Compania de Minas Buenaventura SAA (BVN) 2016 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. After the presentation, we will conduct a question and answer session. Instructions on how to ask a question will be given at that time. Thank you for your attention.

I would now like to turn the call over to Rafael Borja of i-advize Corporate Communications. Please go ahead, sir.

Thank you, Katie, and good morning, everyone. Welcome to Compania de Minas Buenaventura's third quarter 2016 earnings conference call. Please be advised that today's call is for investors and analysts only. Therefore, questions from the media will not be taken.

I would like to introduce our speakers. And joining us from Lima, Peru are Mr. Roque Benavides, Chairman and Chief Executive Officer; Mr. Carlos Galvez, Chief Financial Officer; and members of the Company's management team. They will be discussing the results per the press release distributed yesterday.

If you have not yet received a copy of the earnings report, please visit www.buenaventura.com where there is also a webcast presentation to accompany the discussion during this call. If you need any assistance, 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 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. Thus, 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 our quarterly conference call of Compania de Minas Buenaventura. In addition to our press release, we have a PowerPoint presentation, which is the one that I will be using for this presentation.

In going to page three, the highlights of the third quarter of 2016, we'll be touching on the production in line with guidance, lower costs have been achieved, remain sustainable, the dividend payment to be resumed. We expect the improvements at El Brocal in the fourth quarter of 2016, and here we are with Gonzalo Eyzaguirre, the CEO of Brocal. Our situation of net debt to EBITDA has been reduced. And Tambomayo will start ramping up in December of 2016 with positive reports of brownfield exploration, and attractive pipeline of projects after Tambomayo.

On page four, you can see our financial highlights. And essentially we have increased the -- we have increased in terms of revenues. For the first nine months compared to 2015, we have increased 13%.

Our EBITDA from our own direct operations has increased 215%, which is a substantial increase; our net income, where we brought in $82 million of profit for the first nine months of this year; and our EBITDA including our affiliates has increased 54% to $469 million.

Following with our financial highlights, our net debt to EBITDA has reduced substantially. And with the Tambomayo completion, we'll ease free cash flow starting the first quarter of 2017. No additional debt will be needed in the short term, and cash preservation remains to be a corporate priority.

On page six, you can see the calculation of all-in sustaining costs. And this already has reduced substantially, and the cost attributable to sales as well. In terms of gold, we have reduced 12% compared to the third nine months of the year with 2015; in terms of silver, 19%; very similar in the case of zinc; and a 29% reduction in copper. And this is mainly due to our equity participation in Cerro Verde.

On page seven, our attributable production for the full year 2016 should be in the order of 634,000 ounces of gold, of which 359,000 are our own direct operations and 275,000 are from our equity participation in Yanacocha.

Our silver production will reach close to 26 million ounces of silver, and this is a record for Buenaventura. And this is essentially coming from our Uchucchacua mine that has had a terrific year this year with an expanded capacity and with efficiencies that we will show in the chart of cash cost.

In terms of zinc as well, we have increased. And this is due mainly to our participation -- or our subsidiary, Sociedad Minera El Brocal. And as I mentioned, Gonzalo Eyzaguirre is with us if there are any questions in that respect.

And in copper, we should be reaching 125 million tons of -- thousand tons of copper as of the end of the year.

If we analyze mine by mine, Orcopampa should be producing in excess of 190,000 ounces for the full year this year; 145,000 ounces for the first nine months of this year.

In La Zanja, we are producing -- we will be producing between 130,000 and 140,000 ounces; 107,000 ounces for the first nine months of this year with an increase of 5% in this quarter.

In Coimolache, we have had an increase of 14% quarter-to-quarter from a year ago. And we should be producing in excess of 150,000 ounces of gold from Coimolache.

And in terms of Yanacocha, we should reach 630,000 to 660,000 ounces this year. And the first nine months of this year has been 483,000 ounces. We have had a substantial reduction in this quarter compared to 2015 in the case of Yanacocha. And obviously, the cost applicable to sales has gone up as well, and this has been reported by some analysts in the market.

In terms of our silver mines on page nine, we have had an 8% increase quarter-to-quarter from a year ago. In Uchucchacua, our cash costs or costs applicable to sales have been reduced by 18%, and 25% if we compare the first nine months of this year. And that is efficiencies that we are very proud of reporting. We expect to be producing in excess of 15 million ounces as of the end of the year.

In Mallay, we have also increased our production and reduced our costs applicable to sales. These are operations that are becoming more and more efficient, and that is something that we want to report.

In Julcani, we will have production in excess of 3 million ounces. The production quarter-to-quarter from a year ago has come down slightly by 2%, but its costs have reduced as well. So, we have done a great effort in cost reduction, and that is what we are reporting in this conference call.

In terms of our copper and zinc production on page 10, copper production, due to the expansion of Cerro Verde, has increased substantially. We expect this to continue. And the costs at Cerro Verde have reduced also in a substantial way.

El Brocal has finally reached its installed capacity, expanded capacity. We were discussing that this week we have had a full week of 23,000 tons per day throughput, which is a record, if I may say, in Brocal's production. The costs have also been reduced, and that is showing some efficiencies in terms of copper. In terms of zinc, our costs have gone somewhat higher, but we expect to reduce those costs toward the future.

Just to make a comment on our exploration within our own formations on page 11, we are very excited about the results of the exploration at our Orcopampa mine that will enable us, in due time, to increase somewhat the current level of production.

We are finding a higher grade and wider veins, and we are, if I may say, understanding the whole geology of the district. And we believe that there is a huge potential, as you can see in this drawing on page 11.

At Tambomayo, we are almost there. We have 96% progress as of September 2016. Igor Gonzales is with us. And he has just been to Tambomayo, and exploration and mine development are at 100% progress and the construction is at 93% progress. The project is in line with budget and schedule, and the CapEx is in the order of $340 million.

The following facilities have been completed and commissioned; the tailings dam, water dam, power line and substations, access road, and the crusher and the stockpile area. You can see also some drawings of the tailings dam and the underground work that has been done in a very good way.

What is after Tambomayo? After Tambomayo, we expect to continue with our exploration at San Gabriel and get the approval of the Environmental Impact Study. And the construction should be approved by December of 2016; currently working on the engineering studies.

Trapiche, we are improving the scoping studies, focusing on leacheable ore resources, and strengthening the relations with the community. That is essential to develop a project.

And Yumpag, next to Uchucchacua, will increase the life of mine of the Uchucchacua district and will be possible due to Rio Seco. That will need also be expanded if we go ahead with Yumpag. But those are the projects that we are working on.

There is also some pictures on the advance at Tambomayo. And you can see how much we have advanced. It has been difficult. You have to bear in mind that Tambomayo is located at 4,800 meters over sea level and in very difficult terrain. But we have been able to build all this operation, and we expect to be in production before the end of the year.

With this, may I pass, if there any questions that we can answer? Thank you.

Thank you, sir. At this time, we will open the floor for questions. (Operator instructions.) Felipe Hirai, Bank of America.

Hi. Good afternoon, everyone. I have two questions. The first one is related to the net debt/EBITDA chart that you presented. Could you just share with us any kind of expectations that you have on the leverage ratio, especially after the completion of Tambomayo?

And my second question is related to your silver sales in the quarter. As you could see in your presentation, silver production was actually up on a quarter-on-quarter basis. But when you look at the volume sold of silver, silver came down from 5.6 million ounces in the second quarter to close to 5 million ounces in the third quarter. So, is there any explanation for that? And what kind of sales of silver should we expect for the next quarter? Thank you.

Carlos Galvez.

Yes. Regarding this chart on the net debt to EBITDA, yes, we are taking the total debt consolidated. That includes not only the debt that we got for Tambomayo development, but includes 100% of the debt of Brocal and the subsidiary Huanza, which is a hydropower plant.

We mentioned specifically that we include that because it's a different business, and we expect to refinance this debt in the long term for the future. But it's not related to the mining activities. On the other hand, we are taking the consolidated EBITDA of our varied operations. So, this is the way we project.

We expect to continue reducing the level of this relationship, net/EBITDA, until we make the final decision to go ahead with the construction of the next project, that there should be funds available as soon as we complete the permitting on the engineering.

Regarding the --.

Igor Gonzales.

Silver production, we're in line with what we told the market at the beginning of the year. In other words, Uchucchacua will complete its year. We have now 10 months of operating and two months of forecast. And we are right around the target of 16 million ounces in the case Uchucchacua. Mallay is also on target for 1.6 million ounces, and likewise Julcani.

And so, we're not going to have a miss in our numbers in the case of silver production in the mines directly operated by Buenaventura.

Yes, but my question was more on the volume of sales of silver, because we saw a big decline from the second to the third quarter. In the fourth quarter, should we expect to see the volume sold in line with the third quarter?

Well, the thing is, there has been a drop in the silver production at Brocal. That has to do with the deposit, no? But Gonzalo Eyzaguirre?

Yes, that's right. The problem during the last quarter was that the area that we were mining in the pit is an area of low grade, silver grade. But now we're going to change for this fourth quarter to an area which the silver grade is higher. And we are going to see an increase in the silver production not only for the higher grade but also for the higher production that we are going to have in tons per day.

Right now during October, we are producing above our budget. That was 18,000 tons a day. Now we are producing above 20,000 tons a day. And it's going to happen the same during the fourth quarter. We are expecting that the production for the fourth quarter will be above 20,000 tons a day, and the same we are forecasting for 2007 (sic -- 2017). Our budget will be in 20,000 tons a day.

Okay. Thank you.

Carlos De Alba, Morgan Stanley.

Hello. Good morning, everyone. Thank you very much. I had three questions. The first one is El Brocal. We saw the cost for zinc in the quarter increasing 12%, and it is up 7% -- hello?

Yes, yes, yes, we are listening.

All right, yes. So, costs applicable to sales in El Brocal went up in the quarter. I wonder if you can give us a sense of how you see that going forward in the fourth quarter and in 2017.

And also, when I looked at the all-in sustaining cost, it has been a great achievement, the decline that we have seen in the first nine months of the year versus the first nine months of last year. However, it seemed that most of that has come from higher byproduct credits and that only really La Zanja has been able to reduce cost of sales on a per ounce basis. So, could you tell us how you see the comparison in the fourth quarter now that silver prices in particular have been coming down in the last few months or in the last few weeks?

And then finally, we saw a deterioration in the performance of the affiliates this quarter. Maybe Roque or Carlos, could you comment how you see that going forward? Thank you very much, and good progress on net debt to EBITDA.

Thank you. Gonzalo, about the cost?

Well, no. Regarding the cost applicable to sales in Brocal, yes, it is sure that the applicable to zinc is due to the attributable portion of the cost while reducing the silver production.

You know that we -- to calculate the cost applicable to sales, you allocate the cost on a basis of the volume and value of the production on sales. So, when reducing the rate of silver will reduce the sales and reduce the cost applicable to this material. So, zinc got the majority of this cost. In the --.

Yes, I also want to add that during -- the same as I mentioned before. We were mining during the third quarter an area where we have a lower grade not only in silver. The grades in zinc was also lower. But that's going to change for the fourth quarter, where we have -- where we're going to change the area to the center of the pit where the grades are higher.

So, the cost, as Carlos mentioned, is higher this quarter because the production of finds were lower because of the lower grades. But that's going to change during the fourth quarter. And it's going to improve during that quarter and also next year, because the grades are going to increase and also the total production that we move to the plant is also an increase to 20,000 tons a day.

Just to complement the answer, in the case of La Zanja and Tantahuatay, we're right on target for production to year-end. So, we shouldn't see any hiccups in terms of production or costs.

And regarding the all-in sustaining cost, well, this is true. The method we designed is for perhaps a company that produces only one metal. And you have actually byproducts. But in the case of Buenaventura, we are a precious metals company with an important silver production. And this is why, when increasing the silver production, the byproduct credit they will quote increases dramatically.

In terms of the affiliates, essentially in Cerro Verde it's doing very well. The costs have reduced. And obviously, prices are not accompanying us, but essentially we are in a full capacity and doing well.

In the case of Yanacocha, we have had some meetings with our friends from Newmont in order to see what we can do in addition to what we are already doing. And essentially we will see cost reductions in Yanacocha, but also explorations in Chaquicocha. And the development of the sulfides at the Yanacocha mine will be part of the future of this mine.

We are working on reversing the situation that today is the case for Yanacocha, and we are working very hard on that respect jointly with the Newmont team.

Thank you very much.

Alex Hacking, Citi.

Hi. Good morning and thank you for the call. I have two questions. The first question is on San Gabriel. You mentioned that you're expecting a EIA approval in December. My question is whether or not you've already held the community hearings there or not, or those are still to come.

And my second question is on Cerro Verde. At current copper prices, when do you think that Cerro Verde -- or when would you anticipate that Cerro Verde could begin to distribute dividends to the shareholders? Thank you.

In the case of San Gabriel, we expect that in December we will have the audience for approval of the Environmental Impact Study of San Gabriel. I may say, and I think it's important to mention, that we had another audience in June which went very well, and we got support from the community.

May I just use the opportunity to mention that this has been the first audience ever in Peru that was held in Quechua, which is the language that most people from the Andes of Peru speak. It's something that shocked us, because we thought that many audiences were being done in Quechua.

We are getting support from the communities. And we expect that, with all the information that we will be passing, we should get the Environment Impact Study approval by the community and by, obviously, the authorities that are the ones that have to approve this.

And the second question was on Cerro Verde, if we will be receiving dividends. We have not received any reference in that respect. Cerro Verde has some debt that is being paid. And we are discussing with them the possibility of obtaining some additional -- not additional, but changing the financing of this project in order to generate more cash for the shareholders.

But at this point in time, we have not received any indication that they will be distributing dividends in the short term. But obviously, we expect that in 2017 a dividend flow should be coming to Buenaventura, depending on the amount of debt that Cerro Verde would be paying of its own debt.

If I may add, for the time being Cerro Verde has progressed the payment -- or the repayment of the debt, applying the maximum of the cash flow -- the free cash flow to pay this debt.

However, as Roque mentioned, we are working and considering the possibility to establish a permanent leverage in the company once it is convenient for the full corporation.

Yes. And I'd like to add also, for San Gabriel, another milestone that we hit this month is we concluded quite a significant package of land acquisition with the nearby community of Calidda. And that will allow us to build the permanent access road into the project. As of today we were using a temporary road, and so this is also another milestone for San Gabriel.

Thank you. That was extremely helpful.

Botir Sharipov, HSBC.

Hi, everyone. Thanks for taking my questions. If you don't mind, I'll ask a few of them one by one. Going back to I guess Cerro Verde, Freeport reported that the credit facility balance has declined from $1.8 billion to $1.6 billion. Does that mean they actually repaid that $200 million that they -- out of $1.8 billion in Q3?

Yes. Well, this is right. Cerro Verde has already paid $218 million, and this is the accumulated figure. But the main part of this credit facility was paid during the last quarter. And well, this is something that they have to manage on the basis of the best option for the structural financing of the company. So, this is true.

Okay. Just to reconcile some numbers, my understanding is that they had about $30 million on the balance sheet in cash at the end of Q2, and they may have generated $125 million, $130 million in free cash flow this quarter, if I'm not wrong. How did they manage to pay back $218 million?

Well, they have generated this cash. Initially they got -- let me see in detail. In principal, they got $350 million, a short term facility, but they paid in total $568 million. So, the net reduction of debt was the $218 million.

They are generating free cash flow. And as I mentioned, they are privileging for the time being the repayment of this debt.

Okay. Thank you. And I guess on the performance in Q3, production at Cerro Verde was down quarter-on-quarter. Was that attributable to maybe throughput, or did the grades come down? And I guess what are the expectations going forward?

The Q3 grades have stayed pretty much in line with plan. They're around 0.42. It's throughput that is making the difference in Cerro Verde. The expansion is really pushing the throughput beyond the nominal capacity of the plant to a degree that they exceed easily the nominal capacity.

Yes. I'm just trying to understand why production came down from the second quarter. What was the reason?

In my opinion it's just phasing. As you go into the open pit, you enter into a different phase. And it's just a timing issue.

Okay. All right. And I guess the last one, and sorry for so many questions, but on Tambomayo, if you could just tell me how much in CapEx you spent in Q3 and what's budgeted in Q4.

I don't have the exact figure, but it was about $40 million during the Q3. In Q4, it will be at the most $10 million. That is for the completion and titling of this project. This is just supposition.

You said $40 million, right?

Yes.

Just to complement on Tambomayo, the only remaining work that has been left to finish or to complete later in this year and earlier next year is finishing up the camp and the truck shop facility. So, those two are the only one -- outstanding capital outlays, structures that we will build.

All right. Thank you. Thank you for taking my questions.

(Operator instructions.) Scott Macdonald, Scotiabank.

Good morning, guys. Just a couple questions for you here, one on the cost of sales trends and a second one on San Gabriel. So, firstly on cost of sales, we'd seen you kind of driving down the total costs from your direct operations so far this year in Q1 and Q2, but then kind of saw it spike up again in Q3. I know you've kind of touched on this already, but could you give us a little more specifics as to why the cost of sales on your income statement was up so much this quarter? And is that reflective of any kind of setback in your cost reduction efforts?

In terms of our cost of sales, well, one issue that could impact is we reduced some due to the reduction of our treatment charges. For instance, in the case of our operations in Julcani, we reduced by $214.00 per ton our treatment charges, a new contract. In the case of Brocal in Marcapunta, we reduced by $63.00 per ton the treatment charges due to a renegotiation.

And we are improving the cost of sales by doing these sort of efforts. The trend will continue, but there are not additional specifics. If you would like to have a breakdown of the cost of sales, we could share later on.

And just to complement, in the case of the operations which we measure with the cash cost, the trend is there. We're not -- the cash cost has not increased. We continue to try to drive the cash cost further down.

Okay. Well, I'm just looking at your income statement. Compared to Q2 and Q3, the cost of sales were about $20 million or so higher. Just wondering, what was driving that increase?

Okay. Let me see, please.

Maybe $15 million higher.

You are talking about the cost of sales in this quarter. It was $127 million, and you are comparing with the second quarter. That was -- you had the figure --.

It was $116 million in the second quarter.

Yes. Well, that is -- after all, there are two different volumes. You know that there is a variation in the -- it's cost of sales, not cost of production. So, that depends on the variations of inventory.

Okay. So, it's mainly just timing on this, okay.

Absolutely. Absolutely.

So, on a unit basis, you're comfortable with the trends continuing downward.

That's correct. That's why I mentioned the cash cost, which is the unit cost. The trending continues, yes. We haven't gone the other way, which is what -- that was your concern, yes.

Yes, we have to eliminate the impact of volumes. And this is why we report the cost applicable to sales per ounce or per ton.

Okay, great. Just on -- switching over to San Gabriel, I don't know if Igor is there. But I was just wondering, I know it's still early, but if you'd give us a sense of when that project might be up and running and what kind of production rates and costs and CapEx you might be thinking of on a preliminary basis.

Yes. Basically what we're doing in San Gabriel, we're trying to get all the permitting and all the community issues out of the way first before we fully commit to the project. And then the other effort that we're ongoing is the de-risking the project, in other words review with great detail the capital, doing all the proper engineering before we commit the big capital for the project -- the main capital, I should say.

And so, this is an ongoing effort. And in order to de-risk the project, for example, we've driven 1,000 meters of ramp and we're doing underground drilling just to double-check our model. And then once we do that, then the next phase is to start with the engineering, which is the -- basic engineering and detail engineering would be the next two phases that this project will go through. That's essentially what we're doing today.

The lesson that we have learned from the Cerro Verde project of doing all the engineering before starting the construction is what we will be applying in the case of San Gabriel. And an estimate of the cost of the project is in the order of $400 million to $500 million. But it is early days to say, and we would like to do all the engineering that we can do.

Do you have any sense of when it might start up and what kind of production rates you might be able to achieve?

Well, I would say that it will be at least 2 or 2.5 years (inaudible -- technical difficulty.)

One moment while we reconnect our speakers. Thank you. We now have our speakers back in conference.

Yes. Well, before we had this interruption, I was saying that San Gabriel should be ready in probably 2 or 2.5 years, and that we expect to produce between 200,000 and 250,000 ounces of gold per year. That is the estimate at this point in time.

Right. Okay, great. Thanks a lot, guys.

Rinan Crusio.

Hi, everyone. Thanks for the questions. I have two questions here. The first is on Yanacocha. Do you expect any dividends from Yanacocha next year in the similar amount to what was paid this year? And --.

No.

Is there a -- okay. Is there a gold price where Yanacocha would consider raising dividends?

What was the last question? Sorry. Can you repeat loudly, please?

If there is a specific gold price where Yanacocha would consider raising dividends.

No, we don't have any expectation of dividends in the short term. And we have not discussed any dividends with Yanacocha at this point in time.

I would imagine that if the prices of gold go higher, obviously we will have far more resources and dividends would be paid out. But at this point in time we don't have anything to comment in budget terms.

Okay, that's clear. Thanks. And also if you can comment on your expectation of CapEx next year that would be very helpful.

Yes. Well, the CapEx that we have in our budget for next year should be in the level of $350 million dollars, considering that we should begin construction at San Gabriel during the second half of next year. So, again, we are going to return something in the level of $300 million for 2018 onwards.

Okay, that's clear. Thanks.

Thank you. At this time, I am showing no further questions, and I'd like to turn the call back over to management for closing remarks.

Thank you. Thank you for attending this conference.

And I would like to just say that we also have been -- have approved a dividend of $0.03 per share or ADS, payable November 30th, 2016, as we had our Board meeting yesterday, and also to share with you that at Board level we have continued working on improving corporate government and have decided to separate again towards a Chairman and CEO. In this respect, we continue working on a smooth succession.

During the next months, I will be leaving my strategic role, and the Board has decided I will accompany new management as Chairman of the Board. We will do reporting to this in the next few months, but this is in line with our commitment towards the best corporate governance.

With this, thank you for attending this conference, and see you soon. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.