Compania de Minas Buenaventura SAA (BVN) 2018 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Compañía de Minas Buenaventura Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded.

I'd now like to introduce your host for today's call, Mr. Rodrigo Echecopar of Investor Relations. Mr. Echecopar, you may begin.

Good morning, and welcome, everyone. Presenting on the call today is Mr. Víctor Gobitz, CEO. Also present and available for your questions are: Mr. Leandro García, Vice President and CFO; Mr. Juan Carlos Ortiz, Vice President of Operations; Raúl Benavides, Vice President of Business Development; Alejandro Hermoza -- and Alejandro Hermoza, Vice President of Sustainability.

As we normally do, we will be making certain forward-looking statements during the call. Such statements are based on assumptions of future events that may not prove to be accurate. And as such, they involve risk and uncertainty. It is therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We refer you to our cautionary statements in the press release we filed on July 25, 2018.

With that, I will now turn the call over to Mr. Víctor Gobitz. Please go ahead.

Good morning to all, and thank you for attending this conference call. We're pleased to present the Second Quarter of 2018 Results of Compañía de Minas Buenaventura.

First of all, we would like to welcome Juan Carlos Rodriguez, our new COO. His experience within the mining industry, particularly with underground operations, will add an important dimension to our team. We have prepared and show a PowerPoint presentation, which is available in our website.

Before we go further, please take a moment to review the cautionary statement shown here on Slide 2.

Moving on to Slide 3. Highlights were as follows: In the second quarter, our EBITDA from direct operations was $88.4 million, a 58% increase compared to $56 million reported in the same quarter a year ago. In the second quarter, our adjusted EBITDA, including associated companies, reached $191.1 million, a 73% increase compared to $110.2 million in the second quarter in 2017.

In the second quarter, our net income was $41.3 million compared to a negative $6.2 million for the same period in 2017. Buenaventura's net debt over EBITDA ratio was reduced to 0.8x. The company's de-bottlenecking program is in progress, with results that will be reflected in Tambomayo and El Brocal operations during the second half of this year. At Cerro Verde, a total dividend of $200 million was paid on April 4 (sic) [April 24] and $39 million of which was paid to Buenaventura.

At Yanacocha, Sumitomo Corporation purchased 5% stake of the company in exchange for a payment of approximately $48 million. Buenaventura's stake in Yanacocha returned to 43.65%.

Moving on to Slide 4, financial highlights. Total revenues in the second quarter was $322.6 million, which is 26% higher in comparison to a year ago. EBITDA from our direct operation was $88.4 million, which is 58% higher in comparison to last year, mainly due to a contribution of Tambomayo operating at full capacity since the beginning of the year. EBITDA, including our affiliate, was $191.1 million, which is 73% higher in comparison to a year ago. And our net income in the second quarter was $41.3 million compared to negative $6.2 million a year ago.

Moving on to Slide 5. We're showing our strategic map where we use our usual the capital B from the logo of Buenaventura, the visual index for the following slides. Here we would like to point out in the right part of the slide that our ratio of net debt to EBITDA has been reduced to 0.8x.

Moving on to Slide 6, Attributable Production. Total gold equity production in the second quarter was 148,000 ounces, in line with the [view] reported last year, which has mitigated in some part our reduction in production in the case of La Zanja, which was part of the mining plan; and Orcopampa, where we have decided to prioritize the de-bottlenecking program over production, as we will explain in the slides 14 and 15, with the new production coming from Tambomayo.

Silver equity production for the second quarter was 7 million ounces, which was in line with our figure reported last year.

Copper equity production was 30,100 metric tons, which is also in line with figures reported last year.

Finally, in the second quarter, more than 15,000 metric tons of zinc were produced, 7% higher in comparison to a year ago. This increase was mainly due to Uchucchacua and Tambomayo higher production.

Moving on to Slide 7. As you can see, the consolidated volume sold from our direct operations increased in the case of silver and gold by more volume coming from Tambomayo. In the case zinc, it's explained for more volume sold from Uchucchacua and a new contribution coming from Tambomayo.

Moving on to Slide 8. The all-in sustaining cost from our direct operations in the second quarter was USD 697 per ounce of gold, 14% lower in comparison to a year ago, mainly explained by better results from Tambomayo and Uchucchacua mines.

The costs applicable to sales in the second quarter were as follows: for gold, USD 797 per ounce, which is 1% higher than a year ago; for silver, USD 10.23 per ounce, which is 10% lower than a year ago; for zinc, USD 0.76 per ounce, which is 15% lower than a year ago. Finally, in the case of copper, the cash cost was USD 1.55 per ounce, which is 1% lower in comparison to a year ago.

Moving on to Slide 9 and 10, you can see the volume of gold sold and the cost applicable to sales for each of our gold assets. At Orcopampa, cost applicable to sales was $910 per ounce, an increase of 10% in comparison with the second quarter of 2017, mainly due to lower volume sold. At Yanacocha, the cost applicable to sales in the second quarter was USD 833 per ounce, a 26% decrease as compared to the USD 1,129 per ounce reported a year ago, mainly due to improvement in the gold mill.

Moving on to Slide 11. You can see the volume of silver as well as the cost applicable to sales for each one of our assets that are part of our portfolio. At Uchucchacua, cost applicable to sales was $10.03 per ounce, a decrease of 5% in comparison with the same quarter a year ago, mainly due to increase by product contribution, lead and zinc.

Moving on to Slide 12. You can see the volume of copper and zinc sold as well as the cost applicable to sales for each of the assets in our portfolio.

Moving on to Slide 13. The de-bottlenecking program, which we're implementing in our biggest underground mines, is in progress. The de-bottlenecking program [provides] a means to improve efficiency, reduce cost and also increase our capability for more aggressive mine development and exploration programs in order to increase our life of mine. Results are expected to be seen gradually. For instance, results of additional EBITDA generated will be reflected at the Tambomayo and El Brocal operations during the second half of this year. As you can see, we are providing an updated table with the main projects of this program.

At Tambomayo, the processing plant [tuning] project has been completed during the second quarter of this year. The gold recovery has been increased by 2%, and the ore throughput will be increased from 1,500 metric tons per day to 106,000 -- 1,600 metric tons per day by the end of this year. The effect of the additional gold recovery and/or throughput will add EBITDA in the range of $3 million to $4 million during the second half of the year.

At El Brocal, the Esperanza Tunnel Connection is almost completed. As of the third quarter of this year is working at 3,000 tons per day, reducing the hauling cost and increasing the EBITDA in the range of $1 million to $2 million in the second half of this year.

On the other hand, the processing plant tuning project at El Brocal has been completed during the second quarter of this year. Right now, between the 2 processing plants, which are up to 20,000 metric tons per day capacity, the complete effect of this improvement will be seen during 2019. For the second half of this year, the effect will increase the processing capacity from 15,600 metric tons per day to 18,500 metric tons per day. This will increase our EBITDA in the range of $14 million to $16 million in the second half of this year.

Moving on to Slide 14. Here you can see an [overhead] view of the Orcopampa mine. In yellow, you can see the source where we have decided to centralize the current underground operations, because in these zones, we have well-developed infrastructure, which means hoist, drainage and ventilation systems with high standards that will allow us to operate efficiently. In the same slide, you can see gray some dotted lines, zones located around the central part, where we have some restriction that we intend to resolve through our de-bottlenecking program.

Moving on to Slide 15. Here you can see a cross-section view of the Orcopampa mine. Here also, in yellow, you can see the areas related to the 3 main vein systems, Prometida, Nazareno and Pucará where we have decided to centralize our underground operations. In gray, you clearly see the different areas with limited infrastructure.

Moving on to Slide 16. Here we are presenting in one snapshot the maturity of our organic growth portfolio. As you can see, Quecher Main and the expansion of the underground mine Marcapunta are under development. And also you can see 3 different projects, Rio Seco, Trapiche and San Gabriel, are evolving to prefeasibility stage.

Moving on to Slide 17, Rio Seco. Rio Seco will become a chemical plant with the purpose to remove arsenic content from copper concentrates, following the metallurgy at Buenaventura has established. We have breaking down the project into 10 different components. For each one, you can see its progress. We expect to reach prefeasibility phase by the last quarter of the year.

Moving to Slide 18. Trapiche will become an open-pit copper with -- copper mine producing copper cut-offs in the first stage. Here we have broken down the project into 12 different components, and also you can see the progress of each component. We expect to reach prefeasibility phase by the first quarter of 2019.

Moving on to Slide 19, San Gabriel. San Gabriel will become a gold and silver underground mine. Here we expect to reach prefeasibility phase by the third quarter of 2019.

Moving to Slide 20. Thank you for your attention. I will hand the call back to the operator to open the line for questions.

Operator, please go ahead.

(Operator Instructions) The first question comes from the line of John Bridges with JPMorgan.

I just wondered the Rio Seco development. The -- is that related to Brocal at improving the recovery of that material? You were thinking about this technology, I know, for Yanacocha. But Yanacocha seems to be more of an auto play situation now. That's my first question.

Thank you, John. Yes, we'll simply say, it's a project with the concept, with the purpose to reduce the arsenic content from copper concentrates which, for example, in the case of Marcapunta. Here is Raúl Benavides. He will explain with more detail of the project.

Well, the area at Rio Seco, we have already managed down there and we have the land. So we have been piloting the concentrates of Colquijirca and with success. So we think that the thing is mature in order to do some -- it's an atmospheric bleaching of the concentrate so that we can -- we will get copper cut-offs, and we will probably make a plant of 40,000 tons per day -- per year of pure copper. And we had a peak [of looking]in Arizona and Canada with Koch. So the project is going.

Yes. For us, let me add -- John, for us, the Rio Seco project is a boost to increase the value for Marcapunta. As we mentioned in the past, El Brocal will become 100% copper producing in the future. This project will boost the value of this asset.

Okay. Could you offer us a little bit more detail on the split of Tajo Norte and Marcapunta throughput through the end of this year and into next year on this changing throughput rate?

Yes. It's a good question. We have changed this mix. We received the support of the clients and players. And here Juan Carlos Ortiz, our Vice President of Operation, will explain the details.

Well, this thing right now is almost 8,000 to 9,000 tons per day coming from the underground mine, mean copper production, the Marcapunta ore. And we're right now running at about 13,000 tons per day of polymetallic ore from the Tajo Norte open pit. These 2 together, we are running across the 2 processing plants at an average rate above 20,000 tons per day.

Okay. And that's going to be the same through the end of the year and into 2019? Or have you plans to change as you expand the copper underground?

We're ramping up the production from the underground mine, as we mentioned before in the past. So the ramp-up from copper will increase also in the next year, particularly. We're still preparing the budget for next year, but the trend is to keep growing the production from the underground mine and try to use the highest capacity of the processing plant and try to get over 20,000 tons per day on average annual basis in these 2 processing plants.

Yes. Let me add just in -- let me add just that in the last quarter, we expect to achieve to reach 10,000 tons per day coming from the underground mine.

Yes, that's helpful. And then just finally, the San Gabriel almost was -- as I understand it, was on the point of being developed a couple of years ago. And now in your schedule, we're waiting until the end of 2019 for a prefeasibility study. So something seems a bit strange there. What's pushed it backwards? I know you have the issue with the mining method, but I thought that was well advanced.

Yes, we're working on that, John. As we mentioned, we have established this disciplined way very thoroughly to analyze and to develop our project. But here also, Raúl Benavides will explain with more details where we are.

Yes. John, we are still struggling with these EIA permit provisions. We need to be sure on how to deal with the mining in San Gabriel. And if you go to page where we show San Gabriel, you can see in a darker green...

19.

Page 19, you can see in the darker green, the advancing in San Gabriel. Compared to the projects, these projects have not advanced as much as we would like. But the -- we need to have a clear answer from the geotechnical issues. And we have hired a very competent Chilean engineer that is overviewing all this stage. And we will have an answer in the next month or so.

The next question is from the line of Botir Sharipov with HSBC.

A couple of questions from us, following up on John's question on the Rio Seco plan. It's nice to see that it's coming to the TSF level, hopefully, by the end of the year. Do you guys maybe have an idea at this point by how much your commercial deductions will decline, maybe a ballpark at El Brocal of the copper concentrate, given the arsenic content will decline? That's the first question. And the second one is on Coimolache. If you could maybe give us a color on what the grades were during the quarter. And I know you're treating some of the Gold Fields' ore at that mine. Maybe you could also tell us what the grades are going to be going forward and how long you're going to -- you have this agreement with Gold Fields for treating their ore?

Okay. Thank you, Botir. The first question will be answered by Raúl and the second one by Juan Carlos.

Botir, the -- we only really have a straight number. What these will give us is the leverage to negotiate these concentrates. Today, if you want to sell copper arsenic concentrate, it's very difficult. But if we have refinery, we will be able to negotiate with the smelters. And we have -- as Victor said, we're building these as a showcase for -- with Marcapunta ores. But we know that we have some copper arsenic in Coimolache in Yanacocha. So this is a kind of more than a treatment for all the ores. It will be strategic to generate better conditions for the concentrates.

Yes, for [example,] we call it a booster and the best way to unlock the value behind these copper deposits with higher content of arsenic. So your second question was related to Coimolache and the mix. Juan Carlos will answer it.

Well, the production for Coimolache [is running the] mix, as you mentioned. We're bringing ore from Gold Fields. We expect to keep running this business for the next 3 years, 2018, '19 and '20. The grades that we're bringing from Gold Fields are above 1 gram, 1.2 grams, above that in grades right now. The grade that we're mining for our own operation at Tantahuatay is about 0.4, 0.43 grams per ton. That's pretty much the 2 sources that make a blend for the quarter of about 0.6 grams per ton of gold.

Okay. Perfect. And then quickly if I could follow-up and I'll get out of the way. Your CapEx was pretty low for the quarter. Did you guys offset it by the sale of interest in Yanacocha? Or I guess, what -- why was it so low? And what do you guys see in the second half?

Yes. I'm trying to understand both, Botir. Your question was regarding the -- our guidance in terms of CapEx is really the case. Leandro García will answer it.

In the first semester, we spent $52 million. Okay? Our guidance was for the whole year from $180 and $220 million. We are expecting to reach a number close to $160 million. As we mentioned, there is -- we have a low CapEx foreseeing, because -- well, somehow many reasons. The -- we have budget buying some lands that our negotiations have hold behind, and we're now going to finish buying those budgeted lands. Also, our -- some permits I'm getting behind from the -- our -- the ministers, and we're falling behind with all the paperwork we have to present and all the return -- the timetable, it's longer than we expect. Basically, those are the reasons.

Your next question comes from the line of Carlos De Alba with Morgan Stanley.

So first question or both questions are related to Orcopampa and the reduction in guidance. There was a pretty material reduction to 130 -- in the midpoint, 130,000 tons of -- tons of ounces -- sorry, of gold for the operation. And -- so I mean, I heard the comments, but maybe, Victor, if you could elaborate a little bit more as to what led to this sudden change in production or mining plan? And why was it taken now, like, in the middle of the year? If you could provide more details, that will be really useful. And related to this is how do you see now -- given the first half of the year is done, how do you see the EBITDA guidance that was provided earlier in the year, including affiliate, the range between $700 million to $800 million?

Thank you, Carlos. Yes, clearly, that's the key question. So as you know, in both -- in Buenaventura, we're managing our portfolio. And we're taking advantage that if you see in this portfolio the performance of Tambomayo and the performance that we see in the second semester coming through El Brocal, we have decided to take action in Orcopampa. And instead of dealing with these 2 different aspects, production and also the de-bottlenecking program, the investment in the improvement of the mining infrastructure, we decided to prioritize the de-bottlenecking program, and we explained that in these 2 slides. And clearly, the bottom line, because the results coming from Tambomayo and El Brocal are going very well, we still keep -- we still have the same guidance for the full year.

Our next question is from the line of Tanya Jakusconek with Scotiabank.

I just wanted to follow up on the CapEx question. So because of the delay in the permits in some of the land acquisition, you're going to have CapEx this year of $160 million. Is the $180 million to $220 million a good CapEx number going forward, let's say, for 2019?

Thank you for your question. Yes. We have change in this guidance. And Leandro will explain that -- we are in the range of $160 million, $165 million.

2018.

'18?

Yes, that's the...

For '19, it's too early to analyze that. That depends on the advance, the progress in Peru, Tambomayo, for example, Orcopampa and as well, in Coimolache.

But what's the reasonable sustaining capital for you?

In the range of $150 million.

$150 million, okay.

Yes.

Yes.

Okay. And then can I come back to your de-bottlenecking program. I asked this question last quarter, and we talked about the benefit of the $15 million to $25 million, which, thank you, you broke out nicely on Slide 13, the majority of it coming from the processing plant tuning at El Brocal. And you said most in the second half. But in the -- on the Q1 conference call, you said a lot of these will be in Q4. So I'm just wondering what the breakdown is for Q4, let's say, for the $14 million to $16 million. Is the majority in Q4?

No. In that case, if you analyze our Slide 13, in the case of the processing plant you mean, we're taking advantage of these improvements in Tambomayo and also in Brocal. So the second semester, we will take advantage of these improvements. And we have calculated these numbers in that range.

Yes -- no, I understand that. So I see $3 million to $4 million of EBITDA contribution from Tambomayo, and I see $14 million to $16 million from El Brocal. But you said all of this in the second half. I'm trying to get an idea of, in the second half, what's coming in Q3 and what's coming in Q4?

Yes. It's -- we have also mentioned in the processing plant tuning in Tambomayo, we complete this project in the second quarter. So we're taking advantage. These numbers will be seen really in the second semester, in the second half of the year. As well in the case of El Brocal, we have finished with the repair, the bore mill -- the biggest bore mill, and we're taking advantage of this improvement for the full second half of the year.

Yes. So your guidance of $15 million to $25 million of EBITDA improvement for 2018, what does $15 million come in Q3 and then the remaining $10 million in Q4? I'm just trying to understand the breakdown.

Tanya, this is Juan Carlos from Operations. Well, the split of this $16 million will be even along these 2 quarters. There is no ramp up. We already reached full capacity right now.

Okay. So even. Okay. And then my other question comes from the free cash flow. You're generating a lot of free cash flow now. Given your capital spend was lower in Q1 and Q2, you'll have to ramp up. But can you talk a little bit about your capital allocation? Is all of this free cash flow going to be allocated to some of your development projects that you highlighted? Or are you looking at M&A? So maybe a little bit about your capital allocation or debt repayment? Maybe -- yes, just on capital allocation.

Yes. Good question, Tanya. Just we had a Board meeting, and we have decided to discuss specifically this topic in the following Board meeting that will be taking place on October 26. And probably in the coming conference call on October 26, we'll be able to share our final decision. But clearly, we have to balance the -- the financial figures of the company are very robust, and we have to balance. We can probably increase our dividend, reduce debt and also to take a look of any opportunity in terms of M&A.

And can you remind me of your -- yes -- no, no, I understand, and you're going to be sharing with us. But obviously, internal opportunities, the dividend, reducing debt, M&A. Can you just remind us of your M&A strategy, whether it's still focused in Peru, whether you're looking at early-stage development or producers? Can you just review with us your strategy on M&A?

Yes. Right now, we're [handling] our [full] business located in Peru. But we explained that we can import -- sorry, export this knowledge, this capability in the region some places like Chile, Mexico or Colombia. But probably -- at the moment, we're being more opportunistic. We are not specific program looking for -- because right now, as you see, we have a significant organic growth portfolio. But Raúl Benavides has appointed that person in charge of this business development. He will add some comments.

Tanya, we are -- as Victor said, we are -- we have our antenna there and we're looking for opportunities in Latin America. And we keep on sending our geologists to look into opportunities. But our amount of projects in Peru are important, and we are focusing our activity in the projects, firstly. And secondly, on opportunities here in Peru that are coming to us, we are -- we think that we will eventually have some opportunities to look at. But there is -- we're not aggressive in looking outside of Peru, to put it in context.

And Raúl, within Peru, will you look at early stage from exploration all the way to producing assets?

Whenever makes money, Tanya.

All right. I like that.

We love [money to make.]

(Operator Instructions) The next question is a follow-up from Carlos De Alba with Morgan Stanley.

Just coming back to the guidance -- the EBITDA guidance for the year and then the de-bottlenecking and the change in Orcopampa. So presumably, the $15 million to $20 million in EBITDA expected to come in 2018 from the de-bottlenecking program were included in the $700 million to $800 million EBITDA guidance provided earlier in the year. So is it then fair to say or to assume that the results in Tambomayo and El Brocal are coming above what you were expecting earlier in the year and that would more than compensate or compensate the reduction in EBITDA from Orcopampa this year? And therefore, you can keep their guidance as stable as you was at the beginning of the year? But it also means that basically, you're not going to see any -- yes, there is no incremental benefit from the better performance in Tambomayo and El Brocal, correct?

Yes. The short answer is yes, yes, Carlos. We expect in the second half of the year, a significant improvement coming from Tambomayo and El Brocal. In our guidance, in terms of EBITDA, has been included this improvement coming from the de-bottlenecking program.

All right. And -- so going forward in 2019 and 2020, will we see upside to the $40 million to $50 million EBITDA incremental next year and $65 million to $75 million in 2020 because of this "sacrifice" or acceleration or focus in Orcopampa? Would you be able to sort of basically get back the incremental benefit from the de-bottlenecking that has now been so sacrificing by the changes in Orcopampa? Or would you stick to the current guidance that you have?

No, it's too early to discuss regarding 2019, 2020. But to this -- you have to be sure that we are working in order to create a long-term business plan. And if we have to take -- and we've to also -- we have to take advantage. We manage a portfolio. So we have enough space to deal with -- we'll require more time in the cases of Orcopampa in order to create a profitable and long-term business case. But trying to set number for 2019 or 2020 is, to be honest, too early.

Our next question is a follow-up from the line of John Bridges with JPMorgan.

Victor, just a follow-up. You mentioned the capital spending was a bit below -- behind because of delays with permits. Were the permits on any particular projects or just across the board?

It's across the board, John, but we have some delays in Coimolache, for example. We have some delays also in many exploration programs that are part of our strategy for growth.

Is this something which has happened recently, because we're used to the idea that permits are relatively easy and predictable in Peru?

No. Let's take advantage that our Vice President of Sustainability, Alejandro Hermoza, is here. He will answer, and I'm trying to show you how we deal with these topics.

Yes. This is Alejandro. Yes, as you mentioned, this goes across the board. It's nothing specifically going by just authorities, taking some more time. We have to take into account many changes have been done on different specific ministers, secretaries, through the political context. And some delays have been in both then on the processes of getting those permits. But we expect to get that solved by the second semester on different projects, specifically on exploration projects.

Thank you. At this time, I will turn the floor back to Víctor Gobitz for closing remarks.

Finally, thank you, everyone, for joining our call this morning. As the Buenaventura team, we are committed to reach the 2018 targets in terms of profitability and free cash flow generation. In addition, we are developing the full potential of our existing assets, prioritizing its long-term perspective. And in the case of our growth, we are implementing a disciplined process for value generation through a comprehensive methodology to develop our organic growth portfolio. Thank you, again, and have a great day.

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.