Compania de Minas Buenaventura SAA (BVN) 2018 Q4 法說會逐字稿

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

I would now like to introduce your host for today's call, Mr. Rodrigo Echecopar, 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 questions are Mr. Leandro García, Vice President and CFO; Mr. Juan Carlos Ortiz, Vice President of Operations; Mr. Raúl Benavides, Vice President of Business Development; and Mr. Alejandro Hermoza, Vice President of Sustainability.

Before we get started, during today's call, we will make forward-looking statements that reflect the company's current expectations about our future plans and performance. These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure concerning forward-looking statements within the press release we filed on February 21, 2019.

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

Thank you, Rodrigo. Good morning to all, and thank you for attending this conference call. We are pleased to present our results of the fourth quarter of 2018 from 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: As a key initiative, the company is implementing its Debottlenecking Program to increase profitability and strengthen its long-term business case. As part of this strategy, Buenaventura has centralized operations, refocused mining plans on the highest-margin areas and optimized processing facilities. As a consequence, guidance adjustments were made for certain operations. EBITDA generated during 2018 from this program reached $24 million.

Additionally, with the enhanced methodology of maximizing capital allocation, 2018 capital expenditures were $111.3 million, a significant decrease compared to $259.5 million in 2017. In this fourth quarter of 2018, our EBITDA from direct operations was $68.9 million compared to $118.9 million reported in the fourth quarter of 2017, primarily due to lower metal prices and a reduction in volume sold at the company's Orcopampa and La Zanja mines. In this fourth quarter, adjusted EBITDA, including associated companies, reached $148.6 million compared to the $248.4 million a year ago. In this fourth quarter, net loss was $72.9 million compared to a net income of $8.3 million for the same period in 2017. The loss in this fourth quarter was primarily due to Cerro Verde's recognition of interest and penalties in the amount of $406.6 million, 100% basis, related to Cerro Verde's royalty dispute with the tax authority.

The company was compensated through its Business Interruption Insurance related to problems detected in May 2017 at El Brocal's biggest ball mill. During the fourth quarter of 2018, the company received $28.8 million related to this claim, totaling $38.8 million.

As of December 31, 2018, Buenaventura's cash position reached $369.2 million compared to $214.6 million in 2017. During 2018, the company's net debt over EBITDA ratio fell from 1.4 to 0.99x. A dividend payment of $0.06 per share was proposed at the company's board meeting held on February 21, 2019.

Moving on to Slide 4. We are showing our strategic map where we use, as usual, the capital B for the logo of Buenaventura as a visual index for the following slides. In the coming slides, we are going to discuss the financial results of the company.

Moving on to Slide 5, financial highlights. Total revenues during 2018 were $1,167.4 million, which is 8% lower in comparison to 2018. EBITDA from our direct operations in 2018 was $315.4 million, which is 16% lower in comparison to last year, mainly due to the lower volume sold at Orcopampa and La Zanja.

EBITDA, including our affiliates, in 2018 was $663.8 million, which is 8% lower in comparison to 2017. And the net loss in 2018 was $13.4 million compared to a net profit of $60.8 million a year ago. The net loss is mainly explained by Cerro Verde's provision for tax dispute of $460.6 million (sic) [$406.6 million].

Our CapEx has continued decreasing since the year 2016, having a value of $111 million in the year 2018. The free cash flow in the year 2018 jumped to $229 million compared to $74 million in the year 2017.

During the last quarter of 2018, Moody's upgraded our credit rating outlook from stable to positive. And according to Fitch, our credit rating remains as investment grade.

Moving on to Slide 6. In this slide, you can see the waterfall variation between the budgeted EBITDA from the whole year and the real EBITDA reached. The lower EBITDA was mainly explained by lower metal prices of gold and silver as well as lower volume sold from Orcopampa, El Brocal and Uchucchacua, which was offset by the results of our Debottlenecking Program.

Moving on to Slide 7. Here again, we can see the capital B as a visual index for analyzing the results from our portfolio of operations.

Moving on to Slides 8 and 9, attributable production. Total gold attributable production in 2018 was 603,000 ounces, which is 5% 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 decided to prioritize the Debottlenecking Program, and operations were suspended from December 17, 2018, to January 31, 2019.

Silver attributable production for 2018 was 26.9 million ounces, which shows an increase of 2% compared to the figure reported last year. In 2018, 62,700 metric tons of zinc were produced, 15% higher in comparison to a year ago. This increase was mainly due to Uchucchacua and Tambomayo's higher production. And in 2018, lead [equity] production was 38,800 metric tons, which is 5% higher in comparison to a year ago. And finally, our copper attributable production for the whole year was 121,800 metric tons, which also is in line with the figure reported last year.

Moving on to Slide 10 and 11. As you can see, the consolidated volume sold from our direct operations decreased in the case of gold, mainly due to lower volume sold from Orcopampa and La Zanja. In the case of silver, for the year 2018, we sold 24.5 million ounces, a 1% decrease as a result of lower volume sold at Uchucchacua. In the case of zinc, the 5% increase in the year 2018 is explained by more volumes sold at Uchucchacua and Tambomayo. In the case of lead, the 4% increase in 2018 compared to the previous year is explained by more volume sold at Uchucchacua and El Brocal. Finally, in the case of copper, the 2% 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 2018 was USD 955 per ounce of gold, 12% higher in comparison to a year ago, mainly explained by lower volume sold at Orcopampa and La Zanja. The costs applicable to sales in 2018 were as follows: for gold, USD 849 per ounce, which is 12% higher than a year ago; for silver, USD 10.47 per ounce, which is 7% lower than a year ago; for lead, USD 0.58 per pound, which is 16% lower than a year ago; for copper, USD 1.55 per pound, which is 3% higher in comparison to a year ago. Finally, in the case of zinc, the cost applicable to sales was USD 0.78 per pound, which is 20% lower than a year ago.

Moving on to Slide 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 5 (sic) [Slide 15]. You can see the volume of silver as well as the cost applicable to sales for each one of the assets that are 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 of the assets that are part of our portfolio.

Moving to the Slides 17 and 18. The Debottlenecking Program, which we are implementing in our biggest underground mines, is in progress. In order to become a more profitable company in terms of production and profitability, we have to fully implement the Debottlenecking Program, which would allow us to operate efficiently and, in addition, increase the visibility of our ore reserves for the mine planning purpose. During 2018, we have started obtaining results in Tambomayo, Orcopampa and El Brocal, generating an additional EBITDA of $24 million.

Also, as you can see in the Slide 18, we are providing an updated table with the main project for 2019. During this year, we are going to be able to generate in excess of $45 million due to this program.

Moving to Slide 19. In this slide, we are presenting the variation of our ore reserves. In the case of gold, in 2018, our reserves from direct operations decreased 23% compared to the previous year, mainly by the ore reclassification in Orcopampa mine. However, in the case of our total attributable gold reserves, there has been a significant increase of 42% related to Yanacocha's sulfide project.

In the case of silver, both our direct operations reserves and our total attributable reserves, you can see also a significant increase in comparison to 2017. Our reserves from direct operations shows an increase of 24%, mainly originated by Uchucchacua and El Brocal ore reserves. Our total attributable shows an increase of 35% due to Uchucchacua and also Yanacocha sulfides project.

And finally, our total copper attributable reserves in 2018 shows an increase of 10% compared to 2017. This increase is mainly explained by Cerro Verde's updated ore reserves and also Yanacocha sulfide projects and Marcapunta Norte, which is part of El Brocal.

Moving on to Slide 20. Once again, we see -- you can see our capital B from our logo used for analyzing in more detail the updated version -- information, sorry, regarding our portfolio of projects.

Moving on to Slide 21. Here, we are presenting in one snapshot the current development level for each one of our projects.

Moving on to Slides 12 (sic) [22], 23, 24 and 25. Here, it's important to highlight the following aspects: In the case of San Gabriel, we have an updated geomechanical model, and its mining method was defined. The pre-feasibility study has been assigned to AUSENCO, and M3, another consultant company, will add as a peer reviewer. We expect to reach pre-feasibility phase by the third quarter of 2019 and feasibility stage during 2020.

In the case of Tantahuatay sulfides, the scoping study was completed and discussed at Coimolache's board. And we expect to reach pre-feasibility stage by the first quarter of 2020.

In the case of Trapiche, the consultant company M3 has finished the scoping valuation with no major changes. Trade-off studies are in progress, and geometallurgical and geomechanics drilling campaign will start in March. In this case, we expect to reach pre-feasibility stage by the first quarter of 2020.

And in the case of Rio Seco, HATCH, another consultant company, continues derisking processing activities. The Environmental Impact Assessment is in progress, and the scoping stage was completed during 2018. And the pre-feasibility phase has been rescheduled to the second quarter of 2020.

Moving on to Slide 26. 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) And we'll take our first question from Carlos De Alba from Morgan Stanley.

Just maybe you -- can you please comment on the situation in Orcopampa? How is the ramp-up coming along after the shutdown? And second, if you can just clarify on the Debottlenecking, the target for 2019, is this a cumulative number or just pure incremental EBITDA in 2019 on the back of the 12 programs that -- or phases that you are -- or initiatives that you are implementing? And then finally, the -- given the, I guess, settlement or resolution on the tax dispute that Cerro Verde had, how should we think about the implications of that resolution on the potential dividends that the company, Cerro Verde, might pay you this year or next year?

Thank you, Carlos, for your question. The first one is related to Orcopampa and the ramp-up. Here is Juan Carlos Ortiz, who is our COO, he will answer this part.

Well, we resumed operation as expected by early February. We are progressing with exploration in the nearby -- in the near area for the mine where we are planning to centralize the operation in the near future. And we're expecting to have result from this early drilling campaign by April, by the second quarter of this year. And we will be reporting any progress as soon as we get good news from the exploration.

But just to summarize, Carlos, in the fourth quarter of this year, we expect to reach a profitable result from Orcopampa. Clearly, we -- as Juan Carlos said, we have -- obtaining very good exploration results. The second question was regarding the Debottlenecking Program. Yes, it's a cumulative analysis. As probably I have to recall -- you have to recall that this -- it's a program with an extension of 3 years, and we expect to increase the total EBITDA in the order of $120 million to $150 million. In the first year, in 2018, we have increased the annual EBITDA in the order of $24 million. During 2019, we expect to increase that number in the order of $40 million to $50 million. And in the last year, in 2020, we expect to capture the full value of this program. Your third question was regarding Cerro Verde. Yes, clearly, Cerro Verde, after this resolution, this tax dispute, is an asset with a long-term perspective and very robust financial numbers. It's -- in the upcoming board meeting that will be held on March 8, one point of the agenda is to discuss, define our policy dividend. After that, we'll be able to share this information with you.

All right. But do you see any potential negative implications on the dividend from the settlement and the tax payment?

No, because in the worst case scenario, they are -- Cerro Verde has a right to pay this amount in an extension of 66 months, which is very -- from a treasury perspective, is very, very easy, 66 months.

5-6.

6-6.

6-6. They have the right to [refinance] this number.

We'll take our next question from Tanya Jakusconek.

Maybe just coming back to the Debottlenecking so I'm 150% sure. You mentioned that it is cumulative. So you've done $24 million in 2018. So on a cumulative basis, you're expecting, to get to the $40 million to $50 million, another $20 million or so improvement in 2019. Is that correct?

No, it's not correct, Tanya.

No? So it's $40 million to $50 million on top of the $24 million?

Yes.

On top? Okay. All right. So that's, that. Actually, my big question was on the reserves. I really noticed that your grade at Orcopampa, Tambomayo and Uchucchacua really fell quite substantially on your reserves. Can someone talk to me about what happened at those 3 mines?

Yes. Thank you, Tanya, for the question. Yes, it's a topic related to the Debottlenecking Program. And here, Juan Carlos Ortiz will answer it.

As a consequence of the cost reduction that we are reaching in our operations, particularly in Tambomayo and Orcopampa, we reduced our cutoff. As a consequence of that, we increment the volume of [fine] gold and polymetallic material from the category of resources into reserve to be economical at this point. So that's an increment of -- while the previous year were reported as -- [you know what,] not reported as reserve, it was part of our inventory of resources of low grade. Now they jump from resources into reserve due to the reduction of the cutoff grade.

Okay. So 2 of them are cutoff grade at -- are all the operations or just -- all 3 of them had a reduction?

No, there is a crossover effect that is more sensitive on Tambomayo, Orcopampa and Uchucchacua.

Yes, Tanya. Let me add just the concept that -- regarding -- through this Debottlenecking Program, we are reducing our production costs. And at the end, we are reducing our cutoff. That's the implication.

Yes. No, I got that. It's just that with a lot of tons added at very low grade to really have lowered the grade by half of what the reserve grade was last year. Yes.

But we have to remember that through this Debottlenecking Program, we are increasing the efficiency. We are able to generate margin with low grades material.

Okay. And at San Gabriel, you mentioned you've selected a mining method for the underground. What mining method are you thinking right now?

Yes. Here, it's Raúl Benavides. He will answer it.

Yes, Tanya. Well, we were using cut and fill and that we have been checking the quality of the rock, and we feel very confident with cut and fill that we can work very nicely the ores in San Gabriel.

Yes. Let me add some information that in addition to the cut and fill, we will use primary and secondary stops. In the primary stops, we will use segmented backfill.

Okay. So we're talking then potentially higher mining costs than you were originally contemplating when you were thinking about San Gabriel because it's a more selective mining method with backfill.

It's not really more selective, it's just that we are taking all the contingencies out so that if the rock is better than what we think, we will increase efficiencies. So we're getting the worst case scenario into the project so that the only -- we can expect better things than -- better costs than what we're assuming.

Okay. And then what were we thinking the mining method to be and the costs when you originally thought about San Gabriel?

Well, we were looking at long drill holes so that we could have more efficiencies. But the problem is when you use that, you may get into problems if the rock is not competent enough. So what we have done is go to the worst case scenario, and we're using the worst case scenario in order to run the numbers. So -- and the numbers are very solid with the worst case scenarios, so we're very confident that we'll have no problem.

We'll take our next question from Luis Vicente with CrediCorp.

I just have a question about costs. And I don't know if you can give us some guidance for Orcopampa and Uchucchacua, which I think are the mines that are being most affected with the Debottlenecking Program. And since this will continue on 2019, I don't know if you can give us some guidance on the costs.

Thank you, Luis, for the question. Here is Juan Carlos Ortiz. He will answer the -- he will break down this number for Orcopampa and Uchucchacua.

Well, we expect to reach by the end of the year at a total cost reduction, comparing fourth quarter of 2018 to fourth quarter of 2019, about 20% to 25% cost reduction at Uchucchacua and about 10% cost reduction in Orcopampa. That's the range we are expecting to reach by the Debottlenecking Program along the year, this year.

Okay. But during the Debottlenecking Program, I mean, before reaching this reduction, do you have, I mean, a guidance or something maybe that you can give us?

A guidance in terms of production costs?

Yes.

In terms of U.S. dollar per ton. We have this information or no? Give me seconds.

Yes. We -- last year, we end up with around $120 in Uchucchacua, $120 per ton process. And we expect to be below $100 by the end of the year 2019. In the case of Orcopampa, we end up with around $350 per ton, cumulative 100% of total 2018. And we expect to reach about $250, $280 by the end of 2019.

Yes, it's a significant change for the case of Orcopampa.

(Operator Instructions) We'll take our next question from Thiago Ojea with Goldman Sachs.

First of all, I would like to clarify that on your reported EBITDA, you had the insurance gain at El Brocal of $20 million included on that. And if there is any similar insurance gain expected in the future? And second, if you can provide the guidance in terms of CapEx and the situation in Quecher Main and Marcapunta would be useful.

Okay, Thiago, thank you. Yes, your first question is related to the insurance policy. We don't expect any problem as what we faced in 2018. But this number is -- at the end, this money, it's -- in some sense, it's -- the insurance company's -- is a recognition, the loss of production and the loss of profitability coming from El Brocal. So also, that means that we have a very good policy insurance that covers all our mines because the number is -- was very significant. So -- but your question is, "Do you expect something similar this year?" No. The answer is no. And your second question was related to CapEx. Here, it's Leandro García, our CFO. He will answer it.

We are planning and we have budgeted for this year 2019 to have CapEx between $80 million and $120 million, the same level of last year.

Can you just discuss a little bit the next phase on the Quecher Main and Marcapunta?

Quecher Main is -- as you know, is under development. It's under control of -- it's part of Yanacocha. When we discuss about our CapEx, we are not considering this number. But clearly, the cash position in Yanacocha is very strong. So this probably doesn't require any funds from the shareholders, if this is your concern or question. And the second one...

No, my concern is more when -- sorry, no, my concern is more when do the projects will be -- build a plan, when will be in operation, what time line?

Yes. They started -- in the last year, in 2018, in the last quarter, they started to put some minerals in the patch. So they -- in the last quarter of this year, Quecher Main will be in full production. So it was a very successful project. And in the case of your second question or another question was related to Marcapunta. Marcapunta is an expansion of the current operation -- underground operation. So it's not significant in terms of CapEx. It's more related to solve some restraints, some bottlenecks.

We'll take our next question from John Bridges with JPMorgan.

Just following on from Tanya's question maybe, the mining method. It's not uncommon to sort of start off with a conservative mining method like cut and fill and then as you get comfortable with the rock, maybe go to a cheaper method. Is that something that might happen?

Yes. So this [sometimes happens], but here, Raúl...

Yes. It happens, the rock is not homogeneous. So when you get into operation, you normally have some barren and good rock. What we are assuming is that -- the worst case because we have some elements that the rock is not good. But I mean, it always happens in mining that you run into better-quality rock, and there will be probably an opportunity to reduce costs using long drill holes and more efficient mining methods. What we were doing is just, again, trying to use the worst case scenario so that we are in the safe way in any case.

Yes. We like good surprises on the side of the street. Just on forecasts for 2019. You have them individually in your release, but I wondered if you had sort of some guidance as to what the totals were for gold, silver and maybe the base metals.

Yes, give me a second. But we in the -- during our Investor Days, we intend to present to the market the production and also the production costs for the coming 3 years. We will have enough time to share this information. But here, we have some numbers. In the case of gold, we will produce in the range of 600,000 ounces of gold; and in the case of silver, in the range of 24 million to 26 million ounces. In the case of lead, we will produce in the range of 50,000 to 55,000 metric tons of lead; and in the case of zinc, in the range of [80,000] to 100,000 metric tons of zinc; and finally, in the case of copper, including our equity participation in Cerro Verde, in the order of 125,000 to 145,000 metric tons of copper.

Okay, great. And then presumably, is that going to be relatively stable over the next 3 years? Or is there going to be a pickup from Tambomayo?

Yes. We prefer to analyze this information in terms of profitability. We'll have a more detailed analysis in addition to production and costs in terms of profitability. And as I said, I would like to share this information with you in our coming Investor Days.

We'll take our next question from Carlos De Alba from Morgan Stanley.

Yes, sorry, the question was asked already.

(Operator Instructions) It appears to be -- there are no further questions at this time. I will now turn the call back over to Víctor Gobitz.

Okay, thank you. Thank you again, everyone, for joining our conference call this morning. As 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. Furthermore, we are implementing a disciplined process for value generation through an enhanced methodology in order to optimize our capital allocation.

To let you know, we will be attending BMO's Global Metals & Mining Conference next week in Miami. And finally, we are glad to invite you to our Investor Days that will take place on Thursday, March 7, in New York. Please contact our IR team for further information. Thank you again, and have a wonderful day.

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