Compania de Minas Buenaventura SAA (BVN) 2012 Q2 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 Second Quarter 2012 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, and good morning everyone. Welcome to Buenaventura's Second Quarter 2012 Earnings Conference Call on this the 1st of August, 2012. 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, and Mr. Cesar Vidal, Chief Exploration 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 evening. If you have not yet received a copy, or wish to join the mailing list, please call us in New York at 212 406-3694.

Before we begin, I'd like to remind everyone 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.

Thank you, and welcome to the second quarter conference call with our investors.

Net income in the second quarter was $152 million which was 23% lower than the figure reported in the second quarter of 2011. EBITDA from Buenaventura direct operation was $113 million, 38% lower than the figure reported in the second quarter 2011. While EBITDA including affiliates decreased 16% from $406 million in the second quarter 2011 to $342 million in the second quarter of 2012.

These results were mainly explained by the higher cost and exploration cost at non-operating mine sites and lower metal prices in quality metals that we produce. During the second quarter 2012 net sales were $332 million similar to $327 million reported in the second quarter of 2011. Higher silver, zinc and lead volume sold positively offset lower silver and base metal prices as well as decline in gold sales.

Royalty income increased 17% from $16 million reported in the second quarter 2011 to $18.7 million in the second quarter 2012 due to higher revenues at Yanacocha.

In terms of our production and operating costs, Buenaventura's equity production in the second quarter of 2012, 107,000 ounces of gold, 11% lower than the 120,000 ounces reported in the second quarter 2011 mainly due to a decrease in Orcopampa and Poracota production.

Silver production in the second quarter 2012 was 4.5 million ounces and 32% increase when compared to figures we posted in the second quarter of 2011. Equity production in the first six months period 2012 was 225,000 ounces of gold and 8.5 million ounces of silver.

These represent a 5% decrease in gold and 13% higher silver production compared to 2011. At Orcopampa our production from the Chipmo mine the second quarter 2012 was 56,762 ounces, 18% lower than the 69,335 ounces we posted in the second quarter 2011) due to 15 day strike and 15% lower grade as you can see in the appendix two.

The old tailings treatment produced 3,984 gold ounces and as a consequence total production in the second quarter 2012 was 60,700 ounces, 19% lower than the same quarter in 2011.

Cash operating costs in the second quarter 2012 was $551 per ounce, 23% higher when compared to the same quarter in 2011. This was due mainly to 18% decrease in gold ounces produced, 12% increase in reagents basically, explained by an increase in cynide and sulfuric acid prices and contractor costs also increased 32%.

At Uchucchacua we had a very good second quarter, total silver production was 2.7 million ounces, 33% increase when compared to 2 million ounces in the second quarter 2011 due to higher tonnage treated and higher recovery rates.

At Julcani, the very owned mine -- the mine which Buenaventura started total production in the second quarter of 2012 was 602,000 ounces of silver, 1% lower than the same quarter of 2011. Silver cash cost at this mine was $12 per ounce.

At La Zanja, total production was 27,600 ounces of gold, 25% decrease when compared to the second quarter 2011 but the accumulated gold production for the first six months was 54,000 ounces, 13% lower than the first six months of the previous year.

At Tantahuatay, we are facing the first full year of production in the second quarter 2012. We produced 39,000 ounces of gold in the first six months of 2012, gold production was 66,000 ounces of gold. Cash operating costs $385 per ounce and $433 for the first six months.

El Brocal, Sociedad Minera El Brocal where we own 54%, zinc production for the second quarter, 14,000 metric tons, a 46% increase when compared to the second quarter of 2011. Silver production increased 18% from 1.1 million ounces in the second quarter of 2011 to 1.3 million ounces in the second quarter 2012.

General and administrative expenses in the second quarter of 2012 was $25 million, 28% higher than the figure reported in the second quarter 2011. Due to a provision for early retirement contingencies, a metallurgical research studies for the first six months period 2012, general and administrative expenses were $54.8 million compared to $36.5 million in 2011.

Exploration costs at non-operational mine sites which includes care and maintenance in 2012 was $26.4 million, 118% increase compared to $12 million reported in the second quarter 2011.

Buenaventura's main exploration efforts were focused at the Trapiche, Tambomayo, San Gregorio, Chancas, and Breapampa profects. Our operating income for the second quarter 2012 was $79.4 million, 46% decrease compared to $148 million reported in the second quarter of 2011. These increase were mainly due to 32% increase in operating costs while revenue increased 2%, accumulated in the first six months period 2012 operating income was $211 million versus $326 million in 2011.

During the second quarter 2012, Buenaventura's share in associated companies was $122 million, in line with $123 million figure reported in the second quarter of 2011. Yanacocha's contribution to these results increased 33% from $64.9 million in 2011 -- in the second quarter of 2011 to $86.6 million in the second quarter 2012, while Cerro Verde's contribution decreased 49% from $65.9 million in the second quarter 2011 to $33.9 million in the second quarter of 2012.

For the first six months period Buenaventura shares in associated companies was $258 million, 9% higher than the $236 million reported in the 2011. We have figures here for Yanacocha which you have already heard from the conference call of [new month] for Cerro Verde is mainly only mentioned that the lower income from Cerro Verde was due to a strike and weather conditions in the first quarter of this year.

We also report on Canteras del Hallazgo, our joint venture with Gold Fields and where we have been investing in the development of this project. In Coimolache, which is Tantahuatay, we have an attributable contribution of $9.6 million for the first year as this is the first year of production and this is Buenaventura second quarter 2012 net income of $162 million, $0.60 per share, a 23% decrease compared to $197 million reported in the second quarter 2011.

Accumulated net income for the first six months period 2012 was $360 million, 15% lower compared to 2011. We have been working in a number of project development and La Zanja we have -- we increase the development of our new open pit, expansion of the current and leach pad and improvement to the operation road access. Construction begun in the second quarter of 2011, as of June 30th 2012 total project expenditure was $39 million. We expect to complete by the first quarter 2013.

At Tantahuatay we are including a leach pad stage II development of the Cienaga Norte Pit and an access road between the leach pad and the open pit. Total CapEx totaled $20 million. At Mallay, the new mine that we put in operation in April during the second quarter 2012, we produce 138,000 ounces of gold -- of silver, sorry -- of silver and currently we are exploring Brownfield in the Chancas-Chiptaj area.

We are expecting to -- when it's in full production to produce in excess of 1 million ounces of silver from Mallay. Rio Seco Manganese Sulfate plant, Buenaventura continue with the construction of the manganese sulfate plant with a total budget of $76 million. As of June 30th total expenditure was $44.5 million. Project include an acid leaching facility, a sulfuric acid production plant and a manganese sulfate crystallization plant. The leaching process facilities are expected to be completed by the end of the fourth quarter 2012, by the end of this year.

The construction of the sulfuric acid and the manganese sulfate plant is expected to be ready by the first quarter of 2012 and construction and start-up tests at both plants are scheduled by the end of 2012, most likely the first quarter 2013.

At Breapampa, as of June 30th Buenaventura total investment was $43.3 million representing 84% of the entire budget. We expect to put into production this mine by the third quarter -- by the end of the third quarter of 2012.

Huanza hydroelectric plant continues the final stage of construction. As of June 30th construction progress included water conduction tunnel, 10,074 meters of excavation, 100% completed. Powerplant civil works, 85% completed. The Pallca Dam, 78% completed. Electromechanical equipment is nearly complete and will be delivering on schedule, the equipment assembly is 13% complete.

Yesterday we had a board meeting and we accepted the resignation of Mr. Luis Coleridge who is 75 years old and as you know we have a policy that board members retire at 75. After 12 years on the board and being president of the audit committee, in accordance with Buenaventura's policy. We want to highlight that Mr. Luis Coleridge before being a board member was part of Arthur Andersen and was also related to Buenaventura.

Over 40 years of dedicated work for the development of Buenaventura, we want to praise Mr. Luis Coleridge for that. And he's replaced -- we appointed Dr. Jose Miguel Morales as a new board member and Mr. Morales was the secretary of the board and he has resigned from that.

Also was -- we appointed Mr. German Suarez as president of the audit committee, replacing Mr. Luis Coleridge and Mr. Carlos del Solar was included in the audit committee as a member, in a replacement of Dr. Jose Miguel Morales as board secretary, was appointed Mrs. Gulnara la Rosa as general council. She has been working for Buenaventura for a number of years and she's a very competent lawyer and will contribute to the development of Buenaventura as well.

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 with Morgan Stanley.

Yes, thank you very much, gentlemen. My first question is regarding the impact of the strikes that you had in the second quarter. If you can quantify the impact that the strikes might have had in terms of output, shipments, and cost so that we can understand just to what extent the results that came lower than we expected were affected by that.

And the second question if I may is regarding the Yanacocha cost of production or cash cost were really low and the performance has been great in that operation. Do you expect that to continue in the second half of the year and in 2013? Thank you.

Yes, Carlos, this is Carlos Galvez. The impact of these 15-day strike in Orcopampa impacted wasn't alone the Orcopampa but also for the quarter. And the sales was in the order of 13,000 ounces which made an influence. Normally, when comparing the production, quarter to quarter, but also is the main impact in the cash operating cost.

Of course, the lower rate has its own component but this is due to [sort] of the days that we (inaudible) of operations, we had to reduce and to exploit what we had to have.

Regarding your second question, the Yanacocha's cash cost, having the good performance that today during the first half of the year and the second quarter, specifically. Yanacocha has explored according to the mining plant remember that [trends] for comparison when reporting in last year the negative effect of the [La Zanja] pit difficulties we had that imposed to the Company to notify the mining plant and reducing the grade.

Well of course by comparison, resulted that we have a much better performance. We expect to continue producing the same cash cost slightly higher because according to our guidance, Yanacocha should produce in the year in the order of 1.3 million ounces and we have already produced in excess of 140 sorry.

Let me confirm the information. We have already produced 756,000 ounces. So we are going to reduce some the production in Yanacocha during the second half. And this will impact something on the cash cost.

Thank you -- thank you Carlos.

Your next question comes from the line of Felipe Hirai from Bank of America.

Hi, good morning, good afternoon everyone. So, I have two questions. The first one is that given all what we saw in terms of the strike in Orcopampa and the strong production [surround] your other operations, what is your current expectation for gold production for the year? And if you could already say something about 2013. And my second question is related to the political conditions in Peru, specifically the Conga project? If you could just give us some update of what's the current situation there and the recent developments, thank you.

Well regarding the strike in Orcopampa was part of the negotiation with the union. The important thing is that being this one of the most important operations -- direct operation of Buenaventura, it was important for us to have a series negotiation and reaching to an acceptable agreement with the union because this was going to become the benchmarking for the rest of our operations and negotiation agreements.

This (inaudible) despite of the fact that we suffered a 15 days strike in Orcopampa, was committed to not to have any strike in Yanacocha. But it was announced to begin the same day we reached an agreement with the union of Orcopampa. And the strategy worked.

On the other hand, it was mentioned a strike in Cerro Verde, this is truth that happened during the first quarter of the year. The main impact -- I will take the opportunity to clarify certain information. The main impact in Cerro Verde result has two components.

First of all, is the price of copper that it was considered $2.97 per pound as compared to $3.88 we got during the second quarter of last year. On the other hand, being this reduction as compared with the first quarter, we have to report not only the sale revenues of Cerro Verde, with this lower price, but also we have to adjust the prices for those shipments that we [opened] the [quotational] period.

On the other hand, the sales delivered during the second quarter was a lower deliver of copper in the order of 26.7 million pounds was affected, $80 million and a lower delivery of (inaudible) and silver which impact is close to $22 million. So, if you adjust the figures we have reported a very regular quarter.

In terms of your second question on the political front, it is not easy to explain but essentially we have to realize that we are in a full democracy, the first year Mr. Humala has shown that he is respectful of democracy and that he is following that trend, that he has had crisis obviously, yes, and that has meant that the two prime ministers had to resign.

And we are in the third cabinet and it composed essentially by the same people with a couple of comments that I believe are very positive. Nobody has mentioned that the ministry of agriculture, the new minister comes from (inaudible), which is the agency, the Peruvian government agency to promote investment.

So, he is a very market economy oriented person and will be a big support for Mr. Castilla, the minister of economy. In the ministry of interior and defense, two civilians have been appointed and that has been taken also very well. These two civilians have in place two retired military and it is part of the promises of Mr. Humala during his campaigns.

And then Mr. -- the new prime minister is a lawyer. He was the minister of justice. He seems to be an orderly person and is taking the right steps for I hope working tables and not only dialog tables, but we believe that this continues to a better situation in the political front. We believe that they have received a lot of support from Congress and hope for the better.

(Operator Instructions). Your next question comes from the line John Bridges with JPMorgan.

Good morning everybody. Thanks for the results, I was surprised positively by what came out of Uchucchacua this quarter. You know, I've always thought that you're going ahead with the project to upgrade the concentrates because the situation, you know, the available easy material was running down but is this a one-off this quarter or could you sort of characterize why things are so much better there?

Well, John, this is Carlos. In Uchucchacua we continue progressing with grades and we are improving our operations in not only in terms of selecting the [coals] we exploit and improving our procedures and controlling our metallurgic and this is why we had these better results.

And we are preparing the mine and the infrastructure for the future operation in order to take advantage of the (inaudible) these manganese sulfate plants that will permit to modify the philosophy and the concept of our exploitation to go into these markets, exploitation that, okay, eventually could share some information about the new areas and [more bodies] how wide those are and how important grades they have, despite of the fact that we have an important manganese content.

But this is the future of Uchucchacua and this is why we are working its operation [force].

I think Chacua has shown to be very continuously (inaudible) and the fact that we are working on the manganese sulfate plant is to add value to the whole production in addition to Uchucchacua in the area of (inaudible) which is the brownfield exploration of Uchucchacua, we are finding also substantial resources. I'm afraid that with higher manganese content but also with silver content. So, I think that is very important ensuring to be a district and I'm sure that Cesar as geologist can comment on that as well.

And John, good morning. All I can say in addition to what Roque already said is the [Umpac] prospect is 4 kilometers to the northeast of the underground -- the northeastern most underground development of Chacua, it's a corridor with very strong structural preparation and it has a mine on the one end, given the good results. You can read in the press release in this conference call.

But on the other end, we have a [strong] prospect with very high silver and very high manganese so there may be a continuity. We have done some (inaudible) work, because its cover ground on the surface. And the [evidence is ambiguous] we will have to drill and, of course, we're developing in that direction. So, it's not just an added prospect to the mine, it maybe a corridor a continuous corridor of 4 kilometers.

It's a long shot but the productivity of Chacua has, I would say doubled with the discover of Umpac. And it's only early days but it's the same kind of ore, 4 kilometers away from the underground development and it's going to be part of a district as Roque said.

Interesting and then so, perhaps through the second half of this year, what can we expect in Q3 and Q4's? Is this level of production from Uchucchacua going to continue or is it going to slip back?

Well, we expect to reach in excess of 10 million ounces for the year in Uchucchacua which is in line with what we mentioned earlier in the year. So, yes, and as you can see from our reports in this quarter we are investing heavily probably in addition to what we used to in expiration. So, I think we will certainly have additional results and -- but at this point in time Uchucchacua will be producing the 10 million ounces for the full year.

What would encourage you to spend more heavily on expiration? Was it the fact that, you know, the metal prices have been higher and have enabled you to do that, your strong balance sheet?

Well, that is part of the cultural of Buenaventura, if I may say. I think we are different than many other companies in the sense that we are committed to exploration. If we want to have a sustainable mining, we need to reinvest in expiration especially if we operate underground mine.

In the case of Orcopampa, for instance we want to get back to the level of production that we need to have and for that we need to explore additionally. In the case of Uchucchacua because we have the area of Umpac and we have target there and the thing is, this is the name of the game in mining in our minds. If we have more target we have to invest more in exploration.

If I may add, John. It is important to [put] that we have certain (inaudible). We are leading in the different prospect and projects. In the case of [Prateche] we have invested $3.9 million in exploration but we are working on (inaudible) and we are enhancing the resource.

So, we are pursuing a new project that we will like to deliver in the future, 100% property of Buenaventura and this could be the copper operation of Buenaventura that we are pursuing in (inaudible) value project. On the other hand, we have the (inaudible) project that after 15 years and living with the community we have the opportunity to (inaudible) and to work on the sustainability study and this is what we are working in fast track and this is the opportunity we have to take to go ahead.

In the case of (inaudible) the discovery we had during the second half of last year. This is a very good opportunity in our deposit that we would like to put into value and this is (inaudible) with certain gold content that will replace the reserves we exploited in the past. Chancas being the surrounding part of Uchucchacua and being part of the brownfield of Mallay, this is where we expect to add silver content to pass through (inaudible) plant.

And of course in Breapampa, in preparation for our new operation, this is the opportunity to accelerate our exploration in order to have a new operation.

Interesting and then Roque you mentioned the targets, the production targets for the year. Has anything changed there after this quarter in terms of gold, silver, lead, zinc production, copper?

Not really, we gave some guidance on the production and we continue at that same track.

Okay, and just finally, I see grades are coming off at La Zanja and you are investing in the new leach pad. Can we expect grades to be at this level until the leach pad -- new leach pad comes on?

La Zanja was a very peculiar situation because that year we produced in excess of 130,000 ounces and the expectation was 100,000 ounces but we had higher grade. It was -- it came almost like a surprise. What we are targeting in La Zanja is 100,000 ounces which was in target -- the initial target.

In terms of operation you can review the figures we reported during the first quarter of this year. We have increased the stripping by 10% the [triple] ratio by 10% and we downgraded by 10%. So, this is the balance that have committed La Zanja to pursue the forecast. So this is what we are obtaining and these explain basically the variation of this cash operating cost.

Okay, and then probably one final comment, Verde, I know you were saying there were these shipment issues but there's also a comment there that the grades have been coming down. Again, what sort of grades should we look forward to? You know, will that be at lower levels until the expansion comes along?

Well in the case of Cerro Verde, what we expect to continue producing with the grades in accordance with the guidance of -- we reported by [3 point]. So, something that happened only because there was certain difficulties or lack of (inaudible) to deliver is something that will impact the figures in the paper but, of course, if we continue producing and delivering the production on a scale during the year. So, that is progressing very well, the cash operating cost is very competitive. The grade is good, and perhaps, the copper price will add to this equation.

And we are targeting the 330,000 tons of copper per year until the expansion.

Okay, that's helpful, excellent. Good luck guys, well done.

Thank you.

Your next question comes from Tanya Jakusconek with Scotiabank.

Great, good morning, thank you for taking my call. I just have two questions to deal with guidance. I'll start with the expiration. You did mention on your quarterly that expiration expenditures this quarter had an impact on your earnings and I think from your previous guidance you had provided $120 million this year from non-operating expenditures and then $60 million from operating so, that would be $180 million in total and you've already done $113 million for the six months. So, maybe some guidance on what you see your exploration expenditures this year?

So, let me try to explain our expenditures. We at least I call them investments because they're the long term investments but certainly they are counted expenses. Well the figures you're seeing for the first semester, and it has been spelled out in terms of the first or more important five projects, are all mining but are invested in advanced exploration projects.

Campeche has got six rigs doing intense drilling and expansion or extension drilling. (Inaudible) has got three rigs and four underground levels, not just exploring but developing, making ores accessible. (Inaudible) as Carlos explained after 15 years of no drilling, we have 40 positive hauls and are order, now we are adding 200 (inaudible) to start [Valencio] drilling program. The ore body is there.

We have to know how rich it is and what it will take engineering and metallurgically to make it a positive economic open pit mine. The Chancas is brownfield to Mallay, it's a well known district in the past. We are opening up some of the tunnels and drilling. In Breapampa, of course is having a small open (inaudible) operation in production.

So, you see that 60% of the semester's expenditures in explorations are not the Greenfield or just the romantic looks for new orders. It's the [lineating] loan deposit with a chance to be economic and that makes the bulk of this reinvestment which is probably going to remain higher than the prediction for the whole year.

Okay, so, it's going to be higher than that $180 million combined?

Probably not much but we are already in this first semester going a little bit over, yes.

Okay, so, you know, maybe we -- okay, I'll move it up then and then just on this my second question has to just do with the overall cash cost. John asked about the production levels Roque from the beginning of the year and for gold, silver, and copper. I'm just wondering if the guidance for cash cost levels for the gold in the $580 to $630 per ounce is that still the case for gold this year?

Yes, well, we expect to continue producing with the cash cost we have reported, different than the case of Orcopampa because Orcopampa incorporates a deviation. But in the case of La Zanja and (inaudible) for instance, those should in average report a cash post in the order of $500, $550 according to our guidance. In the case of Yanacocha, where I mentioned at the beginning is that that should include some due to the fact that to achieve the guidance of 1.3 million announces, will reduce the production grades, second half and this will impact on the cash cost.

Yes, just so that I'm sure. The $580 to $630 guidance that was given, that excludes royalties. Does that include Yanacocha in there with their royalties?

Yes, in the case of Yanacocha, the royalties -- the commercial royalties are included. But the royalties' to the state and not because this is part of the -- an additional income tax.

Yes, no, I understand that but is the Yanacocha in the $580 to $630 guidance range?

Yes.

Yes, okay, perfect, and then just for my calculation because I need to report to cash costs with royalties if I take the royalty payments you made in the quarter and I divided by your equity production it come to about $87 an ounce I'm assuming that's all gold, it's probably not but would that be a safe assumption or maybe you can help me on that?

You are talking about the royalties of Orcopampa. Orcopampa is additional report.

Yes, I was just talking about the -- you know, just trying to get a cash cost for you with royalties, yes.

Yes, well, I well when talking about Orcopampa royalties will probably (inaudible). This is not included in our cash operating cost.

Okay, thank you very much.

(Operator Instructions). At this time we have no further questions. I'd now like to turn the floor back over to Mr. Benavidez for any closing remarks.

Well, thank you very much for attending the conference call. For those of you based in London, I will be in London next week attending the attractive industry (inaudible) initiative on Tuesday and if any of you who want to get in touch with me I'll be in London two or three days there next week. So, and then obviously we are open to ay additional questions that you may have by internet or telephone call whenever you feel like. Thank you for attending and hope you have a great day, thank you.

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