15%. And some sustaining or support material instilled in the order of 40%. So we expect to have an important reduction of these costs per division.

All right. Thank you, Carlos. And just, if I may, one last question. There's been some noise about the potential -- a potential strike in the mining, with mainly employees [improve]. Can you give us a little color in that?

No, we haven't had any information about. Eventually, the National Union will try to move people for end of March in order to promote some political reaction in the country. But this is not an actual question of unions against the company.

Great. Thank you so much.

(Operator Instructions) At this time, there are no further questions. I will now return the call to Mr. Roque Benavides for final remarks.

Again, thank you for taking the time to listen to us. We know that your time is very valuable and we appreciate you attending. We benefit from your questions. We take note of all your suggestions and you can be assured that we are reactive toward all of this. I want to give you some information next week. We will be on the road visiting some investors in New York, Boston, the mid-Atlantic. And we will hosting a luncheon at the New York Stock Exchange on Friday the sixth. And we hope that you all can join us. Those of you that may not have received an invitation, please don't hesitate on calling us. We would love to have you there and exchange additional ideas on the best way of continue this successful operations of Buenaventura. With this, thank you very much and I hope to see you soon. Bye-bye.

Thank you. That does conclude today's Buenaventura fourth quarter 2008 earnings conference call. You may now disconnect.