Compania de Minas Buenaventura SAA (BVN) 2016 Q4 法說會逐字稿

Good morning. My name is Tracy and I'll be your conference operator today. At this time, I would like to welcome everyone to the Buenaventura results 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 the question will be given out that time. Thank you for your attention.

I would now like to turn the call over to Barbara Cano of MBS Value Partners. Please go ahead.

Thank you, Tracy, and good morning everyone. Welcome to Compania de Minas Buenaventura's fourth-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.

Presenting on the call today for us from Lima, Peru is Mr. Roque Benavides, Chairman. Also present on today's call and available for your questions are Mr. Victor Gobitz, Chief Executive Officer; Mr. Carlos Galvez, Chief Financial Officer and Mr. Igor Gonzales, Chief Operating Officer.

They will be discussing the results per the press release distributed yesterday. If you've not yet received a copy of the earnings report, please visit buenaventura.com where there is also a webcast presentation to accompany the discussion during this call. Should you need any assistance at all, please contact MBS Value Partners in New York at 212-661-2232.

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. We therefore ask that you refer to the disclaimer located within the earnings release prior to making any investment decision.

I'd now like to turn the call over to Mr. Roque Benavides, Chairman at Buenaventura for his presentation. Mr. Benavides, please go ahead.

Thank you and welcome to Buenaventura's end of the year conference call. We are together this time with Victor Gobitz who is our new CEO. But he has asked me to make the presentation, but he will be participating and obviously answering the questions that you may have, together with the management team of Buenaventura that joined us this morning.

I will present with the presentation that we have submitted to investors and so I will not be following the press release as this presentation contains all the aspects that are included in this press release.

In the fourth-quarter 2016 and for the full-year 2016, we are very pleased to inform that production was in line with the guidance that we gave the starting of this year. We have achieved lower costs and remain sustainable in terms of all-in sustaining cost of $846 per ounce with a very positive results in our brownfield exploration, essentially in Orcopampa and Uchucchacua and we are quite excited about this results.

Tambomayo produced its first dore bar on December 30 and we have had the process of the ramp-up and we expect that by the end of the first quarter of 2017, we'll be in full production.

In the fourth-quarter 2016, the EBITDA from Brocal was $23.9 million showing an important improvement in this operation. As we have mentioned in previous conference calls, the ramp-up of Brocal has been quite difficult that the team led by Gonzalo Eyzaguirre who is also present here has shown results and the fact that we had generated positive EBITDA as of the end of 2016 with a decline in metal prices has been a very positive aspect.

We had to account for non-cash impairments of $388 million from Yanacocha that has taken us to a loss in our financials, but as I say, it's a non-cash impairment. Full capacity and stable production in Cerro Verde, this is a star in the mining industry worldwide and we are very pleased to be part of Cerro Verde.

Buenaventura net debt to EBITDA ratio has been reduced to 1.74 times in line with guidance and in line with Buenaventura's dividend policy, a dividend payment of $0.057 per share will be declared as we are presenting.

The financial highlights show that the -- in terms of the fourth quarter, our revenues have increased compared to the previous year in the same quarter 22%. And in terms of full year, we have increased our revenues in 15%. The EBITDA from our direct operations increased 309% showing the efficiency of our own direct operations and for the full year 234%. We have done a great effort in this year showing this effort.

Our net income has in terms -- if we do not consider the impairments of Yanacocha for the full year, was $99 million positive. And the adjusted EBITDA including affiliates has increased 64% for the full-year 2016.

As you can see in the next page number 5, our net debt to EBITDA has been reduced substantially. From the fourth-quarter 2015 that was 5.33 times, now it's 1.74 times. Tambomayo completion will enhance more free cash flow starting second-quarter 2017. There is a better performance at El Brocal that will continue contributing to our EBITDA growth. And cash preservation remains a corporate priority.

Our cost reduction efforts show sustainable results in all metals, but let us concentrate on the all-in sustaining cost for gold. And comparing full-year 2015 to full-year 2016, the cost -- the all-in sustaining cost has reduced 32%. Also a great effort from our operations people that have obtained this results.

Our attributable production declined in 2016 16%, but we expect with the inclusion of Tambomayo that our gold production will increase by 11% in 2017. We are working on that and we expect to show results. Our silver production has been increasing constantly from 2015 to 2016. It grew 11% and we expect with the production from Tambomayo to increase an additional 22% in 2017.

Our zinc production coming mainly from Brocal also increased 18% and we expect an additional increase for 2017. Our copper production obviously increased due to the expansion and the production of Cerro Verde, an increase 93% from 2015 to 2016 and will increase further with all the adjustments by another 35% in 2017.

Our gold mines, going mine by mine. Orcopampa has declined somewhat its production and will probably decline somewhat more in 2017. But the results of the exploration essentially in the Pucarina -- Pucara and Pucarina [mains] are showing very, very important results and we expect to reverse the situation and maintain a level of production in the order of 200,000 ounces per year.

At La Zanja, we have produced similar to 2015, but we do expect that that will decline somewhat in 2017. Coimolache has a strong performance and will continue at the same level of 150,000 ounces of gold. And obviously the cost applicable to sales is a very competitive one and we expect to continue in that way. Yanacocha declined in 2016 29% and produced 655,000 ounces but at a cash cost in the order of $841 per ounce.

Our silver mines have been quite efficient and we have increased the production of Uchucchacua by 16% in year 2016 and we'll increase additional 3% in 2017. Cash cost came down or cost applicable to sales came down and that is showing a very positive aspect for Uchucchacua.

Mallay also increased 27% its production and its cash cost also was reduced by 8% full-year 2016. The old Julcani mine will continue with the same level of production for 2017 and had a 3.3 million ounces of production in 2016 with a quite competitive cash cost applicable to sales of $11.62 per ounce.

In terms of our base metals copper and zinc, the production at Cerro Verde obviously impacted positively because of the expansion. And what is even more important is that the cost -- or the cash cost came down by 20% because of this expanded capacity. Cerro Verde is world class deposit and we expect to benefit from the results of Cerro Verde.

At El Brocal, we have increased our production in copper and in zinc showing that the production profile is following the better management practices that we are applying, as I mentioned led by Gonzalo Eyzaguirre who is present here and that could answer any questions that you may have. The cost applicable to sales also has reduced in the case of copper, in the case of zinc due to the great has increased somewhat but still competitive cost.

In terms of our projects, we have continue developing the San Gabriel project update in the economic model with the 2016 exploration results that is showing us higher grade and that we need to expand the volumes and that is what we are working on. The approval of the environmental impact assessment is expected in the first half of this year and during the second half of 2017, basic and detailed engineering will be delivered. We are working on this project and we expect to put it in production by 2019 probably or by the end of 2019.

Trapiche project, the copper study for the leachable copper are underway. We are working on the prefeasibility study expected by 2018 to exploit the leachable material. We are reducing the amount of CapEx for this project and making it more feasible and developing by stages leaving the sulphide by to the -- after exploiting the leachable material. We have installed a combined workgroup with the Mollebamba community and this is always something that has to be taken in a very positive, but also very prudent way. We cannot force communities. We need to work with them in order to socialize the project.

In Yanacocha, it's important to mention that the Quecher Main, the decision to go ahead with the project should be ready by the second half of 2017 and we expect production in the order of 200,000 ounces from this project. Production between 2020 and 2025 should come mainly from Quecher Main. And the CapEx is in the order of $275 million to $325 million.

And the Yanacocha Sulphides are also in process and the project added 2 million gold ounces to resources by the end of 2016. We had a meeting with the management of Yanacocha last Friday in Denver and really was a very positive conversation. Most of you have heard the conference call of Newmont and they mentioned Yanacocha. So, we are far more positive on Yanacocha than what we were in the last quarter.

We are working on putting in value on the resources at Yanacocha. With that, also we had our Board of Directors yesterday and we approved dividends that as we mentioned. Obviously, we approved the annual reports that will be submitted to the shareholder's meeting, the financial statement as of December 31, 2016, the appointment of Ernst & Young as our external auditors and the election of one new member, a younger person Mr. Diego De La Torre, and we will be submitting his bio to investors for the shareholder's meeting.

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

(Operator Instructions) Carlos De Alba, Morgan Stanley.

Could you please give us some sort of guidance in terms of the cash or cash cost for the different operations that will be important in 2017 just to see if some of the progress that you have done in the last two years will continue or we should see more stable cash cost now?

Carlos, thank you for your question early. Carlos and Igor will answer it.

The point is -- Carlos, how are you? We have reviewed our cost applicable to sales to the different operations. And in the case of Orcopampa, we are going to continue producing in the same level, no differences. In the case of the Coimolache Tantahuatay, we continue flat. In the case of La Zanja, it could be pretty higher due to the lower ounces we are forecasting. In the case of Yanacocha, this could be pretty higher but about 10% or 15% due to the lower gold produced.

In the case of our silver operations, Uchucchacua will continue controlling the cost applicable to sales. You know that we are going to have a full year of production at 3,960 tones throughput per day that will help. We just mentioned a guidance of maximum 17, but this zero mine is prepared to produce up to 18 million ounces in the year, so this will help.

In the case of Mallay that we are introducing the new bench on fuel method to explore it in areas with a wider range, we believe this cost applicable to sales will be lower than the average we achieved. We have already achieved in a month about $9.90 per ounce of silver due to this variation. We have to confirm that we can continue producing this level to report something in about $10, $10.50 per ounce.

In the case of Julcani, we believe that with the only exemption of this first quarter that we are reducing some of our productivity due to a variation in the exportation method that we are using in Brazil due to safety conditions, we are going to resume the level of production with some equipment we are introducing to this operation. We are going to produce in the order of $11.50 per ounce.

In the case of Tambomayo, we prefer not to mention a final figure until getting the level of production. You know that we are in the ramp-up. We are just tweaking for the time being materials that we have in the stockpile with lower grades. So until confirming that everything is working smoothly in our operation, we are going to adjust and deliver our guidance of cost applicable to sales. We feel very good about the cost applicable to sales in our Brocal's operation and I would prefer Gonzalo to share this cost applicable to sales guidance.

Yes, for El Brocal, the cost will increase around 10%, probably rate of 10% and the reason is that the rate in copper will decrease. Last year, we had a rate of 2.09% in copper. For this year, we are expecting a rate of 1.8% and the other reason is the stripping ratio. And the stripping ratio for 2016 in our bid was 1 to -- is 7:1 and that will increase in 2017 in 8.5:1, so those are the big reason for that increase. And what we are doing to control part of that is we are building a new tunnel in our underground mine, the name of the tunnel is Esperanza tunnel. And with that, we're going to decrease the holing distance. So that will help us controlling part of the underground cost.

Perfect, thank you. And just Carlos or Roque, do you have any comments on perhaps the cash cost expected at cashier?

No, I think it's too early to say and no, we don't have a figure for that.

Okay. And then finally Carlos if I may, in the last quarter last year the working capital numbers were very strong and that allowed the Company to post very strong cash from operations numbers. How do you see that progressing in at least in the first half of this year? Do you think that some of these levels will be sustainable or could you actually bring them down even more and generate more cash flow?

Well, we expect to generate much more cash flow from the second quarter onwards. You know that this one path in Tambomayo means that we have a very reduced production and sales of gold in this first quarter, but we continue expanding for this working capital. So from April onwards, we are going to build a better cash position.

Botir Sharipov, HSBC.

A couple of them. First for Carlos, Carlos, just if you could may be clarify for us, it seems like that the Newmont took the impairment charge a few days ago at Yanacocha, they were able to deduct taxes from that impairment charge. You guys didn't seem to which resulted in higher bottom line loss. Is that because of the different between IFRS and US GAAP, if you could may be first elaborate on that?

Well, you have to bear in mind that what we do is to include our equity accounting. So we do not have any tax impact in our financial statements. This is the result of Yanacocha's financial statements and this is for the financial accounting, not for the tax accounting.

So, when you do it on a subsidiary, just again to clarify, as the associates line in the income statement, don't you take out taxes first on a subsidiary level before bringing into income statement and then just when you actually calculate consolidated taxes, you just don't deduct taxes twice or do you not take out taxes at all?

What happen is that we take the net income after taxes, but what -- it is important to bear in mind is that the impairment that come from reclamation cost is only deductible once you expend the money now and you provision that. Okay?

Yes, that makes it more clear. Then I guess a bit more strategic question, given that reclamation liability Yanacocha have increased and on the other hand Quecher Main is taking shape and so find opportunities, quite a few of them there that I think could extend the mine loss to maybe 20, 30 and beyond. What's your stance on consolidating Yanacocha? How is Newmont's view changed on Yanacocha's future? Are they looking to continue with their presence in Peru? And in the past they sold their Mexican operations to (inaudible) part of it. All these events, how have they changed your stance and maybe Newmont's stance on their presence in Peru?

When we're visiting Newmont in Denver together with Victor Gobitz and Raul Benavides and Carlos Santa Cruz that is now in charge of Buenaventura Ingenieros, the four of us traveled to Denver. And among all other things that were very positive is that we found the management team of Newmont quite excited about Yanacocha in terms of the development of the sulphides. We have increased resources during 2016 and we continue exploring in terms of sulphides.

Our impression, my impression was that Gary Goldberg was quite enthusiastic about Yanacocha towards the future. And in addition to that and if I may say finally they are also excited about Chaquicocha underground and I think they are building an additional drift to develop the oxides at Chaquicocha.

I think Yanacocha is one of its class in the world. You have to bear in mind that we have produced in excess of 35 million ounces in the last 20 years or 20 and more years. And as we say in mining in elephant land there is more than one elephant and my impression is that in Newmont finally there is an interest and they are not interested in selling. They are interested in developing the resources as they are there -- I don't know if Victor wants to comment on that.

Yes. Thank you, Roque. Let me comment on -- add some comments about that. Quecher Main is by far a bridge, it's an oxide deposit. It's a bridge to develop the sulphide project. The sulphide project in Yanacocha is huge. It's clearly is a long-term plan for Yanacocha and is using the current footprint. That's a key point, a technical point. Using the current footprint, you will reuse some social problems and probably speed up the decisions in the future about this project. And in addition, we will reduce the reclamation cost using the same footprint.

Exactly. And I think that is a very important point that Victor made in our conversations with our friends of Newmont.

Great, thank you. Just two quick follow-up questions.

What was that, sorry?

Two quick last questions here. One is on San Gabriel. Are you guys determined to proceed with the project? The concern is obviously that the CapEx is pretty high at $0.5 billion and there are still no results from what I understand. I just have seen quite a few examples in this industry when people put the money into ground building the mines with underground resources and unfortunately find out down the line that it's not all what it's thought out to be in general just given the fact that the mine loss is still fairly short. Are you guys determined to go ahead with it once you get the EIA permit?

Igor will answer this question.

Yes. We're trying to be as cautious as possible in San Gabriel and that's the reason why this last year in 2016, we developed a ramp into a section of the ore body. We did quite a few meters of drilling, sampling. We did metallurgical work, geotechnical work. We review our model, our geological model and all that is coming together at the end of this first quarter.

We also are doing quality control and quality assurance on all our numbers and assays to ensure that the validity of our results. And if our results like Roque mentioned are proven to be economical, then the next phase is to proceed with engineering. And it's precisely in the engineering phase where we're going to try to optimize capital as much as we can as we want to build the project once the engineering is fairly complete and not take any chances on the project.

Great, and again thank you. Sorry for taking so much of your time. One last quick one. Cerro Verde production guidance, seems like you guys are saying now it's 500 to 550 for 2017 whereas I think in Q4 production release it was 550 to 600. Could you maybe clarify what is the actual guidance for this year for the production?

The guidance of Cerro Verde's production is mainly 1.2 billion pounds of copper. Well, whichever variation is due to certain efficiencies, grades and so on and that depends on the front of the pit is operated. But mainly this is the guidance.

If I may add to that, in a deposit like Cerro Verde you cannot see the very short term. The thing is there are grades that coming to the plant that may be lower in the short-term but that will be compensated in the medium- to long-term. So, it is difficult to say but in any event, this mine is managed by free float and I would recommend checking with their guidance as well.

Let me add something, Roque. Also it's important to mention that in the page 7, the copper production of Buenaventura attributable, it's part is related to El Brocal copper. We are increasing the production this year. Probably you can explain that.

That's right. We are increasing the production from 50,000 tons to 55,000 tons in 2017. And the reason of that is that we're increasing the underground productions of copper from around 8,000 tons per day to 17,000 tons per day. That will happen by the end of the year and we are investing the mining to make those changes in the underground mine and also to improve the production of our copper plant. So that's the reason that increase is going to happen.

(Operator Instructions) Ricardo Miranda, Larrain Vial.

I have a question regarding financing. You mentioned you plan to invest in two projects including Trapiche, San Gabriel and also probably further when you start developing the Quecher project. So I would like to ask how would you finance that? It will be with direct EBITDA generation or are you planning to issue debt?

Well, Quecher is within Yanacocha and we have to go -- I know that financiers are always in a faster pace. But we have to go step by step and that applies obviously to Quecher but also applies to our project. One thing that we mentioned last year was that one of our priorities was to preserve cash and that we will be developing the project step by step and depending on the cash generation of the Company and the possibilities of raising debt if possible. The projects will be developed in such a way and we are not going to put pressure to our financials in order to develop the project.

If I may add, for example, just like I explained in the case of San Gabriel. In the case of Trapiche, what we have done is we have, as Roque indicated, we have done optimization of the leaching phase of the -- the leaching material of the project and in size a project that is with reduced capital. And that project will take forward into the prefeasibility at a stage. So we are being, again, prudent and taking every step to ensure that what we built is going to be within our reach. In addition to that, we are also being as careful as possible to resolve all the community issues before we engage into a construction activity in either project. So that's very important in this part of the world and we're trying to make sure that we resolve all community issues before we initiate any construction activity.

(inaudible) for Quecher, you don't think that probably the mine will be will try to issue a shareholder's amount like you did in Cerro Verde?

In Yanacocha, they hold $600 million to $700 million in cash which obviously is there for the closure and for other projects. The thing is if we have a project like Quecher that can delay the closure process, we may use that cash for the development of Quecher but this is a speculation. The thing is we'll see -- we don't know yet how much this project will cost and how we will develop it. So, I think it's early stages to say.

(Operator Instructions) Scott Macdonald, Scotiabank.

I just have one on Cerro Verde again and then one just again about your all-in sustaining cost. So just on Cerro Verde, we saw Freeport their unit cost guidance was up a bit this year. I assume that's because of a lower grades you kind of referred to earlier. Can you give us a sense of long term what you see as the sort of run rates cash cost?

Difficult to say. I think the impact of the expansion has been dramatically positive if I may say with $1.3 per pound of copper. I would say that this is a guesstimate that it will be probably not reaching 150 and that it will depend on how deep the pit gets and in time it's difficult to say. But it is a very, very efficient operation and compared to other operations in the world, it's world class deposit.

Okay. Sorry, that's 150 sort of long-term average, so up a little bit compared to 2016?

I would say so. You see the open pit deepen and the haulage cost increases somewhat, but this as I said, this is a guesstimate, nothing else.

Yes, fair enough. And I think you mentioned in the prior quarter that about $70 million per quarter of CapEx is kind of a normal run rate, give or take?

Yes, that is the figure we have given and that is what we expect in Cerro Verde.

Okay. And you mentioned last quarter that you may start getting dividends out of Cerro Verde. Can you give us an update on that?

We are looking forward to that, but no, no. The thing is seriously speaking, Freeport has prioritized paying back the debt and in that respect they have suggested that the debt in Cerro Verde will be over by 2019 and then obviously a strong dividend will come into the partners. What we have been given as information as well is that they are starting to repay the loans that the shareholders gave them as of the end of 2015 and this will start in March this year. We are expecting $18 million coming from Cerro Verde as a first payment of their repayment of the loan that shareholders and in this case specifically Buenaventura gave to Cerro Verde.

This decision will be reviewed considering the prices of copper towards the (inaudible) and the performance of this operation.

Okay. So you may not be getting dividends, but you'll be getting repayment to your shareholder loan soon?

Yes, yes.

Can you remind us how much the shareholder loan balance from you?

The thing is we lend $126 million, we lend altogether what $600 million, our share was $126 million and that was December 2015 and we are starting to get paid back with $18 million in March.

Okay. And so would you expect that sort of to continue each quarter along with the other debt repayments?

We will promote that obviously. We will promote that they pay us back, but you see, the thing is -- seriously speaking the thing is Freeport is in charge and they have suggested that they want to pay the bank loans first and then obviously our loans are subordinated to the bank loans.

Right, okay. So just moving on to your unit cost, so you kind of talked a bit about your cost to sales for each of the operations. Could you give us a sense of your expectations of your all-in sustaining cost for the year and may be your CapEx for the year, I guess, assuming sort of current metal prices sold?

Yes, in terms of the all-in sustaining cost, there is no devaluation because our direct operations been the majority underground require very reduced CapEx and sustaining the CapEx. On the other hand, after reviewing the fact that in the last quarter or second half of this year, we should have the full engineering of San Gabriel that means that during the year we are going to have only the sustaining CapEx and engineering expenses. So at the most, our CapEx full year will be in between $170 million to $180 million. So we feel pretty comfortable in managing this cash.

Okay. So that's -- and that one $170 million to $180 million, that's excluding Cerro Verde and Yanacocha and San Gabriel?

Sure, yes, yes. That includes the engineering of San Gabriel.

Right, but not the Quecher?

Doesn't include any construction activities.

Thank you. There are no further questions waiting. So I would now like to turn the call over to management for closing remarks.

Thank you for attending this conference call and as I said earlier, we are very pleased that Victor Gobitz is with us, has joined the team and we are working with him, we are making him work very hard. And I wanted to let you know that we are traveling on Saturday night to Toronto and we will be attending PBAC on Sunday and Monday. Personally I am being the speaker at the conference at I think 9 o'clock in the morning. And Victor Gobitz will be participating in the Peruvian Day as a panelist. And so we will be in touch with our investors in Canada and also attend PBAC.

And then we will be traveling to Boston on Monday night and being in Boston all Tuesday and then we will be presenting in New York City on Wednesday early in the morning. If any of you happen to be around and want to attend and have not been invited, which I will be surprised, but please let us know, we will be presenting at the New York Palace I think at 8 o'clock in the morning on Wednesday next week.

With that, thank you again for attending this conference and assuring you that we continue working with great optimism of mining of Buenaventura and certainly of Peru. Thank you very much.

Thank you. Ladies and gentlemen, that does concludes your presentation for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.