Compania de Minas Buenaventura SAA (BVN) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Compañia de Minas Buenaventura Third Quarter 2018 Earnings Conference Call. (Operator Instructions) And please note that this call is being recorded.

I'd now like to introduce your host for today's call, Mr. Rodrigo Echecopar, Investor Relations. Thank you. 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. And in addition, joining us today is Mr. Roque Benavides, our Chairman.

Before we get started in today's call, we will make forward-looking statements that is led by company's current expectations, along with our future plans and performance. These statements rely on assumptions and estimates, and actual results may differ materially due to risk. I encourage you to read the full disclosure concerning forward-looking statements within the press release we filed on October 25, 2018.

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

Thank you, Rodrigo. Good morning to all and thank you for attending this conference call.

We are pleased to present the third quarter of 2018 results of Compañía de Minas Buenaventura. We have prepared a short PowerPoint presentation, which is available in our web page.

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 this third quarter, EBITDA from our direct operation was $53.1 million compared to $118.4 million reported in the third quarter a year ago, primarily due to lower metal prices and lower volume sold at Orcopampa and La Zanja mines.

The third quarter adjusted EBITDA, including our associated companies, reached $143.1 million compared to $186.7 million a year ago. In this third quarter, net loss was $10.3 million compared to a net loss of $12 million for the same period in 2017.

The company's Debottlenecking Program is proceeding well, with better-than-expected results.

Estimated EBITDA for 2018 has increased from $15 million to $25 million to $28 million to $35 million.

Buenaventura has successfully maintained its disciplined approach to capital allocation, thereby generating free cash flow despite a lower EBITDA than previously budgeted.

A dividend payment of $0.06 per share was approved by Buenaventura's board.

During the quarter, the company benefited from its Business Interruption Insurance or profit/loss insurance related to the problems detected with a 20 x 30 ball mill at El Brocal in May 2017.

During this third quarter, the company received $10 million in advance for -- from a $55 million total possible claim.

Moving on to Slide 4, financial highlights. Total revenues in this third quarter was $271.9 million, which is 26% lower in comparison to a year ago. Total revenues in the first 9 months of this year were $911.4 million, which is 1% higher in comparison to a year ago. EBITDA from our direct operations in this third quarter equals $53.1 million, which is 55% lower in comparison to last year, mainly due to lower volume sold at Orcopampa, La Zanja and lower prices of all metals sold. EBITDA from our direct operations in the first 9 months of this year was $239.3 million, which is 6% lower in comparison to last year. EBITDA, including our affiliates in this third quarter, was $148.1 million (sic) [$143.1 million], which is 23% lower in comparison to a year ago. EBITDA, including our affiliates in the first 9 months of this year was $407.9 million (sic) [$507.9 million], which is 10% higher in comparison to a year ago. And the net loss in this third quarter was $10.3 million compared to a net loss of $12 million a year ago. Net income in the first 9 months of this year was $59.4 million, which is 13% higher than a year ago.

Moving on to Slide 5. In this slide, you can see the waterfall variation between the budgeted EBITDA from the first 9 months of the year and the real EBITDA reached. The lower EBITDA was mainly explained by lower metal prices, lower volume sold from Orcopampa, El Brocal and Uchucchacua, which was offset by the results of our Debottlenecking Program.

Moving on to Slide 6. In this slide, you can see the disciplined capital allocation, which allow us to continue generating positive free cash flow despite having EBITDA lower than budget.

Moving on to Slide 7. We are showing our strategic map, where we use usual the capital B from the logo of Buenaventura as a visual index for the following slides.

In the coming slides, we are going to see in more detail the results from our portfolio of operations.

Moving on to Slides 8 and 9, attributable production. Total equity production in this third quarter was 165,000 ounces, which is 7% lower than the figure reported last year. This reduction is mainly explained by lower production coming from La Zanja, which was part of the mining plan and Orcopampa. As previously was announced, we have decided to prioritize the Debottlenecking Program.

Silver equity production for this third quarter was 6.7 million ounces, which was in line with the figure reported last year.

In this third quarter, 15,500 metric tons of zinc were produced, 17% higher in comparison to a year ago. This increase was mainly due to Uchucchacua and Tambomayo higher production.

In third quarter, lead equity production was 11,100 metric tons, which is 18% higher in comparison to a year ago. Finally, our copper equity production was 32,200 metric tons, also in line with the figure reported last year.

Moving on to Slides 10 and 11. As you can see, the consolidated volume sold from our direct operation decreased in the case of gold, mainly due to lower volume sold from Orcopampa and La Zanja. In the case of silver, the 12% decrease was explained by the lower volume sold at Uchucchacua. In the case of zinc, the 2% increase is explained by more volume sold at Uchucchacua and Tambomayo. In the case of lead, the 19% increase is explained by more volume sold at Uchucchacua and El Brocal. Finally, in the case of copper, the 5% increase is explained by more volume sold at El Brocal.

Moving on to Slide 12. The all-in sustaining cost from our direct operations in this third quarter was USD 1,020 per ounce of gold, 16% higher in comparison to a year ago, mainly explained by lower volume sold at Orcopampa and La Zanja.

The costs applicable to sales in this third quarter were as follows: for gold, USD 848 per ounce, which is 16% higher than a year ago; for silver, USD 10.16 per ounce, which is 10% lower than a year ago; for zinc, USD 0.5 per pound, which is 49% lower than a year ago. Finally, in the case of copper, the cash cost was USD 1.50 (sic) [USD 1.47] per pound, which is 2% lower in comparison to a year ago.

Moving on to Slide -- Slides 13 and 14, you can see the volume of gold sold and the cost applicable to sales for each one of our gold assets.

Moving on to Slide 15, you can see also the volume of silver as well as the cost applicable to sales for each one of the assets, part of our portfolio.

Moving on to Slide 16, you can see the volume of copper and zinc sold as well as the cost applicable to sales for each one of the assets, part of our portfolio.

Moving on to the Slides 17 and 18. The Debottlenecking Program, which we are implementing in our 4 biggest underground mines, is in progress. In order to become a more predictable company in terms of production and profitability, we have to fully implement the Debottlenecking Program, which will allow us to operate efficiently and, in addition, increase the visibility of our order sets for mine planning purposes.

As you can see, we are providing an updated table with our main projects of this program, with more details related to the results achieved in this third quarter and what we expect for the fourth quarter of this year. In addition, we are sharing information regarding our main activities for 2019 and 2020. More details regarding the additional EBITDA for -- from 2019 will be announced in the coming conference call.

Moving on to Slide 19. In the coming slides, we are going to see in more detail the updated information regarding our portfolio of projects.

Moving on to Slide 20. Here, we are presenting in one snapshot the current development level of each one of the -- of our projects.

Moving on to Slides 21, 22 and 23. Here, it is important to highlight the following aspects. In the case of Rio Seco, the semicommercial process testing is underway. HATCH, the consulting company, has finished their review of the existing information. They made a field visit and has also validated our scoping stage.

In the case of Rio Seco as well, environmental base-line is underway, and we are expected to reach prefeasibility stage, PFS, by the end of this year.

In the case of Trapiche, we have hired the consultant company M3. They have finished the review of the existing information. They made also a visit -- a field visit, and our scoping stage was also validated. They are currently performing trade-off studies, and we expect to reach prefeasibility stage by the first quarter next year.

And in the case of San Gabriel, geomechanical model is updated, trade-off studies were performed. Currently, we are working on selecting an appropriate mining method. We are expected to reach prefeasibility stage by the third quarter of this year.

Moving on to Slide 24. 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) Our first question comes from the line of Carlos De Alba with Morgan Stanley.

I just wanted to ask -- I don't know if Leandro or you, Victor, can help me understand the big differences between the average metal prices in the third quarter and the realized prices that the company posted and were highlighted in the results on Page 2 of the results. I understand that there is provisional pricing affecting these realizations, but in our calculations, we -- the discrepancy or the difference is largest that we have ever seen. So if you can provide some color as to what happened in the quarter, if there were any particular circumstances that caused these difference in price realizations to increase materially.

Thank you, Carlos. Thank you for your question. I'm going to hand over to Leandro to answer that question.

Carlos, maybe the big reason of this big difference is because we have liquidations and sales opened from the first and second quarter. Normally, maybe you are comparing the final price of the quarter, the third quarter versus our realized price. But normally, we have open sales, open liquidations, open themes, February, March or April. So there's some big price generated in those months like -- it can be 3.6 -- $3,600 on the current prices in the level of $2,500, right? That is a big difference with our final liquidations.

All right. But then -- so typically, we use as a guide the last page of the results. Page 27, you show there a reconciliation of the net profit to cash and cash from operating activities. And there's a line there called provision for estimated fair value of embedded derivatives related to concentrate sales and adjustments on open liquidations. And in the third quarter of 2018, it was really low compared to other quarters. And so that's what we were a little bit thrown off by the numbers.

Yes. But if you see that -- in that charter, you can see the big difference is related to the last quarter -- on the last year, 2017, is the negative effect, is the different effect, the [otherweight] effect. And you have to consider that this $498,000 or the total 9 months $15 million, we are getting back to the net loss. It's a charge we have already made to the sales.

(Operator Instructions) And we have questions from the line of John Bridges with JPMorgan.

Victor, I'd like to reiterate the confusion on pricing. So if there's a way for you to sort of help us better understand how you get to those prices, because we're used to the idea of contracts being open for a quarter or so. But if you can give us some more clarity on that, that would make it easier for us to understand earnings particularly going forward. Thanks for the improved disclosure in the annual presentation. And I was just wondering, also I saw that you brought down the guidance for silver for 2018. How is production -- how are you thinking about gold and silver in 2019?

Thank you for your question, yes. Regarding the commercial part, we are going to analyze and send to you the information, which -- to clarify that concept. Regarding this year, we -- you said we have updated the silver guidance. Because if you analyze these details, we are increasing the production in the case of Uchucchacua from an area called Karachipampa with high grade of lead and zinc, but with lower content of silver. And also in the case of El Brocal, we have some similarities. We are increasing the production on some area with some increased content of lead, but lower content of silver. Particularly, in the case of 2019, we are still discussing and reviewing the numbers. In the coming conference call, we'll be able to share with you this information.

So the cost of silver, is that actually positive and that you're focusing on maximizing profitability with the silver price at such low levels?

Yes. That's the concept. We -- in the case of Uchucchacua, we have an area with high content, as I said, of zinc and lead, lower content of silver. So we could obtain more profitability from this area. As well in the case of Orcopampa, we have the option to increase production from the underground mine or to increase the production from the open pit. So in these 2 cases, we have some flexibility for the coming years.

Okay, that's interesting. You also were trimming back capital spending. Which projects are being slowed down? Is that going to affect the advancement of your pipeline of projects?

No. We are not deferring any progress. But as we said, we have a more disciplined capital allocation. And here is Juan Carlos Ortiz, our Vice President of Operation. He could share with you some samples how we are leading to improve our CapEx.

John, this is Juan Ortiz. Let me give you some example of the way we are optimizing the CapEx allocation for 2018. For instance, in El Brocal mine, we have the problem with the biggest mill, the 20 x 30 mill. We solved that problem by the second quarter of this year. But as a backup plan, we have an additional mill ready to be installed at the processing plant. That construction was not needed. We still have the mill in the warehouse, but we stopped the construction and installation of that mill as a backup for the big one that was with the problem we just mentioned. The other thing, for instance, we optimized the mine planning in one of our operation, La Zanja operation. Based on that reduction in waste, we don't need to build waste down this year, and we're evaluating if we will ever need to build an additional waste down next year for La Zanja. And another example, we were working in parallel, with sinking 2 shafts in Uchucchacua. We make a mine plan. We review the mine plan as Víctor explained with Karachipampa. And based on this new mine plan, we don't need to sink 2 shafts at the same time. We are focusing only on the loose shaft, and we postponed the deepening of the master shaft for probably next year. That's the way we are optimizing our capital allocation this year.

Okay, great. And you received $10 million of the insurance claim. Are you going to get the balance of the $50-odd million? And when is that line show up in the income statement?

We expect to close this case before the end of this year, as was mentioned in the the transcript, that the polling was related to the biggest ball mill in El Brocal, the 20 x 30 ball mill, and Leandro will add some information regarding this case.

John, yes, all our total claim, it's around $55 million and is divided in 3 major concepts. First volume, the claim related to lost volume, it's around $23 million. Metallurgical, the claim related to metallurgical problems, it's around $22.8 million. And lost of commercial terms is $4 million. And we have already received $10 million and it is accounted in our other income in our income statement. We expect to finish this negotiation with the insurance company before the end of this year.

So has the insurance company agreed that it's liable for the full $55 million?

That's [starting to soften], yes. The main topic that took last -- almost a year was to discuss the third one, topic was the root cause of these incidents. We defined the root cause of the accident, we repair this ball mill. This ball mill is running very well. And the second topic was to assure that we have a coverage, a full coverage. This second stage was also reached. So we are in the last and final stage is to discuss the numbers behind this profit/loss. According to our numbers, it's in the order of $55 million, and we expect to announce before the end of this year the final settle of this case.

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

I just wanted to circle back to John's question on the CapEx. It has gone down to $80 million to $120 million for 2018, and I see $70 million to $90 million as sustaining. What does -- and you've mentioned the deferral of obviously the mill at El Brocal and the tailing facility at La Zanja. Can you talk to us a little bit about what 2019 capital budget looks like? And is $70 million to $90 million an appropriate sustaining number going forward? And what do we look like on the development side?

Tanya, thank you for your question. Here, it's Victor. So for 2019, we -- as I said, also in terms of production, we are still discussing these final numbers. But roughly speaking, we expect to be in the range of $100 million to $125 million. We have a more -- in comparison, I remember that in the last conference call, we were discussing the same topic, and we said around $150 million. We have a more positive outlook. In this case, is more in the range of $100 million to $125 million.

Okay, and is $70 million to $90 million still a reasonable sustaining number within that?

Yes, yes, right.

Our next question comes from the line of Luis Pardo with Compass Group.

If you could help me understand, Carlos has already asked this question, but it's still unclear to me the difference between realized prices and market prices, especially if you think 30% discount is quite heavy.

Luis, thank you for your question. Regarding the commercial trends, you have to take into account that when you take base metal concentrates, you receive in advance a payment based in the current price, but the final liquidation, as Leandro explained, is regarding the final metal price. Sometimes, you see the trending. In the third quarter of this year, we see a significant decrease in metal prices for zinc, for lead and also for copper. That means that at the end -- in the final liquidation, we receive -- we have to register a discount. But probably, Leandro will add...

Yes. Normally, Luis, you have your provisional invoice using the price, the current price in that moment. In this year, we have a very big decrease from the first and second quarter to the third quarter. And our realized price, and take in consideration the negative effect that we have and suffer from high prices, we -- actually we received an advanced payment against that provisional invoice. So final -- when you already know the quotational period, you know the final contents of that sale, you have to make an adjustment. And sometimes, the adjustment for the -- in the final invoice is negative against your advanced part payment received.

Okay. And how should I think about this going forward then? Because the metal prices are so volatile, so how should I model this going forward?

Yes. Look, this is -- you remember the chart in Page 27 from our report, you will see in the line provision for estimate fair value of embedded derivatives and the sales adjustments, if you see those $15 million accumulated in the year, mostly, $9 million is for already received final invoices and $6 million is coming from sales that are still open and they do not have the quotational period settled. So already, we are recognizing $6 million that our -- the current curves of the prices are giving this result to us. So if there is any change -- any major change in the future prices, this curve will turn positive. If the prices -- the former prices were positive.

(Operator Instructions) Our next questions are from the line of Carlos De Alba with Morgan Stanley.

So just coming back, Victor, to the waterfall chart of Slide 5, clearly, the debottlenecking efforts had partially offset the negative impact of lower volume, but not quite. And so just could you remind us again what are the issues at El Brocal? Orcopampa clearly there was the lower guidance as you are mining in more concentrated zones and the same in Uchucchacua. But El Brocal, could you remind us what is the issue there that is affecting volumes this year versus what you had budgeted?

Yes, sure, Carlos, but there's no issue. In the case of El Brocal, we decided to increase the production from the open pit, which means we have increased the production of lead and zinc instead of copper. The copper comes from the underground mines. We decided to slow down in order to create a more smooth ramp-up coming from the underground mine of El Brocal. That is not -- as I said, is not an issue. It was a decision made based on that we expect -- at that moment, we expected a similar economic outcome. But certainly, the significant decrease in lead and zinc make these differences.

Okay. So just to make sure I understand then, this was a management decision to reduce the copper output at El Brocal because that would benefit the ramp-up of the plant. However, when the analysis was made, the zinc and lead prices were at higher levels and the expectations was that those prices were going to remain relatively stable. And because of that change, that 27% that you have in there is really what is reflecting, is the lower -- in a way, the lower zinc and lead prices on top of the higher volumes for those metals that were going to, in theory, compensate for the lower copper production, right?

Right, exactly. Carlos, that's the point.

Okay. And what do you expect that it will be the benefit of the smooth ramp-up in El Brocal going forward? Would that -- is it a cautious approach from a [mining] point of view or is it going to result in higher volumes in the future that would hopefully compensate for part of this fall in this year's EBITDA?

No. You have to take into account that in the case of El Brocal, in the long term, we will be 100% underground mine, 100% producing copper concentrates. So we are very cautious in order to generate a very robust mining infrastructure in the case of Marcapunta. So in that case, we decided to prioritize our long-term view, not necessarily in the short-term perspective.

Okay. And then my final question, just to confirm, so the expectation is that the company will get the full $55 million claim on El Brocal problem or business interruption problem paid for by the insurance company, right? So there's another $45 million to come.

Yes. As Leandro said, it's an open negotiation with the insurance company. This is -- we prefer to be cautious and said it's an open discussion. The matching value will be $55 million.

This concludes our question-and-answer session. I'd like to turn the floor back to management for closing comments.

Okay. Thank you, everyone, for joining our conference call this morning. As our Buenaventura team, we are committed to developing the full potential of our existing assets through our Debottlenecking Program, prioritizing the long-term perspective in order to become a more predictable company in terms of production and profitability. And in the case of our portfolio for growth, we are implementing a disciplined process for value generation through an enhanced methodology in order to optimize our capital allocation. Thank you again, and have a wonderful day.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.