Compania de Minas Buenaventura SAA (BVN) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Buenaventura Second Quarter 2011 Earnings Conference Call. (Operator Instructions). Thank you. I'll now turn the floor over to Mr. Pete Majeski of i-advize to begin.

Thank you, Beverly, and good morning, everyone. Welcome to Buenaventura's Second Quarter 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, Chairman and 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 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. Good morning to all on today's second quarter 2011 conference call of Buenaventura results. Our net income in the second quarter reached $204 million, 83% increase when compared to the figure reported in the second quarter 2010. Our EBITDA from our direct operations was $179 million, 103% higher than the figure reported in the second quarter 2010, while EBITDA including Yanacocha and Cerro Verde increased 64% from $245 million in the second quarter 2010 to $403 million in the second quarter 2011. These results were mainly driven by an increase in the gold and copper sales from Buenaventura direct operations, as well as higher metal prices.

During the second quarter 2011, our net sales were $327 million, 54% increase when compared to $212 million reported in the second quarter 2010. This was explained by an increase in the volume of gold and copper sold, as well as higher realized price across all metals.

In terms of our production and operating costs, Buenaventura's equity production in the second quarter 2011 was 120,600 ounces of gold, 10% higher than the 109,900 ounces reported in the second quarter 2010 due to the production from La Zanja, which, as you know, initiated production in September 2010.

Silver production in the second quarter 2011 was 3.7 million ounces, an 11% increase when compared to the figure reported in the second quarter 2010, due to higher production from El Brocal.

Our equity production in the first six months period 2011 was 237,000 ounces of gold and 7.5 million ounces of silver. This represents a 14% increase in gold production and 19% increase in silver production compared to 2010.

At Orcopampa, the production from the Chipmo mine in the second quarter 2011 was 69,000 ounces, 7% lower than the 74,900 ounces reported in the second quarter 2010 due to lower ore grades and as well as a three-day strike at the property.

At Uchucchacua, our total silver production in the second quarter 2011 was 2 million ounces, a 14% decrease when compared to 2.4 million ounces in the second quarter 2010, due to lower tonnage treated as a result of 21 days stoppage in April, in addition to a lower recovery rate.

At La Zanja, total production in the second quarter 2011 was 36,900 ounces of gold, 19,500 ounces attributable to Buenaventura, while our cash operating cash was $304 per ounce.

At El Brocal, in the second quarter 2010, the treatment of polymetallic ore was resumed after devoting full plant to treat copper ores during the fourth quarter 2010. I'm sorry, there is a mistake here.

In the second quarter 2011, the treatment of polymetallic ore was resumed after devoting full plant capacity to treat copper ores during the fourth quarter 2010 and the first quarter 2011.

In terms of our general and administrative expenses, general and administrative expenses in the second quarter 2011 were $19.5 million, 33% lower than the figure reported in the second quarter 2010 due to a lower long-term compensation provision. For the first half 2011, general and administrative expenses was $36.5 million versus $40.5 million in the first quarter -- in the first half, 2010.

Our exploration costs at non-operational mine sites, which include care and maintenance, in the second quarter 2011 were $12.1 million, a 17% increase compared to $10.3 million comparing the second quarter 2010. Buenaventura's main exploration efforts were focused at the Marcapunta El Brocal property, Trapiche and Mallay projects.

Exploration costs -- (technical difficulty)

Ladies and gentlemen, there will be a slight delay in today's conference. Please hold. The conference will resume momentarily.

Hello?

You may resume your conference.

Yes. Hello? Can I go ahead?

Please go ahead.

Yes. I'm sorry for that. I was talking about the exploration costs in non-operational mine sites.

Our exploration costs at non-operational mine sites, which include care and maintenance, in the second quarter 2011 were $12.1 million, a 17% increase compared to the same quarter in 2010. Buenaventura's main exploration efforts were focused at the Marcapunta area in Brocal, Trapiche and Mallay projects.

Exploration costs at non-operational mining sites for the first half were $22.7 million, 25% higher than the first half 2010.

In terms of our share in associated companies, during the second quarter 2010, Buenaventura's income from non-consolidated activities was $129 million, 50% higher than the $86 million reported in the second quarter 2010. Yanacocha's contribution to these results increased 4% and -- while Cerro Verde contribution increased 179% from $26 million in the second quarter 2010 to $72 million in this quarter.

We are pleased to mention that the feasibility study for the Cerro Verde expansion was concluded, as stated in the press release that Freeport McMoRan mentioned and that we are waiting for the environmental impact study approval for the Cerro Verde expansion.

In the meantime, we have reached an agreement with the Arequipa municipality, the main town next to Cerro Verde, by which Cerro Verde has committed to treat the sewage of the city and by doing that, using -- being able to use the water needed for the expansion project. This is a very important step in terms of community relations and of the feasibility of the Cerro Verde expansion.

This quarter Buenaventura's net income was $204 million, $0.80 per share, 83% higher compared to $116 million in the -- reported in the second quarter 2010.

In terms of project development, La Zanja expansion we are already expanding La Zanja, that started production in September last year, at the Pampa Verde project. Construction began in the second quarter 2011. As of June 30, 2011, total project expenditures were $3.62 million. The total investment for this project is in the order of $33 million that we expect to be concluded by the third quarter 2012.

The manganese sulfate plant -- a very important project for Buenaventura. Buenaventura started the design of the manganese sulfate plant in the first quarter 2011 with a total budget of $56 million. As of June 30, 2011, total expenditures were $10 million and the project includes a leaching facility, a sulfuric acid plant and a manganese sulfate plant.

The leaching and processing facility is expected to be completed by the first quarter 2012 and this facility will treat the Uchucchacua mine's lead-silver concentrate by removing the manganese content through a leaching process.

Tantahuatay total -- or Coimolache -- total CapEx is $80 million. As of June 30, 2011, total expenditures were $71 million. The mine construction progress is summarized in a chart that is shown in the press release.

I should mention that we were present on June 29 in the startup of the smelter at Tantahuatay, part of the pre-operation of this mine, and we are waiting for final permits in order to, in a formal way, show that Tantahuatay is already operating. But it is what we consider pre-operation of Tantahuatay.

At the Huanza hydroelectric plant, as of June 30, 2011, Buenaventura's total investment in the Huanza project was $91 million, representing 66% of the entire value. We continue to expect this hydroelectric plant to be ready by the second half of 2012.

In terms of final comments on other information, on July 22nd, on Friday, Buenaventura completed the purchase of 100% ownership of Inversiones Colquijirca that, in turn, owns 51% of Sociedad Minera El Brocal. As a consequence, Buenaventura increased its economic interest in Brocal from 46% to 53%.

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

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

Yes, good morning. Thank you very much for the call. I just want to -- would like to ask you clarification in terms of the cost impact of the one-time bonus that was paid during the labor negotiations with unions in Orcopampa. If you could quantify how much that was in terms of dollars, that would be great.

And also, along the same line, in Uchucchacua there was always there the impact of the stoppage in April and the cost, as a result, increased significantly to $17.74 per ounce. What is the normalized cost that you expect for the second half of the year in this operation now that the union has -- or the strike has ended?

Those are my first two questions. And also, we saw a very nice rebound on the production of Yanacocha. I just wonder if you can comment on what you expect for the second half of the year in that mine.

And then finally, if you can comment a little bit on the Marcapunta, the Trapiche and the Mallay projects, which, obviously, the Company has continued to invest on those sites. Thank you very much.

Let me start with your last question and leaving the others to Carlos Galvez.

In Marcapunta, we -- that is part of Brocal. We continue exploring and, obviously, the focus of the exploration of Brocal is on Marcapunta and on the area of zinc, San Gregorio. But Marcapunta is the focus of the exploration and we continue exploring for copper. We have found areas that have very little arsenic and some gold and we are excited about the results and we expect those to continue.

In terms of Trapiche, this is 100% property of Buenaventura. We have been socializing the property. We have reached agreements with the local communities. We have resumed the drilling campaign and we expect to have some additional results by year end.

And in terms of Mallay, that is a smaller operation that is under construction. We continue with the exploration process. We expect to be in production by year end this year with a mill plant in the order of 1,000 tons per day and things are doing very well in Mallay and we continue discovering lead-zinc-silver ores in that area that is, essentially, the brown field exploration of our Uchucchacua mine.

With this, may I ask Carlos to answer your other questions.

Good morning, Carlos. Well, following the order of your questions, the impact of the Huanza project in terms of our cost -- by the way, you remember that we are going to manage this operation as a -- on an arm-length basis, so we are going to work according to the market prices. The important issue is that we are basically assuring that we are going to count on the power required for our operations.

Secondly, we are hedging our prices because of some investment, a profitable ramp, and as Huanza is 100% property of Buenaventura, we are going to add profits and cash flow to Buenaventura's on the consolidated basis.

So, we are going to work and compete according to the market prices.

Secondly, in terms of Uchucchacua, the stoppage impact, you have to -- impacting costs, sorry, the question is was that there was a stoppage of 21 days, but this is not only a numeric issue of calculating how many days we stopped, interrupted, our operations and resuming as normally we operate. We have to get back to the operations. We have to ventilate. We have to pump. We have to clean up the areas to work and the issues have an impact because we are paying people, consuming power and fuel oil but not producing. And, of course, the Uchucchacua operating unit is working hard and trying to resume towards the year end objectives in terms of production of silver.

On the other hand, one important impact on the cost came from the renewed quote, the higher prices of silver. You know that there is an escalator in terms of the clearing charges that to move up according to the prices of silver. So the higher the price of silver, the higher the impact of this clearing charge, which is shown as a cash cost.

Likewise, the lower grades of lead and zinc in our ores impacted in terms of finalization in this concentrate statement. And this is why we finally reported a pretty high inventory, level of inventory, in our Uchucchacua production.

Regarding Yanacocha's increase of production, well, as it was foreseen, Yanacocha has increased its production gradually month after month and we brought an interesting level of production in June, reducing the cash cost due to this in June.

And this is a trend we have to continue, we have to follow. The production at Yanacocha should be better during the third quarter and even during the fourth quarter, as well.

The bonus at Orcopampa, the impact of the bonus at Orcopampa.

In Orcopampa, as you remember, we had a strike and due to our negotiation with the unions, there was a strike of three days. We completed the negotiation. We increased the wages and we had a one-time payment in Orcopampa when reaching the agreement with the unions.

And this impacted, one time, the cash cost of Orcopampa. So we expect to reduce this cash cost allocation.

Thank you, Carlos. Could you comment on how much was this one-time payment in Orcopampa?

This payment was something like $1,500 per capita.

Okay.

Sorry. One additional piece of information is that since this year we and according to the new regulations, we are reporting the workers' profit sharing as a part of the cash cost and not separately. So this is an additional business cost increase or higher figure in the cash cost for our operating units.

All right. And then just -- thank you. Just coming back to Uchucchacua, is there any way to quantify the impact in terms of the higher cost that were due because of the strike?

Well, $2 -- between $2 to $3 per ounce of silver and we believe that we will continue producing at a cash cost in the order of $15 to $14.50 until we count on the manganese sulfate plant.

All right. Excellent. And the production at the mine is back at full capacity, no?

Yes. Uchucchacua is working hard to resume and, if it is possible, to achieve the initial objective, but by considering and improving in the mining plans, higher grade areas.

At this point in time, we are at full capacity.

All right. Thank you very much, Roque. Thank you very much, Carlos.

Your next question comes from the line of Felipe Hirai of Merrill Lynch.

Hi. Good morning, everyone. So, I have two questions. The first one is related to the current political environment in Peru. If you could, just comment a little bit what are your first impressions of the new ministers that were recently appointed by the elected president? And also, what -- if you already had any kind of discussions related to the potential tax increase in the country?

And my second question is, given this still-uncertain outlook on the taxation, how are your thinking on going ahead with the projects? So we saw last week, as Roque commented, that Freeport has recently finished the feasibility study at Cerro Verde. If you could also comment on the potential development of Minas Conga and some of your other projects, given the current uncertainty on the royalties? Thank you.

Well, now we have the names of all the ministers. Obviously, the ratification of the president of the central bank has been very, very positive. The nomination of Mr. Castilla has been very positive. He's a first class economist and very orthodox. And we are very pleased with him.

The Minister of Mines is a man that has a clear orientation toward the hydrocarbons and the gas and that he has nominated already his Vice Minister of Mines that is a lady by the name of [Vilca] that is quite to the Left. But she comes from the Puno area from the border with Bolivia.

My impression is that they are looking for someone that can face the social impact of mining more than a very technical person, but we will see. We really don't know that much this lady.

There are very, very good ministers that have been called to contribute. I understand that the Minister of Education, she is an excellent person, and there is -- what we were expecting, what we have now as names are better than what we expected. And that is important and we will see how it works. At this point in time, I think that is all that we -- what we can say.

In terms of the tax increase, obviously, there is still a lot of talking on mining paying additional taxation. We -- through the Mining Society we are contributing with ideas and as we understand there have been a couple of meetings with the nominated authorities. All of them understand that competitiveness is very, very important for the mining in Peru.

On the other hand, they insist on additional taxation. But important to say is that our understanding is that they are convinced that it has to be on profits and not on sales and that is important. And, obviously, benchmarking with other countries, mining countries of the region, which is also important.

So we are monitoring these conversations and we are contributing with ideas and showing the importance of maintaining the competitiveness of the mining sector.

In terms of Conga, as you mentioned, we should have information this afternoon. The Board of Directors of Newmont is meeting as we speak and it is for them to announce any further development. I would please ask you to excuse us to mention anything. We will come up with a press release this afternoon, as well. Thank you.

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

Hi. Morning, Roque, Carlos. Thanks for the results.

I just wanted to dig a little bit deeper into Brocal. It's -- we -- well, maybe that's where it's coming from. We're trying to compare this quarter's results with your guidance for the year and on gold and copper it's more or less in line, but it seems to have been significantly lower on zinc. Is that going to be a pickup later in the year or are you going to change the guidance for the year?

John, it's Carlos. Well, you have to remember that we have been moving quarterly in terms of our production in Brocal. The first quarter you have to remember that the flotation plant was fully devoted to copper. Then we resumed the distribution of our production from polymetallic and copper over from April onwards. And we are increasing gradually our production of zinc, lead and silver that to-- that will continue. At the current rate of this first quarter until October and in November we will resume our copper production at 100% and devoting 100% of the plant, the 10,000 tons per day throughput.

So, we believe that finally we are going to achieve our guidance, but his will be not a homogeneous delivery.

Okay, that's helpful. And then, going through your 20F, you're talking about the final stage of the Brocal expansion and I just wondered when you thought that that expansion would be complete?

Well, we completed the first step, the 10,000 tons per day and our expectation is to complete the full expansion, the 18,000 tons per day at the end of year 2012.

End of '12. Okay. And then maybe can we dig a bit deeper into the silver escalator. You said that the strike had cost a couple of dollars an ounce. What impact did the silver escalator have and how long will that contract extend for?

Well, you know that today the lead -- because, technically, those are lead concentrates contracts with a silver content, are pretty penalized on -- even the market is not in play for these concentrates. So unfortunately, I don't have on the top of my mind the figures of how many dollars of the escalator or how percentage the escalator is, but we could share this information later.

Okay, that's fine. And then you hope for the substantial fall in the cost structure once the manganese plant is up and running. What ballpark reduction do you expect in costs?

Well, when I mentioned the reduction as compared with third quarter, will come from the regular operation without -- well, by using the labor force and the power to produce and not only to clean up and (inaudible) the mine.

On the other hand, when completing our manganese sulfate where the reduction will come, which is basically by eliminating the manganese content that today is penalized and by increasing the concentration, so reducing the volumes. That will reduce, in turn, the clearing charge.

It sounds very exciting. We're really looking forward to completion of that. Anyway, thanks for the results and good luck guys.

Okay.

Next question comes from the line of Sergio Matsumoto of Santander.

Hi, good afternoon. I understand that the silver production volume was up 11% year on year with Uchucchacua's strike, which was offset by El Brocal's production. Is this -- but the silver sales content volume was down 2% year on year. I just wanted to know what was the reason behind the discrepancy between the production volume and the sales volume in the second quarter?

You mentioned inventories at Uchucchacua in the previous question. Can you elaborate on that, please?

Yes, as I mentioned, the final inventory of lead silver concentrates was in the order of 5,000 tons of concentrate. That means, basically, in the order of 1.5 million ounces of silver.

So this is not a normal level of inventories. We normally should have just 20% of this amount. So, because in addition, we have zinc silver concentrates in inventory, as well, that means a little more. So this is on a typical volume.

Okay, thanks. And also, another question on La Zanja. It looks like it may be going to exceed the guidance you gave of 100,000 ounces. Do you have a new production target for 2011?

Well, basically, within our models, we had a conservative percentage, but it seems to me that instead of producing 100,000 we could be able to produce in excess of 110,000, 115,000. We are reviewing our models because the grade is pretty high, higher than we had in our models initially.

Thank you.

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

Hi. This is Ima. I just have a couple of questions. The first one is regarding what you just mentioned, the inventory levels and I'm wondering if -- clearly that affected your results this quarter, because you sold less than you produced. Should we expect in Q3 to see that additional inventory sold above what you produce in Q3?

Yes, of course. We are trying to deliver these concentrates and are looking for new markets, because we have increased our volumes by reducing, some, the grade. But yes, we will resume our regular level of deliveries.

Okay, thank you. And back to the questions on the impact on wages and labor due to these issues at Orcopampa and at Uchucchacua. Has the actual workers' profit rate increased or is the increase only due to the higher metal prices?

Well, basically, it's due to higher metal prices that we are generating higher profits and due to this we are increasing this profit sharing. But the difference between the way we used to report in the past is that now we are including this profit sharing in our cash cost as a labor cost.

Right, I understand. But the actual rate, which is I believe is 8%, that still remains the same.

Yes.

Yes.

And lastly, on Cerro Verde, I know Freeport expects to file the EIS in the second half of the year. What do you guys anticipate will be the length of that process?

When should we have the environmental impact study approved? Well, we hope that before the end of this year. But in terms of permitting, it's always difficult to say.

Okay.

The thing is, this fact that Cerro Verde has reached an agreement with the local municipality to treat the sewage and using the waters from that treatment has been a very positive step and we believe that it will have a lot of support in the area where Cerro Verde operates.

Okay. Thank you very much, guys.

(Operator Instructions). Your next question comes from the line of Alex Hacking with Citi.

Hi, good morning, Roque and Carlos. Thanks for the conference call.

My question is not related to results, it's related to Chucapaca. I guess in the last few months we've seen a lot of challenges, social challenges, in developing new mines in the south of Peru, thinking about Tia Maria and Bear Creek. Have you begun the social dialogue at this project? And how confident are you that you'll be able to bring the project forward, as expected? Thank you.

Obviously, we have learned from the lessons of particularly Tia Maria. The Bear Creek thing has been very frustrating for all of us in Peru and I think they didn't deserve that treatment. But -- and, of course, the mining sector as a whole has supported Bear Creek, because they were in the right path and they were doing the right things and they had the local communities supporting them.

So, they did everything by the book and they were performing very well. I really, somewhat, feel ashamed of what happened to Bear Creek.

In terms of Chucapaca, we have -- we decided in the middle of the election -- electoral campaign to stop the exploration process and brought the -- all of our people back home and after the second round or the runoff, they have gone back and they are exploring. They are working on the project.

The socializing of the project continues. We are in excellent terms with the local communities. We are buying the surface land that we require for the project. And, essentially, we have learned from other experiences and we are doing our best in developing the project.

We have had no conflict with the locals. We are in very good relations with the local authorities and we are proceeding with the project, as expected.

So, we don't have anything -- any setback to report in this respect and I think our partners, Gold Fields, are doing -- and led by [Federico Schwarz], who is the general manager, are doing a very good job and we expect to continue doing so.

Thank you, Roque. It's very clear.

There are no further questions at this time. I'll now turn the floor to Mr. Benavides for closing remarks.

Thank you for attending this conference call and just taking the last question to resume, really what the new government of Peru is expected to do is to promote and to support those projects that are in the pipeline and I think that projects such as Conga, Cerro Verde, Chucapaca and our own operations and others as the projects of Xstrata will, I believe, receive support if we want to continue with this very successful, if I may say, path that Peru has been following.

So, we are cautiously confident that things are going to continue working in the right direction. So, thank you for attending and I hope to see you all and if you need any additional information, please don't balk in contacting us. Thank you very much and have a good day.

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