Compania de Minas Buenaventura SAA (BVN) 2015 Q3 法說會逐字稿

Good morning. My name is Katie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Buenaventura Conference Call. All lines have been placed on mute to prevent any background noise.

(Operator Instructions). Thank you for your attention. I would now like to turn the call over to Rafael Borja of I-Advize Corporate Communications. Sir, you may begin.

Thank you, Katie, and good morning, everyone. Welcome to Compania de Minas Buenaventura's Third Quarter 2015 Earnings Conference Call.

Please be advised 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. Carlo Galvez, Chief Financial Officer, and members of the company's management team.

They will be discussing the results per the [earnings release issued] yesterday, Thursday, October 29. If you did not receive a copy, please contact I-Advize in New York at 212-406-3693.

Before we begin, I would like to remind you that during this call comments made by the management may include forward looking statements which are subject to various conditions and uncertainties based on a variety of factors.

These forward looking statements may differ materially from actual results. We ask that you refer to the disclaimer located in the earnings release prior to making any investment decision.

And now it is my pleasure to turn the call over to Mr. Roque Benavides, Chairman and Chief Executive Officer of Buenaventura, for his presentation. Mr. Benavides, please go ahead.

Thank you, and welcome to Buenaventura's Third Quarter Conference Call.

In this quarter, EBITDA from our direct operations was $6.9 million, and adjusted with the associated company was $73.5 million. Total activity for production in the third quarter was 187,000 gold ounces and 5.8 million ounces of silver.

At the Tambomayo Project, 100% of major equipment has been purchased, and operations are expected to start in the third quarter 2016. At the San Gabriel Project, the environmental impact assessment of the project's construction is expected to be approved in the first quarter of next year.

During the third quarter 2015, El Brocal average ore treated reached 15,000 tons per day level. Full production capacity level of 18,000 tons per day will be reached in the fourth quarter 2015.

Cerro Verde's plant expansion to 360,000 tons per day is in-line with schedule and budget. Full plant capacity is expected to be reached in the first quarter of next year.

In terms of our operating revenues during this quarter, net sales were $200 million -- a 35% decrease compared to the $306 million reported in the same quarter of 2014.

This was mainly explained by a decrease in gold, silver and copper prices as well as lower gold and copper volumes sold.

Royalty income decreased 9% to $8.7 million in this quarter, compared to $9.5 million in the same quarter of 2014. This was due to lower revenues at Yanacocha -- 13% lower quarter to quarter.

In terms of our production and operating costs in the third quarter of 2015 Buenaventura's gold equity production from direct operations decreased 16% -- from 108,000 ounces in the third quarter of 2014 to 91,000 ounces in this quarter due to the decline in production at the Breapampa mine that was expected.

Gold production, including associated companies was 197,000 ounces -- 9% lower than the reported in the same period 2014. Silver equity production from direct operations increased 11% mainly due to higher production at Uchucchacua.

In Orcopampa, our gold production increased 3% in the third quarter 2015 compared to 2014 due to higher ore grade. Costs applicable to sales in the third quarter decreased 23%, explained by lower contractual costs and lower reagent costs.

Gold production guidance for 2015 continued to be between 190,000 and 205,000 ounces of gold.

At Uchucchacua, silver production increased 15% compared to the third quarter of 2014 due to higher ore treated. Costs applicable to sales decreased 24% compared to third quarter 2014, mainly explained by lower consumable costs and lower holding costs.

Silver production guidance continued to be between 14 million and 14.5 million ounces of silver.

At our Julcani mine, silver production increased 3% compared to third quarter 2014 due to higher ore treated despite the lower grade. Cost applicable to sales in the third quarter 2015 was 21% lower than the third quarter 2014, mainly due to lower exploration expenses.

Our guidance continues to be in the order of 3 million ounces of silver.

At La Zanja, gold production in the third quarter 2015 decreased 1% compared to the same period of 2014. Costs applicable to sales in the third quarter of this year increased 22%, mainly due to higher ore hauling costs explained by the longer distance between the Pampa Verde Pit and the leaching pad compared to the San Pedro Sur Pit. In the same quarter 2015, 95% of the production came from the Pampa Verde Pit in contrast to 50% in the third quarter of 2014.

Gold production guidance for this year continues to be between 138,000 and 142,000 ounces of gold.

At Tantahuatay, gold production in the third quarter decreased 7% compared to the same figure of last year. Costs applicable to sales increased 14%, mainly due to higher stripping ratio and preoperational stripping in the Dienaga Norte Pit.

Gold production guidance continues to be 138,000 to 142,000 ounces of gold this year.

At El Brocal during this quarter, 55% of the plant capacity was used to treat pollymetallic ores and 45% to treat copper ores. As a consequence, copper production decreased 20%, silver production increased 26% and zinc production increased 667%.

In this quarter, zinc costs applicable to sales increased 30% compared to the same quarter last year, mainly due to higher commercial deductions. Copper costs applicable to sales decreased 2% compared to the same quarter of 2014.

Zinc production guidance for this year continues to be between 50,000 and 55,000 metric tons and copper production guidance between 30,000 and 35,000 metric tons.

General and administrative expenses were $20.4 million, 11% lower compared to the third quarter of 2014. For the nine months period 2015, the expense was [$60.8] million.

Expiration in non-operating areas during this quarter was $5.3 million, compared to $7.2 million in the same quarter last year. During the period Buenaventura's main exploration efforts were focused on Tambomayo project and for the nine months period 2015, the expense was $25.7 million.

During the third quarter, Buenaventura's share in associated companies was $13.4 million compared to $23.6 million reported last year.

At Yanacocha during this quarter, gold production was 242,000 ounces of gold, 3% lower than the same period of 2014. For the nine-month 2015 period, gold production was 706,000 ounces of gold, 9% higher than the same period of 2014.

Gold production guidance at Yanacocha is between 880,000 and 920,000 ounces of gold.

At Cerro Verde, during this quarter production was 55,800 metric tons, a 5% increase compared to the same quarter 2014, 10,430 metric tons attributable to Buenaventura. For the nine months of 2015, copper production was 151,000 metric tons.

During this quarter, Cerro Verde reported a net profit of $6.7 million compared to $85.3 million in the same quarter of 2014. This was mainly due to lower sales explained by the decline in copper price despite a 12% increase in volumes sold.

For the nine months of 2015, net income was $46.5 million compared to $321 million in the same period of 2014. Capital expenditures at Cerro Verde were $385 million compared to $1.3 billion in the same period of -- no -- $385 million in the same quarter and $1.3 billion for the first nine months of this year.

Cerro Verde's plant expansion was 360,000 metric tons, in-line with schedule and budget. In September 2015, one of the primary crushers in two mills started operations, resulting in the first production of copper concentrate coming from the new plant.

As of September 30, 2015, accumulated CapEx on the expansion project was $4.5 billion. Full plant capacity is expected to be reached in the first quarter of 2016 and will become the largest concentration facility in the world.

At Coimolache, attributable contribution to the net income in the third quarter was $4.1 million. For the nine months of this year, the contribution was $10.1 million compared to $17.2 million in the same period of 2014.

In terms of our project development, the Tambomayo project 100% owned by Buenaventura, detail engineering currently at 95% of development. Civil works are expected to be completed by the third quarter next year, 100% of major equipment has been purchased and CapEx of $290 million to $340 million, including 100% of mine development and a plant of 1,500 metric tons per day.

At San Gabriel, environmental impact assessment is expected to be approved in the first quarter of 2016. Feasability studies complete in the third quarter next year. Estimated CapEx at this point in time, $400 million to $500 million. Basic engineering of the project is expected to be ready by the first quarter of 2016, and construction of the expiration ramp, 280 meters drifted, have been concluded.

Yesterday, we had our Board meeting, and we have approved a financing transaction for El Brocal. Essentially, El Brocal has called for an increase in capital of $70 million in two trenches of $35 million each. And [in a munitions page], they will be issuing a private bond issue of $35 million that adds to -- all together to $70 million, which the first (inaudible) will be increasing capital and the -- and a bond issue that will be converted into capital in due time.

We did -- we are open to any questions that you may have from Carlos Galvez, Igor Gonzalez. And we have Gonzalo Eyzaguirre, the General Manager of Brocal, also with us this morning. Thank you.

Thank you, sir. At this time, we will open the floor for questions. (Operator Instructions) Our first question comes from Carlos De Alba from Morgan Stanley.

Yes. Good morning, gentlemen. Thank you very much. So the first question is if you could help us understand the big difference that we saw between silver production of around 5.6 million ounces in the quarter and silver volumes sold of around 4.86 million ounces.

And then the second question is if you can quantify if you know how much the higher stripping ratio at (inaudible) -- particularly the pre-operational stripping of the Cienaga Norte Pit in Tantahuatay. What was the impact that that had on [cash]? And if that will continue in the next few -- in the next few quarters.

That's basically -- basically, that's the questions that I have right now.

Yes. Well, Carlos, it's Carlos Galvez. The difference of 1 million ounces that you mentioned between the silver production and silver [contained salt] is mainly due to a slight increase in different operations of the inventory.

In the case of Uchucchacua, we increased our inventory by 100,000 ounces. In the case of Julcani, we increased 200,000. This is because the material [salt], in the case of Julcani, is considered one -- this material which is through the smelter which is [about the time] that it has taken to this [content] is just material in inventory. [And short] increase in Brocal inventory used through the burning production of the additional production of ore concentrate coming from the (inaudible) area that increased something over 50,000 ounces.

Generally -- in general terms, this explains about 750,000 ounces. We have additional materials that come as a byproduct in other different operations, like the Tantahuatay, the (inaudible) and others.

In terms of the -- of the stripping ratio in Tantahuatay, it has increased from about 0.07 to 0.26, give or take the numbers. So this increase in the stripping ratio will remain for throughout this year and in the first quarter of next year.

Okay. Thank you. And just another one, if I may add, is looking at Appendix 5, the all-in sustaining cost. If I looked at the Buenaventura column and also the attributable production columns, they are -- the numbers for all-in sustaining costs are above or close to $1,200 per ounce.

So basically it means that, at these levels, the company is just breaking even in gold operations. So what -- could you comment how you see this situation? And what are the plans that the company has to or can ensure that the cash generation on an all-in basis improves going forward.

Well, essentially in a very profound effort to reduce costs, and we are getting some important results. The fact that Orcopampa has reduced its costs, the fact that maybe because of lower grades at La Chancas and Tantahuatay may have increased somewhat. But we expect that in this quarter, in the fourth quarter, costs in La Chancas and Tantahuatay will also come down.

So the thing that we -- we are confident that costs in all of our operations will come down and certainly will contribute to the overall profit of the company.

Just to add a little bit more flavor on this, what we have done in terms of costs in the operation is that we map the other elements that contribute to the costs. And then we've targeted the largest elements -- the largest contributors to cost, such as contractor charges and supplies, for example. And we are renegotiating some of our -- with our -- some of our suppliers. And we are also working on productivity programs in every mine.

So every mine has a program to improve productivity. If you review the cost data for this quarter in all the underground mines that has been the trend. So we expect that this will continue going forward.

All right. Thank you very much.

Thank you. Next question comes from [Anna Zinnemann-Spencer] from Credit Suisse.

Oh, hi. Thank you for the call. And could you elaborate a bit more on how will Uchucchacua [vertical] expansion impact overall cost?

And also a second question. If you could provide guidance on Cerro Verdes production for the remaining of 2015 and for 2016. And also how will the expansion impact cash costs? Thank you.

Well, in the case of the Uchucchacua -- well, it's not actually an expansion. We are just to complete each month some additional [opportunities there is to make] to increase the (inaudible). [Plus it's 100 pounds] to 3,800 pounds. So it's [more opportunity].

But this what [it means to dilute] sort of fixed costs and, on the other hand, we are going to improve the metallurgical [postures] in order for instance to reduce the [sanitation] of certain material that will permit us to reduce [unsustained] costs due to the expansion of special (inaudible) facilities].

On the case Brocal, for sure. Achieving the target of producing 18,000 tons in three months will permit to [reach] these lower cash costs for our operations. Gonzalo that is over here could expand on that because he has full details. I don't know if, Gonzalo, you can --.

Yes. We are working on reducing costs. That's a major issue for us. And we [seek] to have a reduction of at least 5% to 7% of our total costs. So how we are going to do that?

We are negotiating with our contractors. We are also reducing the costs of regions, of -- in quantity and in prices. And we are also working on having better recovery by including some additional modifications to our project.

And we are also working on improving our production by including two [con crushers]. These con crushers are going to be installed in parallel to the one that we have right now. And that project will be ready by January. With that project, what we expect is to increase the production and the recovery by decreasing the particle size.

Regarding the Cerro Verdes performance and production with -- well, they are progressing well with the first step. They have already reached initially up to 100,000 tons per day to put from the new facility. And they are going to progress as Roque mentioned.

In this regard, they have -- they have added certain additional production that has been needed to reduce the cash cost during September, for instance, at a level of $1.47, which was lower than what it has been during the past.

So -- $1.49 -- sorry, per pound. And in terms of focus, we expect to achieve this lower -- [continue operations] with lower cash costs in the future to the extent that we reach the total capacity.

Importantly, we mentioned that the reduction in the contribution expected on the profits from Cerro Verdes is due to the fact that they began to depreciate the new facility in September -- and due to this depreciation during one month -- September -- was close to $18 million, as compared with the traditional $11 million they got in the past. So this is something that we expect has a positive result.

The expected production as of the end of the year?

Well, it is difficult to mention because [they involve] the ramp up (multiple speakers).

The accumulated production -- I would like to comment on that. For example, on the [material] mines, they are on target right around about 700,000 tons per day.

On the accumulated production, they are also on target. The final figure for the year should be around 450 -- 500 -- between 450,000 and 550,000 tons. So they are on target again there. And also on the [grades]. On the (net). And the --.

Yes. Well, the thing is the projection should be in the order of 280,000 -- 280,000 tons of copper. No? That's the budget. No?

Yes. [It is. It is].

Thank you. Your next question comes from Karel Luketic from Bank of America.

Hi. Good morning, Roque and everyone. Thank you for the questions. I have two questions. The first one is a follow-up of the question you were just answering.

Just to confirm, this year we're talking about 280,000 tons potentially from Cerro Verdes. And looking at 2016, if I'm not mistaken I heard 450,000 to 550,000. Right?

No. No. It's in the order of 600,000 tons of copper.

That was this year. This year's projection.

Yes, yes. No. Sorry. Sorry. Let's clarify. 280,000 tons of copper will be produced this year. Next year we'll be duplicating -- or in excess of duplicating the production. We expect to reach 600,000 tons of copper next year. That's the figure.

That's clear. Perfect. And my second question, actually, it's two questions tied to the same one.

Looking at Yanacocha here, what is the outlook in terms of -- I know you still haven't provided official guidance for next year. But what can we expect in terms of similar volumes or a bit lower volumes, and the same looking at costs?

And my second question, maybe tied to Yanacocha or not, is there any sort of M&A that you are considering today? Not only in the Yanacocha and renegotiating your stake or something of this sort -- or even outside of Yanacocha. Is there any other option that we -- you are analyzing? Those are my questions. Thank you.

Well, Yanacocha will produce similar to this year for next year. But will depend -- it will depend on the expirations. We don't have a specific figure at this point in time.

In terms of M&A, we essentially have nothing to comment on that respect. We don't have any specific information to give at this point in time.

Okay. Thank you.

Thank you. Your next question comes from John Bridges of JPMorgan.

Good morning, Roque, Carlos, Igor. Congratulations on the cost control progress at (inaudible) and Uchucchacua.

I was just wondering. You mentioned the higher DD&A at Cerro Verdes. And there's an accumulated spend of $4 billion, which I understand was covered by project debt. I'm just wondering if that was being capitalized up until now. And maybe the interest charge on that is going to start showing up in the accounts next year.

I just wondered if you had any idea on what we should keep in -- take into account over and above the $1.50 per pound for a cash cost in order to get to the likely contribution to your numbers beginning next year. Thank you.

The thing is the -- what Cerro Verdes has is a $1.8 billion facility, which has been taken and has been invested. I don't know -- would you specify your question, please? I don't know if I got it.

I was just wondering, will there be an interest charge which was, perhaps, capitalized up until now which will show up in their income statement?

No. They have been -- considering the financial expenses in the P&L, they have capitalized only during the construction. But from now on, they are going to [spend] what is going to (inaudible) to [deter] quarterly in terms of financial costs.

Right. So was that included in the Q3 results with the higher DD&A or will that kick in in Q4?

No. They are going to begin in the fourth quarter. They began only to charge depreciation and amortization [due] to the [way] to declare and to calculate that for units produced. So when they began to use the new facilities, they began to depreciate that.

Okay. Do you happen to know what the interest rate is on that? Maybe we can discuss [afterwards]?

No. The [interest] rate is LIBOR plus 1.9%.

Excellent. Thank you very much. And well done.

Thank you. Thank you.

Thank you. Our next question comes from Patrick Chidley from HSBC.

Yes. Hi, everybody. Just well done on the cost control and some of the assets there. I think it's great that you've been able to renegotiate some of those contractors down, and I think it's shown in some of the mines there.

But one where obviously it doesn't seem to be the case is Brocal. And I was just wondering is there any way you can get these commercial deductions down? They seem to be extremely high and a big portion of actual revenue. Thanks.

Well, [you can make] that the commercial deductions in the case of copper have to do with the arsenic content of the concentrate. But the effort that Gonzalo Eyzaguirre and his team is doing in Brocal is essentially concentrated in renegotiating with contractors, and, as he mentioned, reducing the consumption of some supplies.

And they are doing an effort -- in the [middle] of around [path] that have been quite difficult but that we are getting there. And we have confidence that we will improve the results of Brocal going forward. And (multiple speakers).

Sorry. But perhaps something that is really important to clarify. When we mentioned the average realized copper price of Brocal, what we are talking is not necessarily regarding to the drilling charges that Roque mentioned, but specifically is the impact of the final price we obtain and we charge to the current price due to the [QP]. In the case of our sales in Brocal, that is the QP has a difference of six months in some deliveries and up to eight months in some certain deliveries.

And this negative impact due to the drop of prices impacted the current price. So --

Right.

-- this is something that shouldn't be repeated for the future. But [if we] keep flat, we are going to continue [reporting the provision] of prices.

Right. (multiple speakers). Yes, $3,700 a ton, that was a ton. That was actually provisional pricing impact. And that's not to be continued. So you will get more revenue per ton for your copper, you think, if it's a fairly flat pricing environment.

(inaudible). Okay. (inaudible).

Okay. Thanks.

Thank you. (Operator Instructions) Our next question comes from [Tanya Jaquismic] from Deutsche Bank.

Hi. Good morning, everybody. I have two questions, and one's a technical one and one's just on the finances.

Maybe on the technical one, just on Tambomayo. I think on the last conference call, we talked about the CapEx in the $250 million range and now it's $290 million to $340 million. Maybe someone can explain to me, like, what has happened to have that increase in the CapEx?

What happened is that the CapEx mentioned over here is 100% CapEx. The total CapEx of the project. But what we have [in them] to invest is 125%. We have already [progressed], and -- but the figure is not the number that we have to disperse. We have already dispersed in excess of 50% of that. [We have] (multiple speakers) [that] --.

Tanya, the CapEx includes mine development also. So we have completed about 98% of the detailed engineering for the project. And we have, as Roque mentioned, purchased 100% of major equipment.

And we are doing -- we are finalizing now all the [bulk] (inaudible) and beginning the concrete -- some of the foundations for the equipment as we speak. And we are also [mobilizing] some of the structural steel.

So the project is moving along quite well. And -- but, yes. That capital figure includes the mine development cost.

So the number given of $250 million last quarter did not include the mine development cost?

Yes. It did.

I'm just trying to reconcile the $250 million that was given to us last quarter and the $290 million to $340 million. Is one without mine development? And this one now is with?

No. No, no. The question is that when we mentioned this with development cost and the building of the project. But this cost of between $290 million to $300 million, so it includes the full [exploration] -- the full cost of the project since the beginning.

The $250 million is without considering the time cost of this project.

So the $250 million you gave us last quarter was -- is less to be spent?

Less the development and construction that we had to (inaudible) up for exploring and putting this project in (multiple speakers).

But we have already invested in the project close to $100 million. So what is left to invest is more in the order of $150 million to $160 million.

Okay. All right. And then maybe you can just -- I wanted to ask about the grant -- the loan of $21 million that was done. What exactly was that?

Which loan is this?

You granted a loan of $21 million, was in your press release.

Oh. Yes. Well, the loan that we [lended] to Cerro Verdes. You know that the main shareholders of Cerro Verdes committed to grant some loans in -- subordinated loans, if there were certain limits on the [covenants] of these facilities -- financial facilities.

Cerro Verdes has already received $1.6 billion out of the $1.8 billion committed. And it's (inaudible) to continue receiving additional $200 million to complete the project. However, temporarily due to the EBITDA generated, there was a constraint in the relationship [that] EBITDA generated. And due to this and not to break these covenants, we were requested -- we were [called] for this is (inaudible).

Okay. All right. Thank you very much.

Thank you. You're welcome.

Thank you. (Operator Instructions) I am showing no further questions. I would now like to turn the call over to Mr. Benavides for closing remarks.

Well, thank you again for attending this conference call. This has been a quarter where we have shown essentially cost reductions, the effort that the organization has been doing in targeting these reductions in cost.

We certainly have been working very hard on El Brocal. And we do expect results from now on.

In Cerro Verdes production with lower copper pricing was impacted relatively, but the expansion is under way. And we are very pleased to say that it's on budget and on time. And it will certainly contribute to the overall revenues of Buenaventura.

With that, I thank you for attending this conference and hope to see you soon. Thank you, and good morning.

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