Compania de Minas Buenaventura SAA (BVN) 2011 Q1 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I'd like to welcome everyone to the Buenaventura First Quarter 2011 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 would now like to turn the call over to Pete Majeski of i-advize Corporate Communications. Please go ahead.

Thank you, Jackie, and good morning, everyone. Welcome to Buenaventura's first quarter of 2011 conference call. Today's call is for investors and analysts only. Questions from the media will not be taken.

Joining us today from Lima are Mr. Roque Benavides, Chief Executive Officer, Mr. Carlos Galvez, Chief Financial Officer, Mr. Cesar Vidal, Chief Explorations Officer, as well as other members of the Company's senior management team. We will be discussing Buenaventura's results per 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 Company's press release in the 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, and good morning. Thank you for attending this Buenaventura conference call. The net income during the first quarter was $218 million, 40% increased when compared to the figure reported in the first quarter of '10, mainly due to 171% increase in our operating income. EBITDA from Buenaventura's direct operations was $205 million, 142% higher than the figure reported in the first quarter '10, while EBITDA, including Yanacocha and Cerro Verde, increased 40% from $280 million in the first quarter '10 to $394 million in the first quarter '11.

These results were mainly driven by an increase in gold, silver and copper sales from Buenaventura's direct operations as well as higher metal prices. It is important to note the positive impact of Buenaventura's new La Zanja operation when comparing first quarter '11 versus first quarter '10 operating results.

Buenaventura's equity production in the first quarter '11 was 116,270 ounces of gold, 19% higher than the 97,770 ounces reported in the first quarter '10. Silver production in the first quarter '11 was 3.5 million ounces, an 18% increase when compared to the figure reported in the first quarter '10.

At Orcopampa, the production from the Chipmo mine in the first quarter '11 was 73,570 ounces, 13% higher than the figure reported in the first quarter '10. At Poracota, 30 kilometers from Orcopampa, gold production in the first quarter '11 was 12,101 ounces, a decrease of 13% when compared to the first quarter '10.

At Uchucchacua, our silver mine, total silver production in the first quarter '11 was 2.5 million ounces, an increase of 23% when compared to the same period of 2010. At Antapite, total production in the first quarter '11 was 8,254 ounces of gold, an increase of 17% compared to the first quarter '10.

La Zanja, our new kid on the block, total production in the first quarter '11 was 25,151 ounces of gold. This, of course, is in line with the target annual production of 100,000 ounces for this year. At El Brocal, full capacity of the concentrator plant was devoted to copper ore treatment to leverage the high copper prices in the first quarter '11. Copper production for the first quarter '11 was 7,473 metric tons, 249% higher than the first quarter '10.

Our operating income in the first quarter '11 was $176 million, a 171% increase compared to $65 million in the first quarter '10. During the first quarter '11, Buenaventura's income from non-consolidated affiliates was $105 million, 6% lower than the $112 million reported in the first quarter '10.

Yanacocha's contribution to these results decreased 32%, from $70 million in the first quarter '10 to $48 million in the first quarter '11, partially offset by the 39% increase in contributions from Cerro Verde, which rose from $46 million in the first quarter '10 to $64 million in the first quarter '11. This quarter, Buenaventura's net income was $218 million, $0.86 per share, 40% higher compared to $156 million reported in first quarter '10.

In terms of the future and project development, La Zanja expansion, we are already working on an expansion on the Pampa Verde project. The construction will begin in the second quarter '11. This project includes the development of the Pampa Verde Pit, a mine waste deposit, an acid water plant, and the construction of a road to connect the Pampa Verde Pit with the San Pedro Sur Leach Pad Stage II. Construction will be completed in the third quarter 2012. Total investment for this project is expected to be $32.5 million.

The manganese sulfate plant, to treat the ore concentrate from the Uchucchacua mine that contains high manganese. Buenaventura commenced construction of the manganese sulfate plant in the first quarter '11 with a total budget of $56 million. The objective of this plant is to remove the manganese content in the Uchucchacua lead-silver concentrates using chemical processes.

The facility will be located on the northern coast of Lima and include an acid washing plant, a sulfuric acid plant, and a manganese sulfate plant. This will enable us to increase our resources at Uchucchacua and surrounding areas. It is a very important project for Buenaventura and for our future silver production.

At Tantahuatay, our total estimated CapEx is $72 million. As of March 31st, 2011, project expenditures have totaled $44.3 million. The construction permit was obtained on May 24, 2010. We expect to be in production at Tantahuatay by July this year and at a rate of production of 100,000 ounces of gold per year, very similar to La Zanja project. As of March 31st, 2011, Buenaventura's total investment in the Huanza hydroelectric plant was $76.4 million, representing 58% from the entire budget. $66 million of the total amount investment was via a leasing agreement with the Banco de Credito del Peru.

Construction progress at Huanza through March 31st, 2011 was as follows, water conduction plant, 44%, the powerhouse excavation was completed and the first shipment of electromechanical equipment arrived, finally, in the Pallca Dam, the excavation was completed and is ready to start with the concrete base construction. With this I hope we have shown how active we have been, certainly, this last quarter and during this year as we have already explained. So, we are open to any questions that you may have on this presentation. Thank you.

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

Good morning, Roque, and good morning, Carlos. The question that I have is on La Zanja expansion. Obviously, a success story that is leading you to try to seek this new project, Pampa Verde. Could you comment a little bit on the potential size of the project in terms of production or the deposit that you have there in terms of reserves or resources? That would be my first question.

The second question, if I may, is related to the timing for the start-up of the manganese sulfate plant and the potential impact that you see that giving you in terms of better realized price for the lead-silver concentrates and also the reduction in costs for Uchucchacua.

And then finally, with everything that is going on in Peru right now in terms of the political uncertainty and also the latest news on the Tia Maria project, we are hearing that the community may be starting to question the Tantahuatay project. So if you can also give us some information on that end, I would really appreciate it. Thank you.

Right. The thing is, in this type of deposit at Tantahuatay or in La Zanja, our mines are developed as we progress. And at La Zanja, we started with an open pit and then we have to continue with the second open pit, which is Pampa Verde. What we are finding and this is a constant process and we understand that many other mines are very well defined in its [geometry] and its infrastructure. But keep reaching mines require constant investment, and this is the case in La Zanja.

May I just comment that we are finding a higher grade ore in La Zanja than what we had in our reserves base, and that applies for the current operation and for the Pampa Verde area of the mine. So we are very excited. We believe that this project is a success. And, of course, being a success, this did not go to the front pages of the newspapers as Tia Maria did, because only bad news get to the front pages of the papers.

In the case of Tia Maria, just to touch on that, essentially, the government decided that the environment, the social environment, was not ready there. We believe that there has been fault, if I may say, on the three sides, meaning the community, meaning probably the company and why not, the government that didn't support these projects. We expect that towards the future this will improve, and I hope that Southern Copper may develop Tia Maria in the future.

Regarding the sulfate plant, we expect to the ready probably by the end of next year in 2012. It is a new chemical process that will enable us to treat and to add value to the ore concentrates at Uchucchacua. But more than cost reduction, which we expect to get down to probably in the order of $10 to $12 per ounce in Uchucchacua with this process, more than that is the expansion of the resources in the whole area.

We have a brownfield exploration of Uchucchacua where we are finding substantial resources, but also with high manganese and high grades of silver. If we find a way to process these concentrates, we are going to enlarge the resources at Uchucchacua, and that is the strategic importance of the manganese sulfate plant.

In terms of Tantahuatay, we had some confrontations which were previews to the public audience and those were the front pages. But then, we realized we did our public audience with the local community and it went very well, very smoothly, with all of the legal requirements. And, of course, the success of this audience did not make the front pages.

It is part of, I suppose, the freedom of press and democracy that they can publish whatever they want, but I tell you that we have gone through all the formalities and we have been successful in our public audience in Tantahuatay and we are foreseeing starting production by July this year.

In terms of Peru, we have had new polls this morning in the newspaper, and the two candidates are very, very close, if we can believe on polls. But the thing is, the first polls that came on Sunday last week were giving 6% advantage to Mr. Humala. Today, it's essentially exactly the same. Humala and Fujimori have exactly the same percentage, which means, if I may try to understand the polls, a trend which we expect that will continue.

On the other hand, and this is not a speculation, is that the Congress that was elected three weeks ago, nobody, no political party, has an absolute majority. So the democracy of Peru will have to handle with situation where we will have a president on June 5th and a Congress that will be divided by a number of forces and that we expect the constitution and the laws will, of course, be respected.

Alright. Thank you, Roque. Just if I may get a clarification on La Zanja, so then, Pampa Verde would only extend the mine of life of the operation more than increase the annual capacity?

Exactly. We are still in line with 100,000 ounces of gold per year, and this was an expansion that was planned in advance it's the process of the development of the mine.

Alright. Thank you very much, and good progress on the cost reduction front.

Thank you.

(Operator Instructions). Your next question comes from the line of Victoria Santaella with Santander.

Good morning, Roque. I have two questions. The first one is, assuming the guidance that Yanacocha provided in terms of production for this year, even on the low range of the indication, it seems that for the next quarters we might see a significant recovery in gold production. I would want to hear your opinion on that. And also, this quarter we saw some important declines in zinc and lead. Also, if you can give us some guidance -- I know you touched part of it -- but guidance for the rest of the year.

Thank you for your question, Victoria. Zinc and lead has essentially reduced because of Brocal producing copper all this quarter, and that is the main reason for the reduction in production. The other mines where we produce lead and zinc, really the production is very small. So that is the answer for your second question. And may I ask Carlos Galvez to answer the first question, please, on Yanacocha?

Yes. Victoria, Yanacocha continues working with the same guidance we reported initially. But you remember that it was reported that during the last quarter -- actually in December, there were several difficulties with the stability of the northern wall of [Lakim] and so on.

And it is considered that there will be a ramp-up in the production during this year, moving from the lower levels that Yanacocha produced in the first quarter that we will believe will be similar in the second quarter, but going up in the third and in the fourth quarter of this year. So continue aiming to the same guidance.

Thank you very much, gentlemen.

Your next question comes from the line of Imaru Casanova with MLV.

Hi, guy. I thank you for taking my question, following up a bit on what Victoria asked regarding Yanacocha. Should we expect with the increase expected for the second half of the year, should we also expect costs to come down a bit? You guys reported about $600.00 per ounce for the quarter and I think guidance is more in the 500s for the year. Is that primarily due to the lower production?

Well, you're right, to the extent that the operation will continue improving in terms of ounces produced. We are going to reduce the cost applicable to sales per ounce, so we are continuing the same guidance in terms of cost applicable to sales for the year. So, you're right.

Okay, great. And then, this is more a bit of a technical question on the income statement. You guys usually would disclose worker's participation expense. We didn't see that this quarter. Is that now included perhaps in the cost of sales or in another item of this statement?

You're absolutely right. The question is that we are just working with the new regulations and, according to this we are obliged to report as a part of our operating costs, these worker participation. So this is exactly right.

Okay. So it would be included now in the cost of sales?

Right.

Okay, perfect. Thanks very much, guys.

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

Good morning, everybody. I'd just like to congratulate you on your foresight in switching to copper at the plant. That seems to be working out very well for you. At Uchucchacua, you talk about the use of contractors and the higher costs there. Is there a way of giving us some guidance ahead of the year as to when you're going to be spending a lot of money on additional contractor expense?

Well, John, we have been and we will continue working in some pretty high efforts to explore in the Uchucchacua to new areas despite of the fact that we know we have higher grades of manganese and in preparation for the new manganese sulfate plant that we are going to have in the future. So we are going to be able to treat and to explore economically loan materials that in the past were not considered economic. So due to these, we are exploring hard, increasing these exploration costs that is included in our production costs.

Okay, that's very helpful. So we should anticipate this elevated cost will last for another year or so and then it will drop back?

Yes, that's the absolute truth. Not only due to these, but also because we are going to have much better conditions to exploit with wide ore bodies, wider ore bodies and mechanizing our operations.

Okay, brilliant. Excellent. Another accounting question as well. Just in terms of how we handle our model, you're referring to the hydroelectric plant ones, and the investment there. How should we factor that into our model? Should we -- how are you going to factor it into your reporting? Are you going to report the benefit in the form of lower operating costs at the mines or is there going to be a separate item for profit from that?

We have separate item and we are going to sell this power to the operations [on length] as if it were a supplier of power, an external power supplier. But, of course, these operations will make some profits, so it would be a reduction in the total cost in the operation. We are going to be prepared to -- well in the bottom line, you are going to observe higher profits as a global operation in the consolidated financial statement. But, of course, we are going to be prepared to disclose this gap between the market price and our operating costs.

So there will be a separate item. Where will that appear in the income statement?

Where we -- it will be shown in the operating -- in the financial statement. Well, we are going to report the sales in a different item as power sold, and on the other hand you are going to be a separate line in the operating costs of this hydro electrical plant.

Okay.

So we are going to report similarly the mining operation regarding -- specifying the power business.

Okay. Okay. That's great. So we can make our model look a little bit more insightful. Excellent. Many thanks. Well done, guys.

You're welcome.

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

Hi. I have two questions. One is on your tax stabilization agreements. Do you still have ones that are current? And, if so, when do they expire? And the next question is again on Yanacocha. During the last conference call, you mentioned that there was a possibility to increase production to 1.5 million in 2012. Can we get an update on that, and perhaps if you could tell us how this increase in production will occur?

Buenaventura as a Company does not have any tax stabilization contracts. Yanacocha has until 2012/2013, I don't know, but it is going to be due in the next couple of years, I would say. It may be three years, I don't know. And Cerro Verde does have a taxes stabilization contract and it's for until 2013. Cerro, yes, okay -- 2013. So essentially, the taxes stabilization contracts are almost done. In terms of Yanacocha guidance of production for next year, we still are not in a position to give a full guidance. But the figure we are taking of is close to the same figure as this year.

Sorry, the point is that the Company has reviewed the mining plans and is considering to get back to the level of 1.5 million ounces a year in 2012. Nothing has changed during the last month that permits to foresee something different. So we are going to continue with a lower guidance for year 2011, but the expectation and the plans are to get back to 1.5 next year.

Thank you.

(Operator Instructions). Your next question comes from the line of Imaru Casanova with MLV.

Hi, guys. Sorry, I just had a follow-up, and this is bit of a higher level on the exploration side. I know we've all been very excited about Uchucchacua, and I was wondering if there's any more news on that or any kind of update or timelines that you can tell us on that project.

We are going to come up with a press release probably in September with a new figure of resources, and probably we will get to some sort of -- close to reserve figure. We expect to be in a position to make a decision of construction by the end of this year -- next year, sorry, next year, and we expect to be in production by 2015.

Thank you. That's very helpful. I appreciate it.

Thank you. That was our final question, and I'll turn the floor back over to Mr. Benavides for any closing remarks.

Thank you very much for attending. May I just touch on a corporate governance matter in Buenaventura? We had our board meeting yesterday, first board meeting of the newly elected board. And we had the contribution of Mr. Timothy Snider, who is a new member of the board. He used to be Chief Operating Officer of Phelps Dodge and we believe that he is going to continue contributing to the Company and certainly to the board.

Also, the incorporation of Mr. Carlos del-Solar as a proposal of the Peruvian Pension Plans, Mr. Carlos del-Solar was the Chief Executive Officer of Hunt Oil in Peru until the end of last year. He is a geologist by background and has a lot of experience in social and business matters. This, of course, added to our first-class board of directors composed of Mr. Aubrey Paverd. That was the man that led the discovery of Yanacocha many years ago, used to work for Newmont and has been a board member of ours for at least 10 years.

And the three Peruvian additional that are Mr. Felipe Ortiz-de-Zevallos, who was the founder of the most important think tank of Peru, Apoyo, and continues to be a reference for Peruvian politics and Peruvian development. Mr. German Suarez that was chairman of the Peruvian Central Bank, when, at the time when inflation came down from 7000% to 2%, so he is a very well respected person. And Mr. Luis Coleridge, that was for close to 35 years the Chief Executive Officer of Arthur Andersen in Peru.

So we are very pleased in Buenaventura to have a group of first-class board members. Six out of seven board members are independent and they will have to look after the developments of Buenaventura and we think we are going to have great support on their side. Other than that, we will be attending the Merrill Lynch Conference in Barcelona, for those that may attend and, of course, we will keep posted of any other conference that we will be attending. And we are open to any questions as you may have to email or telephone to the management of the Company. With this, I want to thank you for attending this conference, and have a great weekend.

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