Compania de Minas Buenaventura SAA (BVN) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Buenaventura Second Quarter 2017 Results Conference Call for Buenaventura. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host, Barbara Cano, with MBS Value Partners. Ma'am, the floor is yours.

Good morning, and welcome, everyone. Presenting on the call today is Mr. Víctor Gobitz, Chief Executive Officer. Also present and available for your questions are Mr. Carlos Gálvez, Chief Financial Officer; Mr. Gonzalo Eyzaguirre, Chief Operating Officer; and Mr. Raul Benavides, Vice President of Business Development.

If you've not yet received a copy of the earnings press release, please visit www.buenaventura.com, where a webcast presentation is also available to accompany today's discussion. Should you need any assistance, please contact MBS Value Partners here in New York at (212) 661-2232.

Before we begin, I'd like to remind you that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts, and are therefore subject to the risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's regulatory filings.

Statements made on this conference call should be considered together with the cautionary statements and other information contained within the company's earnings release dated July 27, 2017, as well as the information contained within the company's most recent periodic reports filed with the BVL.

With that, I'll now turn the call over to Mr. Víctor Gobitz, Chief Executive Officer. Mr. Gobitz, please go ahead.

Thank you. Good morning to all, and thank you for attending this conference call. We are pleased to present the second quarter results of Compañía de Minas Buenaventura. We have prepared a short PowerPoint presentation, which is available in our web page.

Moving on to Page 3. Second quarter highlights were as follows: one, production remained in line with the annual budget for most of our mines; two, Tambomayo showed steady improvement in the ramp-up process; three, El Brocal reported its third consecutive quarter of positive operating performance and financial results, despite challenges in the processing plant; four, we have started our comprehensive debottlenecking program at Buenaventura's direct operations and subsidiaries to maximize value; and five, at Cerro Verde, the syndicated loan has been refinanced with subsequent repayment of the shareholder's loan.

Moving on to Page 4, financial highlights. Total revenues in the second quarter of this year were $256.7 million, which is 10% lower in comparison to a year ago. EBITDA from our direct operation was $56.5 million, which is 48% lower in comparison to a year ago. EBITDA, including our affiliates, was $110.2 million, which is 40% lower in comparison to a year ago. And the net income in the second quarter was negative, minus $6.2 million, in comparison to a year ago when the result was $55.5 million. In the following slides, the reasons for these results will be explained.

Moving on to Page 5. We'll use the capital B, the logo of Buenaventura, as a visual index in the following slides. As you can see, by using the capital B, we summarized Buenaventura's portfolio of operations in the upper part and its portfolio of projects located in the lower part. And so these 3 different colors, we differentiate our gold, silver and base metal assets.

Moving on to Page 6, attributable production. In terms of gold production, in the second quarter, it was 145,000 ounces, which is 5% lower in comparison to a year ago. In terms of silver, in the second quarter, it was 6.7 million ounces, which is 13% higher in comparison to a year ago. In terms of copper, in the second quarter, it was 29,000 metric tons, which is 7% lower in comparison to a year ago. And in the case of zinc, in the second quarter, it was 13,000 metric tons, which is 1% higher in comparison to a year ago.

Moving on to Page 7. The all-in sustaining cost in the second quarter was USD 812 per ounce of gold, which is 33% higher in comparison to a year ago. The cost applicable to sales in the second quarter was: for gold, USD 797 per ounce, which means 24% of increase in comparison to a year ago; for silver, USD 11.48 per ounce, which is 1% higher in comparison to a year ago; for zinc, USD 0.89 per pound of zinc, which is 13% higher in comparison to a year ago; and for copper, USD 1.56 per pound of copper, which is 35% higher in comparison to a year ago.

Moving on to page 8. We are going to explain the results and projections for each one of our gold assets. In Orcopampa, the production was 47,000 ounces, which is 2% lower in comparison to a year ago. However, for Orcopampa, we have increased our annual production guidance based on the access to new and around areas with higher gold content. So we expect a better second semester.

Regarding La Zanja, Coimolache and Yanacocha, these 3 assets are located in Cajamarca in the north of Peru, where our country suffered heavy rains due to El Niño, which meant lower production, limited access to new areas and higher consumption of reagents. However, in all these 3 assets, its annual production guidance has not changed, so we expect also a better second semester.

Moving on to Page 9, to explain the Q2 results in Tambomayo. In Tambomayo, our new gold mine, the production was 12,000 ounces of gold. And specifically in June, the gold production was around 5,000 ounces, which means that the ramp-up process is going well.

We maintained our last annual production guidance in the range of 60,000 to 90,000 ounces of gold. The processing plant has reached 1,000 tons per day of treatment capacity. And by August, we expect to achieve 1,300 tons per day.

The main challenge in Tambomayo is still the filtration system for paint, where we have installed 2 operation filters, with the capacity of 500 to 600 tons per day each. So we complement our current requirement of filtration capacity using (inaudible). We have also bought a new filter with a capacity of 1,500 tons per day to be installed in the first quarter of next year.

Moving on to Page 10. We are going to explain the results and projections for each of our silver assets. In Uchucchacua, our production in the second quarter was 4.3 million ounces, which is 10% higher in comparison to a year ago.

Since June, we have decided to increase the underground production of run of mine of Uchucchacua from 3,900 tons per day to 4,300 tons per day, despite the current processing plant capacity is just 3,900 tons per day because the excess of 400 tons per day is being treated at Mallay's processing plant, which is located just 30 kilometers away.

So through this synergy, we have increased the profitability of these 2 assets. Particularly in the case of the Mallay mine, we have decided to produce from the stops located above the 4,090 meter level to avoid a significant damage from areas located below this level.

In the case of Julcani, we have decided, for safety reasons, to change its mining method, so we have reduced the underground production from 600 tons per day to 400 tons per day. But, at the same time, we are increasing its ore grade from 15 to 18 ounces of silver per ton. Therefore, we intend to create a more profitable business model for Julcani.

Moving on Page 11. In the case of Cerro Verde, Freeport has announced that its annual production guidance hasn't changed. So we also expect better results in the second semester. In the case of El Brocal, during all the second quarter, the main volume unit, with a dimension of 20 feet by 30 feet, was off-line due to electrical problems in its model. In August, we are starting a smaller standby volume unit, which we will establish full capacity in the processing plant. Let me highlight that when the main volume unit comes back online, in the fourth quarter of this year, El Brocal will gain redundant capability in its processing plant.

Moving on to Page 12, debottlenecking program. We have hired an underground expert, Nick Mosenthal. Nick is a mining engineer with more than 34 years of underground experience in South Africa, Australia and Nevada. And he's leading a team in order to design a comprehensive program to improve our underground infrastructure as a straightforward way to increase the efficiency and the productivity of our mines.

In the case of Tambomayo, the main opportunity is to improve the backfill system, changing from rock fill cemented to paste fill cemented. In the case of Orcopampa, the main opportunity is to improve its ventilation system in order to speed up its mine development. In the case of Uchucchacua, the main opportunity is to improve its drainage system, also in order to speed up its mine development. In the case of Mallay, we are taking advantage of its location close to Uchucchacua, and since June, we were implementing synergies between these 2 mines.

In the case of Julcani, we are increasing its profitability, reducing its volume and increasing its ore grades. And finally, in the case of El Brocal, specifically in the case of Marcapunta Norte, our underground mine, we are implementing an expansion in terms of copper production. And we have found an opportunity to improve its current mining method.

Moving on to Page 13. Thank you for your attention. I will hand the call back now to the operator to open the line for questions.

Operator, please go ahead.

(Operator Instructions) And our first question comes from Botir Sharipov from HSBC.

Congratulations on having the Cerro Verde term loan refinancing, getting your loan back. Couple of questions from me. First, on a question that's on many investors' mind, I think, is with Freeport basically outlining a number of projects outside of Cerro Verde that they would like to invest in the next few years and the Cerro Verde refinancing a term loan, how should we think of the free cash flow coming out of Cerro Verde which seems to be pretty high at these copper prices? Can we expect a dividend in the second half of this year that'll go into 2018 for the next couple of years?

Well, this is Carlos, Botir. The refinancing of Cerro Verde is a natural improvement of the liquidity and the facilities for continued operating and developing provision operations at Cerro Verde. What they would like is to have this strong position in order to face the possibility of a negative resolution of the Supreme Court regarding these royalties. So what they have is a good liquidity position. They have room to increase cash required from this financial facility, just in case there is a negative resolution and they have to pay royalties. This is the first use of profit. Secondly, the internal or conservative message is that they would like to pay the debt as soon as possible, as it has been announced in the past. However, you know that the term has been extended from 2019 maturity to 2022. And this is what an operation, with such an important life of mine, should maintain. So I hope we expect that Cerro Verde will be in the future prefer to pay out cash dividend.

Let me add just that, at the board level, we didn't discuss this topic yet.

Okay. Quick one on the volumes, looks -- comparing consolidated and sold volumes, looks like you guys sold less gold, zinc and lead than you produced. Is that a fair assessment? And can we expect that metal to be sold in the upcoming quarters?

Well, it is important to mention that from Tambomayo, you know that we produced accumulated 12,400 ounces of gold. We have already sold only 4,500 or something like this. You know that what we obtain in the mine is doré-bar, the content in excess of 80% silver, and the complementary part is gold. So we transfer these doré-bars to our local refinery to refine gold and silver. And then, we export the refined gold. In this process, we kept about 8,000 ounces of gold. With margin, at this point in time, is something about $10 million that we have not reported due to this holding of production. On the other hand, we had an extended maintenance process in Rio Seco, which is a plant where we leach the lead silver concentrate of Uchucchacua, and we kept about 3,000 tons of concentrates, in excess of what should have been our inventory, at least in the order of $3 million value. So margin, I mean, and this is a negative impact in our P&L.

Okay. And then last one, on El Brocal, you mentioned that you've improved recoveries. Can you maybe give us your current recoveries for all metals?

Yes. With -- we've...

Here is Gonzalo Eyzaguirre, he will answer your question, Botir.

Yes, we have improved the recoveries in copper. Last year, we had recoveries of near 90%. Right now, we are obtaining a recoveries of 93%, 94%. And in silver, also we have improved the recovery for, in this case, for 1%. And in lead, we have improved the recovery for -- from 50% to 60% in the last quarter. And that improvement was because we changed the way that we were floatating the materials in the process plant. What we are doing right now is using a bulk floatation.

But let me comment there. The question is that, the silver recovery in the lead concentrate increased to 49% -- or, close to 50% when it was 22%, 23% in the lead concentrates. The balance in the past was recovered in the same concentrate. And everybody knows that the silver content is well paid in the lead concentrate more than in the zinc concentrate, and this is the actual improvement.

And our next question comes from Carlos De Alba from Morgan Stanley.

This is Carlos. Just, Victor, you mentioned that you expect the second half of the year to see a recovery in production. And therefore, the annual guidance for some of the mines, and most of them probably have not been reduced, even though it was a little bit below expectations in the first half in the year and obviously in the second quarter. And you also mentioned that part of that will come from higher grades. Is the company like high-grading some of those mines? Is this sustainable? What do this mean for 2018 and beyond production at some of the mines when you are going to see higher grades in the second half of the year? Meaning, is this part of your traditional and medium to long-term mining plan? Or is this just a short-term strategy to recover some of the output that was lost in the first half? And then in the second, maybe for both Victor and Carlos, could you tell us what will be your expectation for the -- or that the -- what is the earliest expectation for a potential dividend payment in Cerro Verde?

Thank you, Carlos. Regarding your first question. We expect to increase this grade in the medium term, specifically in the case of Orcopampa. I mentioned in the past, this new area called Pucara, Pucarina, is a new area with high-grade, so we are very confident to maintain this level of production, a new level of production for Orcopampa. And in the case of Coimolache, specifically, we also, in the second semester, we have access to a new area called Cienaga Norte. We also expect to keep this new level of production in the case of Coimolache Tantahuatay. And centrally, in the case of Uchucchacua, there is a potential of production increase through this integration with Mallay and also through the integration with the Greenfield project called Yumpaq. So just to summarize, on most of these cases, we expect to keep this increase of production in the medium and long-term.

If I may add, Carlos, in the case of Coimolache, with the grades from Cienaga Norte, moving the same volume we're going to have lower cost in this operation. So we are going to reach our production objective in finance in the gold content with lower cost, which is important. And as it was mentioned in Uchucchacua, by using the high grades we have in Yanacocha, using the floatation plant of Mallay, is the best result that permitted to reduce the cash cost from 11 something -- 11-plus to $10 per ounces of zinc.

And your -- Carlos, your second question was regarding the

The expectation for dividend.

Carlos has the answer obviously.

Well, as Víctor mentioned, this is a topic that hasn't been discussed on the board of Cerro Verde. But we see very clear that if you have a long-term debt that permits you to operate and to generate a free cash flow that is not committed with a requirement of CapEx, this will be a very positive indication that it could be baked, but nothing to confirm.

Carlos, I cannot, regarding the first question, I need to mention Tambomayo. Let me share with you my optimism about these gold assets. Carlos? I said that, clearly, in the case of Tambomayo, we are very confident that Tambomayo is an underground mine with long-term and profitable life. So we have solved this problem, this bottleneck in the filtering system for tailings. But clearly, Tambomayo will be also a significant asset with long-term and very profitable as part of Buenaventura's portfolio.

Just maybe a follow-up, while I'm at it, on Page 12, you have the debottlenecking program, is it possible for us to have a sense of how much, either volumes, cash flows or a metric that we can track, do you expect to generate from this program? And when do you expect to start seeing -- delivering some of the results?

Carlos, thanks for your question. It's, obviously, it's at an early stage, but here, Gonzalo will explain with more details what's the program.

Yes. We have started this evaluation. Right now, I don't have a number for the improvements, but we have a list, a very long list. And probably in 3 months, we're going to have the measure of how much each of those improvements will make us to our EBITDA. And right now, we're also structuring the teams that are going to be following these specific projects, and this is going to happen in the following weeks. So in 3 months, I can have more details about the benefit of these projects.

Our next question comes from Felipe Hirai with Bank of America.

Actually, this is Karel. I have a question on growth in Yanacocha, we saw your mentioned in Quecher and the sulfide deposits. And in the press release, we also heard Newmont's comment on the conference call, but we would like to hear your takes on what's the potential there in terms of production, CapEx for both Quecher and eventually, the sulfide -- the exploration of the sulfide deposits over time? And any timing on that will also be great. Those are my questions.

Thank you for your questions. Let me start saying that we are working closely with the new Senior Vice President of Newmont, (inaudible) in this program. Clearly, there are 3 different projects that are interconnected, Quecher Main, the sulfide project, but also the updated version of the pressure plant. As I said, we are working closely with Newmont in the development of these 3 different and interconnected projects. Specifically in the case of Quecher Main, we expect to achieve the approval of these projects in the last quarter of this year. The CapEx for Quecher Main is in the range of $300 million, and we'll extend the life of mine of Yanacocha until 2025 with the annual production in the range of 200,000 ounces of gold. And specifically, in the case of the sulfide project, which is located in the current footprint of Yanacocha, it's part of -- or, we are working also to work with them, it's more related to our metallurgical process. And probably, he's here, Raúl Benavides. He's the Vice President in charge of all our portfolio of project. Raúl, probably you could some comments about these copper projects.

Well, we have some copper in Yana Verde. The issue with Yana Verde is the arsenic. But we also are getting into the underground in Chaquicocha. The people from Newmont are agreeing that we should go into floatation and have a posterior autoclave installed in Yanacocha. This is a project that is being studied right now. It's in the early stages in the conceptual engineering but we think that Yanacocha will have in the very medium term a flotation plant, with an autoclave, so that they trim complex ore that today are not possible to be treated in the gold mill.

(Operator Instructions) And there appears to be no further questions.

Okay. Thank you. Are you there? I am ready for my closing remarks.

I would like to turn the call over to management.

Okay. Thank you. As a closing remark, let me say that, as a team, we are committed to reach the 2017 target, which means: the achievement of commercial production for Tambomayo in the third quarter of this year; the development of the de-bottlenecking program for our underground mines in order to achieve its full potential; and three, a stronger second semester in terms of production and lower (inaudible). Finally, thanks again for having joined us. Operator, you can take over the call.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.