Compania de Minas Buenaventura SAA (BVN) 2010 Q2 法說會逐字稿

Good morning. My name is Laurie. And I'll be your conference operator today. At this time, I'd like to welcome everyone to Buenaventura Second Quarter 2010 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 session. (Operator Instructions). Thank you. I will now turn the call over to Pete Majeski of i-advize Corporate Communications. Please go ahead, sir.

Thank you, Laurie and good morning, everyone. Welcome to Buenaventura's second quarter 2010 conference call. Today's call is for investors and analysts only. Questions from the media will not be taken. Joining us today from the Company are Roque Benavides, Chief Executive Officer, Carlos Galvez, Chief Financial Officer and other members of the Company's senior management. They will be discussing Buenaventura's results for the press release distributed Friday afternoon. 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 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 Mr. Roque Benavides. Mr. Benavides, you may begin.

Good morning to all. And thank you for attending this conference call. Our net income during the second quarter was US$110 million. EBITDA from Buenaventura's direct operations were US$88 million, while EBITDA including Yanacocha and Cerro Verde decreased 7% from US$264 million in the second quarter '09 to US$245 million in the second quarter '10. These results were mainly driven by a lower volume of gold and silver.

During the second quarter '10 in our operating revenues, net sales were US$212 million, a 7% increase when compared to US$198 million reported in the second quarter '09. This was explained by higher realized prices in all metals despite a decrease in the volume of gold, silver, zinc, and lead sold.

Royalty income in the second quarter '10 totaled US$13.4 million, a 7% decrease when compared to US$14.6 million reported in the second quarter '09 due to lower gold volume sold at Yanacocha.

Accumulated net sales in 2010 were US$399 million, an 11% increase compared to the same period of 2009, while royalty income was US$27.5 million, a 2% decrease when compared to US$28.4 million reported in the comparable period of 2009.

In terms of production and operating costs, Buenaventura's equity production in 2010 was 109,974 ounces of gold, 11% higher than the 99,322 ounces reported in second quarter '09. Silver production in the second quarter '10 was 3.4 million ounces, a 9% decrease when compared to 3.7 million ounces reported in the second quarter '09.

Equity production in the six-month period of 2010 was 207,744 ounces of gold and 6.4 million ounces of silver. This represented a 3% increase in gold production and 17% decrease in silver production compared to 2009.

The quarter in the Orcopampa gold mine has been an excellent one. We have been in place with the production profile that we suggested in the previous months. We produced 80,482 ounces, 12% higher than the second quarter '09. And cash costs were in line with what we have given as guidance.

In the case of the Uchucchacua silver mine, the first half of the year has not been a good one. But we do expect that the second half of this year will be much better, considering that June and July have been better months than the previous ones. We have had, as you all know, a number of minor strikes essentially in Uchucchacua.

And we are also working on the solving of the manganese content at our concentrate. We, according to the operations people in Buenaventura, we expect to have a much better second half and looking forward toward the future to have a much better production from the Uchucchacua silver mine.

Antapite had a very good quarter, considering that production was declining in the past few quarters. And we produced 9,560 ounces of gold, which was an increase of 21% compared to second quarter '09.

A major event that we would like to stress is that at El Brocal, at [Sociamine] El Brocal, where we have a controlling interest, where we have a 45.97% economic interest, stage one of the concentrator plant expansion project was completed to increase capacity from 6,000 tons per day to 10,000 tons per day. In order to leverage higher copper prices, the Company will prioritize copper production at the Marcapunta operation, increasing ore treated from 1,000 to 4,000 tons per day. The remaining capacity of 6,000 tons per day will be used to treat the polymetalic ore from Colquijirca.

As you all know, we expect to reach a capacity of 18,000 tons per day at the El Brocal operation. And this will be finalized in the second quarter -- in the first half of 2011. But we continue working on this expansion project that in total will consider a CapEx of US$200 million.

Going to exploration costs in nonoperational mining sites, exploration costs -- and we have Cesar Vidal with us this morning. Exploration costs at non-operational mining sites, which include care and maintenance, in the second quarter '10 was US$10.3 million, a 3% increase compared to US$10 million reported in the second quarter '09.

The main efforts were focused on Castrejon prospect at La Zanja, US$1.1 million, Mallay US$2.1 million -- to US$2.4 million, Marcapunta US$1.3 million, Colquemayo US$600,000, and Breapampa US$0.5 million in that project. Exploration costs at non-operating mining sites in the six-month period of 2010 were US$18.2 million, a 5% increase when compared to the same period in 2009.

Greenfield projects currently being drilled are the Coripuquio prospect at the Colquemayo project in Moquegua. This is not far away from Chucapaca, with 3,000 meters drilled this far with interesting results at one of the drill holes with 109.7 meters with 0.51 grams per ton of gold in shallow oxides with 15.46 meters deep. This is 100% owned property by Buenaventura.

The other one is Chaje, 18,000 hectares surrounding the Chucapaca area, also in Moquegua, where a second diamond-drill hole is testing depth potential of narrow gold-bearing veins in sandstones and carbonaceous shales.

In Central Mexico, Buenaventura has designed an exploration program and positioned the responsible team for the Pachuca-Real del Monte project, which consists of a silver-rich vein project optioned from Solitario Resources. We have people already in the site. And we are starting working on this exploration project.

We are not going to get into major details on Yanacocha or Cerro Verde, where essentially production is on line with the guidance that we have given in the past few months.

In terms of net income, this quarter, Buenaventura's net income was US$110 million, representing US$0.44 per share compared to US$134 million in the second quarter '09. This was mainly explained by 23% decline in operating income and the 12% decrease in contributions from Yanacocha and Cerro Verde. Net income for the six months period 2010 was US$266 million, US$1.05 per share, a 13% increase when compared to US$234 million reported in the same period '09.

In terms of project development, we continue with the old tailing treatment plant in the Orcopampa mine and the Tailing Dam number four expansion. Those are in line. And we continue working on those two projects at the Orcopampa mine.

At Uchucchacua, the engineering study for the chemical plan to clean manganese content from the lead-silver concentrates to obtain better commercial terms and improve the mining process is underway. Currently, the location has been identified. And the Company is working on environmental permits.

Finally, a very important announcement for us and for the morale of all the Company is that La Zanja project is -- has been completed. And we are waiting for permits to start operations. As we speak, we have a committee of the Ministry of Mining checking on all details at the site. And we expect to get permits for starting operation in the next few days, hopefully in the next couple of days if possible.

Today, they are in sight. And we expect to have this permit for operations, having obtained in the recent days permits to use water, which is of course essential for the operation. So we are very pleased to announce that all the project is ready to start operation, only waiting for the permit from the Ministry of Energy and Mining. With this, we are prepared to answer any questions that you may have. Thank you very much.

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

Hi. Good morning, everyone. I have two questions. The first one is related to the cost at your direct operations. We saw that the cash cost increased. We calculated something between 5% to 10% from the first to the second quarter despite the fact that you were producing more in the second quarter. So can you just tell us a little bit of what happened in the cost in the second quarter? And how do you see this cost going to the second half of this year is my first question.

Felipe, how are you? This is Carlos Galvez. Well, mainly, you know that, as Roque mentioned, we had some strike in Uchucchacua basically and that, well, due to these, we reduced our silver production. So the dilution of that [tail] (inaudible) on fixed costs impacted our cash costs.

On the other hand, the effort in explorations pushed the cash cost up. Simultaneously, we have had during this time the new [location], hopefully with the unions. We finally signed the agreement with the union of Uchucchacua last Monday. So -- last Tuesday -- so that is good news because we are not going to have additional problem with the unions. And according to the information that Roque mentioned, the production for the second half of this year, we are going to reduce this cash cost for the second half of the year.

And thanks, Carlos. And that applies also to [Verde] operations, right?

Well, the one thing that I forgot to mention is the appreciation of salt that is impacting our cash costs. This is an issue that we have to face. And this is an important driver of our cash costs.

Okay. Thank you. And my second question is related to your exploration efforts. Roque mentioned a few new projects that you are -- or new areas that you are exploring. So if you could just elaborate a little bit more on some of the projects that you think that you have been getting the best results. Particularly one that sounds interesting is the project surrounding Chucapaca. Thank you.

Yes, ask Cesar Vidal to answer that question. But before him answering, may I just say that Chucapaca is an area where we have this joint venture with Goldfields that we are very, very excited of course. And Goldfields has some properties in the surroundings. And we have our own.

This is not that we are not in good terms. On the contrary, we are in the best possible terms that each of us have their own properties. And what we would like to report and I would ask Cesar to report is on those properties that we own and control 100%. Cesar, please?

Yes, this is early days for the new prospects in the Moquegua region in Southeastern Peru. We have over the last 12 months acquired substantial property. In particular in this conference, we are announcing our first hole that is encouraging in the Colquemayo project. The Colquemayo project is a large area of hydrothermal alteration in tertiary volcanic rocks. It has been explored in the past by Rio Tinto, but only very scarce.

Only six holes were drilled since six years ago. And we are drilling currently our whole number 20. These are short holes over gold anomalies and surface. The gold anomalies average 0.3 grams per ton gold. So it's a low rate. But it's on surface. It's a very good indication.

And we have announced hole number six, which is the best result so far. But it proves that we have some surface, very shallow mineralization, which is substantial in thickness, 100 meter intercept, which translates to an 80-meter thick mineralized zone with 0.5 gram gold. It's keeping us very excited about this. And we will continue drilling this. This is 100% Buenaventura's, Roque has already mentioned.

We also have Chaje, which is a new project surrounding the area of interest of Chucapaca, where we have minor indication of polymetallic veins with gold on surface. And we are only drilling our second hole at the moment. So the entire region seems to be highly prospective. And our mandate is to concentrate on those properties that are 100% owned by Buenaventura.

Okay, Cesar. Thank you.

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

Morning, Roque, Carlos, everybody. Just coming back to the accelerated exploration in drilling, was it Uchucchacua but also at Orcopampa and Poracota, was there any reason that you accelerated that this quarter?

Cesar?

I may suggest the reason in the area of Orcopampa, we have reached an agreement with our neighboring company of [Horkshire]. And we have more land to explore. We have consolidated a position in the Poracota mine area, where we are drilling more intensively, and also nearby properties that will be operated by Buenaventura with an interest of Horkshire. This will be announced in detail later on. But we have more acreage to cover. We have reached the good agreement with Horkshire to include some of their claims in our portfolio and vice versa and also have joint ventured some new areas.

And in the case of Uchucchacua, of course, because we have better targets, so I think that speaks for the future of Uchucchacua. We think there's a lot of potential. And that's the reason why we are investing further on drilling.

Okay. That's very helpful. Following up on Brocal, you've achieved the 10,000 tons per day. But were you really benefiting from it in this quarter? Or could you give us some indication as to what sort of production buildup we should expect in the second half?

John, the question is that we have already completed the construction of this [first] step of the expansion. But this month, we are commissioning the full equipment. And we expect to increase production from August onwards. So this will impact the production of El Brocal from this third quarter gradually up to gaining full capacity in the fourth quarter.

Q4. Could you give us some indication as to how much zinc, silver, and copper we should expect in the fourth quarter?

Silver is quite erratic, if I may say. It is not easy to predict. In terms of zinc, I would say --.

In Brocal?

Yes. But the amount of production total, I don't have a figure for that at this point in time. We may come to you -- back to you and give you those figures.

Okay. Yes, it's really just a question of trying to get the right sort of forecast into our models. And then maybe would -- based upon this quarter, do you think you can catch up to the lower silver from Uchucchacua in the second half? Or will you be lower than you previously expected for the year?

(Inaudible - microphone inaccessible)

Well, what we expect in the case of Uchucchacua is to catch up with our guidance quarterly. So we expect to product in excess of 2.5 million ounces per quarter. In the case of El Brocal, we are going to [privilege] the copper production. So we expect to get in the order of close to 6,000 tons of copper metal contained in this third quarter and in the order of 7,000 copper metal contained in the fourth quarter.

In the case of zinc, lead, and silver, we are going to keep on producing the same levels that we got during the last quarter, so in the order of 10,000 tons of zinc, tons of copper, in the order of 4,000 tons of lead, and in terms of silver in the order of 700,000 or 800,000 ounces of silver.

You know that we are exploiting the [Franquela aye] area, which is a lower grade than the one we exploited last year. And this is why we are privileging the copper production.

Okay. And when you're up at 18,000 tons a day at the end of next year, what would the split be between the zinc, silver ore in the Marcapunta, copper ore?

Well, we are going to complete -- I believe that there was a slight mistake. I believe that we are going to complete the expansion to 18,000 tons at the year end next year.

Yes, okay.

So what we are going to modify our structure will be from the year 2012 onwards. And the balance, we expect that we will keep on producing in the order of -- well, we'll be in the order of 6,000 tons of copper. And the balance will be polymetallic ores, lead, zinc, silver.

Okay. That's great. And that 109-meter hole at 0.5 gram sounds very interesting. Was that still in ore at the bottom of the hole?

It went into sulfide, low-grade copper-gold sulfide that is negligible in terms of economics at the moment. We are just evaluating the shallower oxide portion of the deposit. You'll have to wait a little bit for further results. And of course, one good intersect is encouraging. But it's not proving anything at the moment. It takes a little bit time to put up resources.

You've got us all excited now.

Well, this is because you're following us. And we are also excited. So we share in that feeling. And we keep our fingers crossed for more intersects.

Thanks, guys. Good luck.

(Operator Instructions). Your next question comes from the line of Carlos de Alba of Morgan Stanley.

Yes, thank you, everybody. A question on Marcapunta costs -- any -- where the expectations in terms of the progression in that number has been a little bit on the high end. And just wanted to get your sense as to how you see that progressing. And also if you could comment on Tantahuatay and Trapiche, that would be great. Thank you.

Carlos, in the case of Marcapunta costs, you know the (inaudible) of their lock is the one (inaudible) driver of this cash cost and the fact that the commercial terms are pretty tough as well due to the arsenic content. So this is something that we are working with and will have to put up with. We believe that we will continue getting this in the order of US$4,000 per ton of copper cash cost. This is the level that we expect to get.

In terms of Tantahuatay and Trapiche, we continue getting the permitting for continuing the project of Tantahuatay. We are quite excited that things are moving faster than what we expected. And we will say at this point in time that we expect that by the end of the first half of next year, we may be in production at Tantahuatay at the rate of 100,000 ounces of gold per year.

In the case of Trapiche, we continue with the exploration. And I don't think there are major results to report at this point. We are negotiating with the local communities. I think they're going fine there. And we, as I say, we have nothing much to report at this point in time.

And thank you. And just my final question is on balance sheet, very strong with a very healthy level of cash. What were you planning to do with that money?

Well, we certainly are not planning to increase the dividend payout. We think that we have -- looking forward, we will have some important investments to do. We are talking of [congra] towards the future. We have the Chucapaca project that will also require some cash from us in terms of investment. There may be also the possibility of Cerro Verde expansion that may require some cash from us. And then we are, of course, building the [Juanta] hydroelectric plant. And we are building the expansion of El Brocal. We think that it is our responsibility to add value to the Company and to invest monies in the proper way.

I do understand that there are a number of companies that are giving guidance that they are going to start distributing more dividends out to the shareholders. That has not been discussed in the case of Buenaventura. We -- on the contrary, we are looking for additional projects to add value to our stock.

Okay. Thank you very much.

Your next question comes from the line of Sergio Matsumoto of Santander.

Hi. Good morning. My question is on the administrative expenses. We noticed that it increased over 80% quarter over quarter. And I understand that a lot of this comes from the long-term compensation of offices. So could you help us how we should forecast this, like what increases as a function of what, just if you could give us more insight into that line, please?

Yes, well, this is Cesar. You may recall a stock appreciation [like] that is a compensation for 10-years program. So what we have to report is a mark-to-market value of this position. Of course, having this variation with the stock beginning last year and this year, this impacts in a provision. It is very difficult, even for us, to estimate this provision due to the fact that it's a mark-to-market value. It's very volatile and aligned with the volatility of our stock price.

Okay. I guess I'm trying to understand it because from last quarter to this quarter the stock increased about 25%. But this increased over 80%. So I'm just wondering where that discrepancy's coming from.

The long-term compensation is as its own name says. It's very long term. Long term considers up to ten years. So the thing is, when we compare, when we have to adjust this cost, we also compare with prices of five years ago or five years -- yes, five years ago. So it can be far more. Or it can be less than what it is today.

Understood. Thank you.

(Operator Instructions). At this time, there are no further questions from participants. I'll now return the call to Mr. Roque Benavides for closing remarks.

Well, thank you. Thank you to all of you in joining us in this conference call. What I can just say to finalize this conference call is that we, the team of -- the management team of Buenaventura continues to work very, very hard on adding value to the Company, adding value to the shareholders and that we expect to offer you much better news in the coming conferences that we will be attending and in the coming conference calls. So thank you very much to all of you. And have a great day. Bye, bye.

Thank you for participating in today's conference call. You may now disconnect.