Compania de Minas Buenaventura SAA (BVN) 2014 Q2 法說會逐字稿

Good morning, and welcome to the Buenaventura second-quarter 2014 conference call. (Operator Instructions).

I will now turn the call over to Maria Barona, on behalf of i-advize Corporate Communications. Ma'am, please go ahead.

Good morning, this is Maria Barona with i-advize. Today from Compania de Minas Buenaventura in Lima, Peru, we have Mr. Roque Benavides, CEO of the Company; and Mr. Carlos Galvez, Chief Financial Officer. They will be reviewing the quarterly report that was issued for the second-quarter period. At this time, the gentlemen will begin their speech, and we will take questions and answers after the presentation. Thank you very much for your attention.

Mr. Benavides, please begin, sir.

Thank you, and welcome to the Company conference call of Compania de Minas Buenaventura. This quarter has been much better quarter than the first quarter of this year. EBITDA from our direct operations increased 89% compared to the second quarter 2013, and 41% compared to the first quarter in 2014.

Net income increased 22% compared to the second quarter 2013, and improved significantly compared to the $16.1 million loss in the previous quarter. Stronger results were driven by higher silver and copper volume sold from Uchucchacua and El Brocal production, respectively. Yanacocha's contribution the results was a loss of $12.9 million, mainly due to $21.3 million leachpad write-down. Gold production is expected to ramp up in the second half of 2014 to reach guidance of close to -- over 900,000 ounces.

Equity gold production from direct operations to recover in the second half of 2014 to achieve annual guidance of 420,000 to 430,000 ounces of gold. Accessing new areas closer to surface in Orcopampa will allow a 2014 production of 200,000 ounces. La Zanja and Tantahuatay are expected to produce 140,000 ounces of gold, each one, in 2014. And Breapampa will produce 80,000 ounces of gold in this year.

Uchucchacua is expected to increase ore treated volume in the third quarter 2014 due to new permitting that has been obtained. Ore extraction will be focused in the Socorro mine, with high silver-manganese content that will be held by the Rio Seco manganese sulfate plant that is in operation.

The Public Audience at Tambomayo project was successfully held last week, and the environmental impact study has been filed and approved -- approval is expected by the end of 2014. Our Huanza hydroelectric plant commenced full commercial operations and should be generating 95 megawatts, in excess of the 90.1 megawatts that we were expecting, due to higher capacity in the turbines.

El Brocal plant expansion to 18,000 tons per day was completed, and full operations should start in September. The plant will operate in August at 14,000 tons per day capacity.

During 2014, our net sales were $298 million, a 9% increase compared to $273 million in the second quarter 2013. This was explained by higher copper and silver sales. In the second quarter 2014, Buenaventura's gold equity production from direct operations decreased 4%, mainly due to lower production in Orcopampa, but was positively offset by higher production from Breapampa. Gold, including associated companies, decreased 20% due to lower production in Yanacocha.

At Uchucchacua, total silver production in the second quarter 2014 was 3 million ounces, 10% higher than the 2.7 million ounces reported in the second quarter of 2013, mainly due to higher tonnage and ore grade, despite all the problems that we have had in the operation.

At Mallay, total production in the second quarter was 302,000 ounces of silver, 4% lower than the second quarter of 2013. At Julcani, total production in the second quarter of 2014 was 763,000 ounces of silver, 39% higher compared to the second quarter of 2013 due to higher ore treated; and in the second quarter of 2013, we had a strike.

At Breapampa, total production in the second quarter of 2014 was 21,228 ounces of gold, 10% higher when compared to the figure reported in the second quarter 2013. At La Zanja, total production in the second quarter was 36,685 ounces of gold, a 1% decrease compared to the same quarter of last year. At Tantahuatay, total production in this quarter was 35,000 ounces, 1% lower than the figure of the same quarter last year. At El Brocal, copper production was 11,300 metric tons versus 5,050 metric tons reported in the second quarter 2013.

Exploration in non-operating areas during the second quarter 2014 was $14.8 million compared to $4.1 million credit reported in the second quarter 2013. During the period, Buenaventura's main exploration efforts were focused on the following projects: La Zanja Underground, $3.5 million; Tambomayo, $3.1 million; and San Gregorio at El Brocal, $2 million.

Our share in associated companies during the second quarter 2014 -- Buenaventura's share in associated companies was $20.2 million, 59% lower when compared to $48 million reported in the second quarter 2013. At Yanacocha, during the second quarter 2014 gold production was 190,600 ounces of gold, 35% lower than the second quarter of 2013.

Net income was negative $46.5 million compared to $54.5 million in the second quarter 2013, driven by a $21.3 million write-down of leach inventory value from La Quinua pad.

At Cerro Verde, during the second quarter 2014, copper production was 56,683 metric tons, an 8% decrease compared to the second quarter of 2013. During the second quarter of this year, Cerro Verde reported net income of $138 million, 30% higher compared to $106 million reported in the same quarter of last year.

At Coimolache, attributable contribution in the second quarter of this year was $6.1 million, $2.1 million in the second quarter of 2013. Our net income for this quarter was $23 million, 22% higher when compared to the $19 million in the same quarter of last year.

It is important to mention that we have continued with important projects such as Huanza that I mentioned earlier; El Brocal expansion that we also mentioned; and the Tambomayo project in the Caylloma province of Arequipa, which is continued to be developed, and that we hope to be in production by 2016.

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

(Operator Instructions). Karel Luketic, Merrill Lynch.

My first question is regarding the guidance for the second half of this year. You were quite emphatic on reiterating the guidance for 2014, which basically implies a strong volume growth both in your direct operations and also in Yanacocha. Could you help us understand what level of growth are you expecting for the second half, and where it is coming from? And also, most importantly, how should that impact your cost levels?

On that also, on Yanacocha, we noticed Newmont lowered the guidance for Yanacocha this year. What level of cost is sustainable for Yanacocha on, let's say, on a recurring basis going forward? Those are my questions.

In terms of the guidance for our production during the second half of this year, we expect to catch up with our objective for the year in terms of silver production attributable to Buenaventura grows to 20 million ounces. So that means we should produce in the order of 11 million ounces during this second half.

In terms of our gold production, the attributable to Buenaventura's gold production should be in the order of 460,000 ounces of gold, due to the fact that we have arranged certain production for the second half in Orcopampa. And we will continue maintaining the objectives that we had in La Zanja and Tantahuatay and Breapampa.

On the other hand, the range of the guidance on production of Yanacocha was pretty wide: 875,000 ounces to 985,000 ounces for the year. So they are reviewing, but still they are going to produce in excess of 900,000 ounces, approximately. So this is why we believe that we are going to be able to comply with our initial guidance (technical difficulty).

In terms of the costs, this is the main concern during the first half of the year, and specifically in the case of Yanacocha, due to the very high stripping on lower ounces of gold produced. We are increasing the ounces of gold produced during the second half and reducing the stripping, we should obtain costs applicable to sales that should be in the order of $800, $850 per ounce.

Okay, that's great. Thank you.

Santiago Perez Teuffer, Credit Suisse.

My first question is related to El Brocal. Can you give us some color on [transport] time in terms of production volumes probably for the next three years? And also what are cash costs and margins you are expecting from it?

Yes, well, in the case of Brocal, as it was explained during Roque's speech, well, the big production was delayed for certain difficulties in the crushing equipment. And now we are producing at the level of 14,000 tons per day; 7,000 tons per day in the (inaudible) devoted to polymetallic, and 7,000 to copper. Beginning in September, and after completing the solution of these crushers, we should produce 18,000 tons per day, considering 11,000 tons per day of polymetallic and 10,000 tons of copper ores.

With these, we are going to be able to produce at the rate of -- let me say it in terms of copper, will be 11,000 tons of concentrates per month in Brocal, plus 4,000 tons per month of concentrate of lead, and close to 13,000 tons of concentrates of zinc. So, this is going to be the average for the future.

If I can add, I think the start-up of the expansion project has been far more complicated than what we expected. In fact, some of the equipment, as Carlos mentioned, the primary crusher, was not in the -- performing as we expected. And obviously we did expect that coming from a first-class company in Sweden, we would receive a crusher that would work perfectly. But this is something that happens in expansion projects of this size, and we are suffering from that. But starting September, we do expect to have all the expansions in place.

Thanks a lot, Roque, for that. And if I may, going back to the question, how do you expect cash flows and margins after this stabilizes?

It's going to be pretty complicated to talk about the costs in Brocal, due to the fact that we are talking about three different concentrates. But in terms of the copper, the figure we have on the top of my mind is a little less than $5,000 per ton of copper, as costs applicable to sales in Brocal from September awards. And unfortunately, we couldn't review these details for [sink and let] later on.

If I may add also, we are working on developing the non-arsenical area in Brocal. This will add a lot of value to Brocal. Because as you can realize, with enargite, arsenical copper, we are being penalized by the smelters. And when we get to this sweet copper, as we call it, with no arsenic, we will be able to produce at far lower cash costs, and costs in Brocal. In addition to that, we have signed a new contract for the arsenical copper that are in better conditions than the previous one. So we are looking forward to a much better performance in Brocal.

Perfect, thanks a lot. And just lastly on the Uchucchacua mine, how will the Socorro vein change these -- let's say, how will they change the ore rate of the mine? Or will it impact recovery?

Yes, well, the good news is that we are getting into the Socorro vein, which is a wider structure with higher grades of silver that will permit us to assure in excess of 13 or 13.5 ounces per short ton grade to be exploited from now on. And in addition to that, we are going to be ready to treat (technical difficulty) short tons per day, instead of 3,000 tons per day, as we have produced until now due to the new committees.

And in addition to that, we are improving the recovery that -- for instance, in the lead-silver concentrate was about 69% recovery of silver. We are obtaining, on average, 75% and eventually pretty higher recovery. With this, we expect to achieve our objective of producing higher than 12 million ounces during this year in Uchucchacua (multiple speakers). Sorry?

Thanks a lot.

Okay.

Thanks a lot. This is very helpful, Carlos. Thanks, Roque.

John Bridges, JPMorgan.

Thanks, Roque, Carlos. Thanks for the progress on the results. I was just wondering on the copper at Brocal, I thought you were in the relatively low-arsenical material, and the rest of the stuff was tougher. So, there's clean ore ahead of you?

No, we are currently exploiting the enargite, and that is high arsenic. We are preparing the mine in the area that has lower arsenic. And so towards the future, we will be producing copper concentrates with lower arsenic, but not at this point in time.

While during the top half of the year, John, Brocal was able to [increase] not only copper ores from Marcapunta, the enargite that Roque mentioned, but also some copper ores with high grade of silver obtained from the open pit that was in our stockpile. So this is what permitted to reduce of the arsenic content and increasing of the silver production in Brocal.

So, which deposit is this clean copper going to come from?

John, this is Raul Benavides. It's from Marcapunta West. We're developing a ramp to access this ore that has lower arsenic, lower enargite, as compared to the rest of the deposit.

It seems a bit backwards. Why are you mining the easy ore last?

Well, it's not easier because it's weaker.

And it's underground.

And it's underground, and the cleaner ore is spotty. So it has been very difficult to locate it and be able to measure it. So finally, after putting all the geology together, since we now have been working very hard in that, we have been able to measure indicate spots of coppers with less arsenic in the deposit. And this is to the west of Marcapunta; and where we were mining is Marcapunta Norte, where you have 100% enargite. And we were also mining, as Carlos said, from the northern part of the -- the southern part of the pit. And there we have some copper with high grade silver, relative to higher grade silver.

Okay, great. Thanks for the clarification. And then there's a lot of interest at the moment in zinc, and your spending at San Gregorio. What sort of timeline do you expect for that? Could you bring San Gregorio over the next few years?

Well, we have received some positive news in terms of community relations in the case of San Gregorio, but we have to still do all the engineering and the development and the permitting. So I don't see San Gregorio being in production at least in the next five years or so. I don't think it would be less than that. But we continue working on the exploration, and the important thing is the social front has improved substantially, and we are very pleased with that.

Yes, I know you've had a lot of progress there. At La Zanja Underground, I know you've been spending money there. What do you think you are going to have there when you've properly detailed what the reserve is?

Well, the thing is, I think we are very excited about the La Zanja Underground. The veins are certainly high grade, and we are developing -- we have already started -- I don't know how many meters, 150 or 160 meters of ramp. And we expect to put in value all those results to justify the construction of a flotation plant and produce ounces. Initially will be outside, that will go to the leachpads, and then after on a flotation plant.

Maybe Raul can expand on La Zanja?

Yes, the idea of La Zanja is to develop the Alejandra vein. We have 200,000 ounces in oxides. These are high-grade oxides, grading 20 grams in a wide vein. I would say it's over 4 meters in [fluid]. And we think that this ore will crush, and we will crush it to half an inch, and put it in a special heap leach in order to make a first recovery. We won't be able to recover the coarse gold from there. We hope that we will justify the plant, and then we can process these ores in order to get the gravity ore. And then by the end of 2015, we should have enough ore to justify the plant. And this will be a gravity flotation and cyanidation plant of 1000 tons per day.

Okay. Okay. It sounds like some of these other plants. And then would the heap leach still be operating, or would that be closed by then?

Well, we hope -- we have had very good experience on these deposits, that they kind of grow bigger after we have mined them, and the grades are higher. So if this happens in Pampa Verde, as soon as possible as proceeding La Zanja, we may have enough ore to keep on going with the heap leaching. But in pure theory, we will run out of open pit resources by the end of 2017.

But obviously we will continue exploring. And as we insist all the time, if you explore, you normally find additional ores. We believe that La Zanja has a huge potential. This Alejandra vein have shown that there's a lot of resources to be found in that area of Peru.

Okay, brilliant. And then just finally, you guys are the expert underground miners. Newmont has been talking a little bit about Chaquicocha Underground. I know there's some talk about going after the oxides underground. What sort of potential do you see there?

Well, I must tell you that we have been insisting on Chaquicocha Underground. We have been insisting that Yanacocha should not fear going underground. And we believe that there is a huge potential in Chaquicocha. It is also high grade, and I think it will help us to understand further the deposit.

Yanacocha is not over. Yanacocha has a lot of potential, and not only in copper but also in gold underground. And Chaquicocha is a clear way to produce some gold underground. As you know, we come up with this gold mill that with a few flotation cells, we would be able to treat that sort of ore. So it is not major investment, CapEx investment. It would be, we believe, a good idea to go underground sooner than later. (multiple speakers)

Always we are discussing these matters with our partners of Newmont, and we will come up with a strategic plan for Yanacocha in the short term.

What is the metallurgy of that Chaquicocha material?

I think we have to do some more metallurgy. But it doesn't seem to be refractory ores or anything like that. It seems to be quite straightforward.

Okay, brilliant. Well, that's great news. Thanks again, and well done on the progress.

Pablo Abraham, Morgan Stanley.

I have a couple of questions. The first one is if you could explain also with more detail the dynamics of Yanacocha's latest write-down. We really do not understand it, because of the gold price has been relatively stable for the past six months, and this is the fifth consecutive write-down of Yanacocha.

The second question is, if you could give us more color regarding the almost $16 million stoppage mining cost --which mine did you close? And is this a one-off, or it will be recurring? Thank you.

Regarding the write-downs (technical difficulty) in the term, we have to review with our partners of Newmont, quarterly. This is from basis of the inventory having toxins in the leachpad, and the valuation on not only the price of gold but also the costs to recover, including the variation, the precision on the monetization that you may know is in terms of the life of mine. So, to the extent that we have reduced the life of mine temporarily in these areas, we are adjusting gradually these values, or increasing the costs which is diluted in the lower period of time. So we are reviewing these quarterly, and this time what impacted was in the order of $21 million to our [work canal].

Regarding the cost of the stoppage, you know that we made a decision to stop operations in Recuperada, Shila-Paula, Antipite, and Poracota. And we had to pay several issues. First of all, we made also made payment to workers to retire. Secondly, to the extent that we hadn't shut down completely the mines, we have to continue treating acid water or so in this area. And while we expected to sell some of those deposits, we had to work on maintaining certain infrastructure. But we have reviewed that, and we are going to proceed on shutting down completely the four mines, just trying to recover the metallurgical facilities we have in the area in order to be sold.

Thank you very much.

Karel Luketic, Merrill Lynch.

Two quick questions. The first one, a follow-up of growth. Could you provide an update on how Conga and Chucapaca are evolving? And also on the Yanacocha front, what are the other options in addition to the Chaquicocha that you just commented? And what is the timing that we can expect the, let's say, a final update on the growth options there? That's my first question.

And my second question, if possible, could you please remind us what the CapEx for this year should be, and also the recurring level for next years, please?

I'll answer the first question, and Carlos will answer the CapEx question. The Conga project, as you know, we're heading for regional elections in October. And it is not sensible to do much work in Conga while we don't have a clear picture of the political and social situation. So we have been building the internal roads for the project, and we are prepared to go ahead with the project if the conditions are given. But at this point in time, it would be speculation on our side.

At Chucapaca, we essentially have been negotiating for the land acquisition. And some progress has been done, and we expect to report on that soon. And at Yanacocha, in addition to Chaquicocha, there is a huge potential for copper-gold ores that we are also working on the development of a strategic plan to develop all those areas. As I said, Yanacocha will have production coming out from the mine for many, many years to come.

Now, regarding the CapEx guidance for us this year, remember it was on the order of $285 million. We have already invested less than $140 million, so we are achieving our objectives. And after completing the main expansion projects we have and the construction of the projects -- Rio Seco, the ones that I think was mentioned, and Brocal. So, and for the future, we expect to reuse this CapEx to a little over 250. I believe at least we have a new project to be developed.

That's great. Thank you very much.

Santiago Perez Teuffer, Credit Suisse.

In case the best-case scenario, politically speaking, happens in Cajamarca an October, what steps would follow to develop Conga? What would you think would be the next steps to do there?

The critical aspect is to dewater the Perol Lake and build obviously the dam. That will enable us to provide water to the farmers in all the basin, but this is the critical path, if I may say. If that cannot be done, we would have to reevaluate and look after some other alternatives. I don't think of any one at this point in time, but that is the critical aspect.

And then after that, would you reassess the project, then, in terms of time? When do you see, on a best-case scenario, we could see ounces coming of Conga?

This is Raul Benavides. The people from Newmont have been reviewing the Conga and looking to other scenarios. So we cannot give you a straight answer for that until we don't have all these new data coming. But essentially what Roque says is correct: we may need to dewater the Perol Lake, and that would be the startup of permitting.

Because the open pit will be underneath the Perol Lake --.

The Perol open pit.

The Perol open pit will be there, yes.

Thanks, Raul. Thanks, Roque.

(Operator Instructions). At this time, we have no further questions.

I'd now like to turn the call back over to Mr. Benavides for closing remarks.

Thank you very much. Thank you for all of you for attending this conference call. I can assure you on behalf of all the team that we are working very, very hard in turning around the whole situation that happened during the first quarter of this year. We are working with the people of Newmont to reverse the situation at Yanacocha, and we expect to have better results there. We are very excited about Cerro Verde, and I think we'll have a cash cow coming out from Cerro Verde starting at the end of 2015. And we look forward also to solve social problems in (technical difficulty).

Thank you, ladies and gentlemen. This ends today's conference. You may now disconnect.