Compania de Minas Buenaventura SAA (BVN) 2013 Q3 法說會逐字稿

Good morning, and welcome to the Buenaventura Third Quarter 2013 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. At that time instructions will be given to the procedure to follow if you would like to ask a question. It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to Compania de Minas Buenaventura's Third Quarter 2013 Earnings Conference Call on this October 31, 2013. Today's call is for investors and analysts only, therefore, questions from the media will not be taken.

Joining us from Lima, Peru are Mr. Roque Benavides, Chairman and Chief Executive Officer; Mr. Carlos Galvez, Chief Financial Officer; as well as other members of the Company's senior management team. They will be discussing Buenaventura's results per their report issued yesterday. If you did not receive a copy of the report, or you wish to join the mailing list, please contact i-advize in New York at 212-406-3691.

Before we begin, I'd like to remind you that -- 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 earnings report in the disclaimer. 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, please begin, sir.

Good morning, and welcome to Buenaventura's quarterly conference call. During this third quarter, Buenaventura's previously announced measures to achieve significant cost savings and focus on cash generation were successfully implemented. We are including those we stopped production in three of our small unprofitable operating units, and by doing that reducing costs, focusing mine exploration activities on high grades, an accessible target for both brown and green field areas, and improving efficiencies across all of our operations.

Our operating income during the third quarter of 2013 was $63.4 million, a significant improvement when compared to the $4.3 million loss reported in the second quarter 2013.

Net income was $65 million, higher than the $19 million reported in the second quarter 2013. EBITDA from our direct operations was $104 million, 157% higher when compared to the $40 million reported in the second quarter 2013.

EBITDA, including Associates, was $238 million, 37% lower than the figure reported in the same quarter 2012. This was mainly due to an inventory write-down provision and social responsibility expenses at Yanacocha.

During the -- in terms of our operating revenues during the third quarter 2013, net sales were $335 million, a 15% decrease compared to $394 million reported in the third quarter of 2012. This was explained by lower gold, silver, and copper prices, as well as reductions in zinc and net volume sold.

Net sales for the first nine months 2013 were $949 million, 12% lower than the first nine months of 2012, while royalty income was $37 million in 2013, a 32% decrease compared to the $54 million reported in the same period of 2012.

Buenaventura's equity production in the third quarter of '13 was close to 100,000 ounces of gold, 3% higher than the 97,000 ounces reported in the third quarter of 2012, mainly due to an additional production from Breapampa, partially offset by a decline at Orcopampa.

Silver production, including associated companies during the third quarter of '13 was 4,930,000 ounces of silver, 5% higher when compared to the figure reported in the third quarter of 2012.

Our equity production for the first nine months of this year was 303,600 ounces of gold, and 14,100,000 ounces of silver. This represented a 3% increase in gold, and 7% increase in silver production compared to the first nine months of 2012.

Orcopampa total production in the third quarter of 2013 was 59,000 ounces, 16% lower than the 70,000 ounces reported in the third quarter of 2012.

Cash operating costs in the third quarter of 2013 was $649 per ounce, 21% higher when compared to the third quarter 2012. However, when compared to the second quarter 2013, cash operating cost decreased 18%.

At Uchucchacua total silver production in the third quarter of 2013 was 2.9 million ounces, 5% higher than the 2.8 million ounces produced in the third quarter 2012.

Cash operating cost in the third quarter 2013 was $14.43 per ounce, 14% lower than the figure reported in the third quarter 2012.

At Mallay total production for the quarter was 348,000 ounces of silver, 35% higher than the third quarter of 2012, and 950,000 ounces for the first nine months of this year, 140% higher than the same period of 2012.

At Julcani total production for the third quarter of this year was 779,000 ounces of silver, 32% higher compared to the third quarter 2012 due to higher ore treated explained by the increase in plant capacity from 400 tons per day to 500 tons per day. During the first nine months of the year, silver production was 1.9 million ounces, 6% higher than the same period of last year.

Breapampa total production in this quarter was 20,000 ounces of gold with a cash cost of $371 per ounce. At La Zanja total production for the quarter was 35,600 ounces of gold, 20% increase when compared to the third quarter 2012.

At Tantahuatay total production for the third quarter of this year was 39,500 ounces of gold in line with the figure of the same period for last year. The cash operating cost in the third quarter was $360 per ounce for Tantahuatay.

During the first 7 months of 2013, El Brocal plant capacity was on average devoted to treat 60% polymetallic ore from Colquijirca Tajo Norte, and 40% to copper ores for Marcapunta Norte. However, since August 2013, plant capacity was entirely devoted to the treatment of copper ores. Copper production was 8,200 metric tons versus 3,700 metric tons reported in the third quarter 2012.

General and administrative expenses in the third quarter of 2013 were $16.9 million, 26% lower than the figure reported in the same period of last year.

Exploration in non-operating areas during the third quarter 2013 was $5.7 million compared to $27.4 million reported in the third quarter of 2012. During the period, Buenaventura's main exploration efforts were focused on La Zanja and Chanca. It is important to mention also that Buenaventura entered into an agreement with a Mexican company, Surutato Mining, to explore a silver-zinc-lead deposit located in North East of Culiacan city in Sinaloa.

Operating income in the third quarter of 2013 was $63 million, 48% lower when compared to $123 million reported in the third quarter 2012. However, this result was significantly better than the negative $4.3 million reported in the second quarter 2013, due to higher sales, lower production costs, and lower exploration expenses.

During the third quarter, Buenaventura's share in associated companies was $40.9 million, 65% lower than the $118 million reported in the same period last year. Yanacocha's contribution toward this result decreased 96% from $65 million to $2.4 million in the third quarter of 2013, and Cerro Verde's contribution decreased 27% from $45.8 million in the third quarter of 2012 to $33.6 million in the third quarter 2013. Coimolache's contribution decreased 64% in this period.

During the nine months of 2013, Buenaventura's share in associated companies was $174 million, 54% lower than the figure reported in 2012.

In terms of our project development at La Zanja in Pampa Verde Project, it will allow us to develop of a new open pit, an expansion of our current leach pad and improvements of the operation's road access. We continue working on that.

At Rio Seco manganese sulfate plant, Buenaventura continued with the construction of the manganese sulphate plant. Total budget for the project is $98.5 million. As of the end of third quarter of 2013, total expenditures were $94 million. The project includes an acid leaching plant, a sulfuric acid production plant, and a manganese sulphate crystallization plant. It also includes a warehouse to store low manganese silver-lead concentrate, and another one to store the finished manganese sulphate crystals. We expect to be finished with the construction and the operation of this plant by the end of this year.

Construction at the Huanza hydroelectric plant progresses and during this quarter have included the finalizing the water conduction tunnel, 10-kilometer tunnel, where we found some difficult ground, but we have solved those problems. We have finished with the power plant and the civil work of that plant. We are finished with the Pallca Dam that will mean a reservoir for the generation of electricity. We are finished with Penstock, and we are installing the second generator, and all of this should be completed before the end of the year.

It is important also to mention that the Chailhuagon reservoir for Yanacocha was finished and it's in operation, and today we have learned that the access roads for the Perol reservoir are being built by Yanacocha in order to be in a position to build the Perol reservoir, and that will enable us to develop the Minas Conga, or the conduct work.

Yesterday we had a board meeting and following the policy of Buenaventura to distribute 20% of net income of the year per year, and an interim dividend of 10% and deducting of that the Cerro Verde and Yanacocha equity income, while we did not receive any dividend from those two companies, we have declared a small cash dividend of $0.01 per share, but yet to follow with the policy that we have been following for the last 15 years.

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

Thank you, sir. At this time, we will open the floor for questions. (Operator Instructions). Our first question comes from Diego Macedo from Merrill Lynch.

Hi, thank you for the questions. My first question is on cost. Could you give us some more color on your cost cutting initiatives? Do you think there is additional measures you can take from here, and do you see more room to reduce costs, and improve productivity? Are there any other mines you could shut down, so and generally if you could comment on that?

And the second question, sorry I missed the beginning of the call, so could you comment a bit on your potential growth initiatives on Conga or Yanacocha? What's being decided within the company right now? If you could update us on that, it would be great. Thank you.

In terms of our cost reduction program, this is following our strategic plan, and obviously we were working on this, and we hired Proudfoot for increasing efficiencies both in Uchucchacua and Orcopampa. With the drop in the metal prices, we have started a very austere program for which we have stopped producing from 3 smaller operations, and we continue evaluating others, and our business development area is looking for opportunities to sell, or to reduce all of the operations that may not be as efficient as we would like to.

In addition to that, we are obviously in very tight cost-reduction program, which essentially is being shown in this quarter. So in terms of cost, we continue with all these programs. I don't know if Carlos has anything to add to that?

Mainly, what you pay is to focus on our operations, controlling our exploration expenses, the reduction of the labor force has been already completed, and as Roque mentioned, we are in the process of [coffering] the small operations that are not able to create value for the company.

I think it is a constant process, and we will continue with this cost reduction.

In terms of growth potential, obviously and we have mentioned this many times, Buenaventura has to be seen as a company with three -- or a table with three legs, our own direct operations that we have referred to; Yanacocha, where we are developing the Conga project, and taking into consideration the social confrontation that we had a couple of years ago. I think the situation has improved. We have been able to build one of the reservoirs. We are building the access roads for the second one, and we are receiving substantial support from the government.

In addition to that, Cerro Verde continues with its expansion project to reach 600,000 tons of copper output per year, and obviously, we have been investing heavily in the Rio Seco plant. We have been investing in the Huanza plant. We have been investing in the feasibility, the construction of Tambomayo that we expect to be in production probably in a couple years time. We continue finding additional ores with high grades, and I must repeat that we continue exploring in our own mines.

And the word of Buenaventura these days is focus. We have to focus on our operations. We have to focus on brownfield exploration. We have to focus on the project that we are working. And focus on retaining as much cash as we can in order to face any difficulties in the future. So, you can be sure that we are working as intense as ever, but with a very -- with our focus on cost reduction.

If I may add to that, we are going to complete the expansion of Julcani that will -- that production with an important change in their economies of scale. We are going to reduce our OpEx dramatically, because we are including [an important that built] another [land boat] to transport the ores to a plant, a new facility. The new mills higher recovering and these will be an important progress from [down way old] ores.

Okay, that's great. Just back to Conga, what are the next steps and when do you think is a reasonable timing for approval, and then for the start up.

I think diplomacy will play a substantial role in Conga, I'm afraid. I think Peru as a country cannot afford that Conga and that Tia Maria or Southern Copper don't fly. I think we are all aware that with this different situation in the world, in the global economy, we need to get all these projects going on. And obviously the Conga project has become an emblematic project, and we, as I say, we have been able to build one of the reservoirs. We are building the access roads within the property in order to build the Perol reservoir. And then if things are okay, we will go ahead with the project.

Today just for those who are not Peruvians and not as familiar with the news as some others, today Cajamarca is the only region of Peru that is in recession. And people are very much aware that they cannot continue in this situation. And Conga has meant a rebirth on the progress of the region, and we believe that this situation is working in our favor. At this point in time, we cannot give you a specific date, but we are very optimistic that this project will fly.

Okay. That's clear. Thank you.

Thank you. Our next question comes from John Bridges from JPMorgan.

Good morning, Roque, Carlos. Thanks for taking my question. I just wondered, you mention the hydro plant -- hydroelectric plant coming on. Presumably, that's going to start generating revenue for you later this year, or early next year. How is that going to appear in the accounts, and how much value do you expect to see from that next year?

Hi, John, how are you? It's Carlos. Well, first of all, we expect to begin the generation mounting in November, mid-November if everything goes fine. Our expectation, according to the capacity of this plant, it is 90 megawatts, and the hydrology we have to manage, we are going to generate in excess of 500,000 gigawatts hours. And that means that we are going to create an EBITDA in excess of $25 million per year.

This will be accounted as our consolidated operation. This is not going to reduce the cash operating cost of the mine. But it will add value to our P&L, in a consolidated base.

Okay, great. And then, you mentioned earlier that Brocal was going to be going up to full production next year. What can we expect from Brocal next year in terms of throughput and metals production?

Well, mainly Brocal's capacity is going to be 18,000 tons per day throughput. According to our new mining plan, we are going to devote 7,000 tons per day throughput, which is one-third of the metallurgical facility to copper ores coming from Marcapunta, and the complementary 11,000 tons per day throughput to the polymetallic ores that come from Colquijirca until we complete the work to carry out the project of San Gregorio, which we are waiting for.

By the way, it is important to share with you that the new [Saving Mine] is now under operations. The only thing that is missing to complete is just to complete the commissioning -- I'll follow with the [build around built] and then the commissioning of certain equipment. Last, completing a small part of the power line to have the power supply to this project. The expectation is to complete this within this year.

Okay, and you mentioned that a recovery -- so you must have an idea as to how much metal you expect from the mine in 2014?

We don't have an exact figure. The important thing is that we are going to eliminate flake with a [milch] and a longer time curve -- washing mills. But we are committed to improve the recovery a few percentage points. But until completing the commissioning and testing with the (inaudible) facilities would be pretty difficult to say so.

Okay. San Gregorio, how much longer do you think that could take?

Well, we are in good terms with the local community, the community of [Bico]. We have reached an agreement to get back and infill drill. And we have the support of the Prime Minister's office. We are meeting with the community of Bico in order to reach a positive agreement. We have the feeling, the same as in Conga, that things are moving in the right direction.

Communities are getting to realize that time is of the essence. Time is the opportunity for them to also receive the benefits of this project, and the case of Bico is that we are working with the community and we hope to reach a good agreement, and then develop the project. I would not dare to tell you a date, because we do not have a date. But the positive thing is that we are meeting, and that we will come with good news in the near future.

Very wise, very wise. Do you want to say a few words about what you see in Mexico, in the joint venture, and what's driving that interest?

We have been timidly looking for opportunities in different countries. At the end of the day, we have concentrated in Chile, which is an expensive country, because they have developed most of their projects, but there is always opportunities there. Colombia, we have also good indications, but the security situation is still something that worries us. And then Mexico.

Mexico is a country with a tradition, and we have been looking for opportunities, and we find that our geologists consider that this agreement that we have reached is the possibility for us to explore, to show our capabilities in finding additional deposits, and developing the project. Some of these projects, and this one that we have reached an agreement is somewhat known, but we think we can add value to it, and we are looking essentially for silver ores, more than gold ores in the case of Mexico. So, the thing is we're excited about this agreement, and we hope to show some results in the near future.

It's all likes that we like it. Thanks a lot, Roque. Thanks, Carlos.

I don't know if Cesar wants to comment on this.

John, good morning, this is Cesar Vidal. We see an upside in one or two liter veins of flush analysis per ton silver with very simple metallurgy. It's very simple structure, very simple metallurgy. We see an upside there. Our minimum commitment, though, in time and money, which is always important in this deal, is one year, $2 million. After 1 year and $2 million in the ground, we should know if we want to stay, and the potential is really significant.

Our maximum exposure is over six years and $30 million to earn 70% of a new [co]. So, let's wait for the first year there, and see how much we can reassure ourselves about the potential. But it's simple veins and high-grade silver, good metallurgy.

Excellent. Many thanks for the (multiple speakers)

Thank you. Our next question comes from James Bender of Scotiabank.

Hi, good morning, Roque and Carlos. Thank you for taking my call. Sorry, just to clarify on the previous question for the Mexico. Did you say that the maximum exposure is $6 million plus 70% interest.

No, the maximum exposure, if we carry all the exploration and development is 6 years, $30 million. 3-0.

$30 million, okay.

We'll earn 70%.

Okay. Thank you. So to my questions. I have some questions on the operations, and then a couple financial ones. Is -- at Orcopampa, are you still going through the strike there, and could you provide us a status there?

Yes, unfortunately, we have this strike. But we believe that it will take another few days. You know that the business policy, the unions of [two to be] unfortunately outside the legitimate negotiation, but we expect to resume our activities shortly.

And is the strike just limited in Orcopampa, or is it anywhere else?

As of today, it is only at Orcopampa.

And do you expect that, based on the base that they've been on strike to impact your annual guidance for gold at all?

Well, always several days of a strike could impact. However, Francois, our Operations Vice President is over here and he is showing that he could resume there a little production according to his own mining plans that they could recover the time lost.

Okay. Perfect. Moving on to Breapampa and Tantahuatay, it looks like they've been doing well so far. Should we expect similar operations for the last quarter of the year?

Yes, yes. I think those are nice, very unique operations that are doing very well, and we are very proud about them.

Okay. Perfect. And for El Brocal should we expect 100% of the plant for copper for the remainder of the year?

Yes, I would expect to continue producing copper until the end of the year. Yes.

That's it for my operations. Now, moving to more on the financial. On exploration, I saw on the total exploration expenses where if you combine the two from the current operations and the non-operating, it's about $45 million. Is that a good run rate for the rest of the year, or can we expect to see that decrease a little bit?

Yes, mainly we are going to continue performing the same level. We have already reduced the exploration outside the mining operations operating side. And you know that we show an ongoing concern our exploration in the operating unit. So, yes, we'll be [100 acenta].

Okay, and for 2014 --

May I add to that?

Yes, yes.

If I just may add to that, we have 8 ongoing targets in brownfield exploration being addressed by drilling and a combination of [family], and only one target in greenfield.

Okay, and then the brownfield for 2014, should we be expecting similar levels as in what we expect for 2013, or a bit lower?

No, similar levels. If you are asking me, we start projects that are essential for the life of our ongoing mines.

Okay. Perfect. And then my last question is on CapEx. Your guidance was, I believe, $385 million for the year this year. Could you provide your expectation of what we should expect for Q4, given that year-to-date, I believe, you've done around $350 million, and then what you expect for 2014 as a reasonable number?

Well, just completing the package that mainly counts on the Brocal, which is [less power] the CapEx that we are carrying out now. And as for next year, for next year, it should be slightly lower, at $250 million. $150 million out of those, with sustaining CapEx of our incomplete operations La Zanja, Tantahuatay, and Breapampa. But then, yes, the maximum is $250 million, including the initial effects of Tambomayo portion.

You have to understand that we have finished with, essentially, by year end we'll be finished with Huanza. We'll be finished with the expansion of Brocal, and we will be finished with Rio Seco. Those are substantial investments of Buenaventura, and so next year, we have to continue developing Tambomayo, and when we will be looking for opportunities that essentially we do not have budgeted additional and substantial CapEx.

Absolutely. Okay, that's it for me. Thank you very much.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Mark Ross from -- he is an investor. Mr. Ross, your line is now open.

My answer was questioned by the previous analyst from Deutsche Bank about the strike. So we can move on.

Thank you.

Thank you. (Operator Instructions). We are now holding for questions. At this time it looks like we have no further questions in the queue. I would now like to turn it back over to Mr. Benavides for closing remarks.

Thank you. Really, the message that we can pass is that we are certainly not happy with our stock performance, but I can only say that the team in Buenaventura is working very, very hard on reversing the situation, and facing the situation that we are facing.

It's typical of the mining industry that we have cycles, and the important thing is that we maintain a strong position in terms of efficiencies, in terms of reduction of costs, in terms of being reactive and active towards the market. So you can always find us, and we will be obviously prepared to answer any questions that you may have, and you can be sure that we will continue working very, very hard to perform as best as possible. Thank you very much, and have a good day.

Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect your lines.