Compañía de Minas Buenaventura S.A.A. (BVN) Q2 2012 Earnings Report, Transcript and Summary

Good morning, my name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Buenaventura Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Pete Majeski of i-advize Corporate Communications. Please go ahead.

Thank you, and good morning, everyone. Welcome to Buenaventura's Second Quarter 2012 Earnings Conference Call on this 1st of August, 2012. Today's call is for investors and analysts only. Questions from the media will not be taken. Joining us today from Lima are Mr. Roque Benavides, Chairman and Chief Executive Officer; Mr. Carlos Galvez, Chief Financial Officer; Mr. Cesar Vidal, Chief Exploration Officer, as well as other members of the company's senior management team. We will be discussing Buenaventura's results per the press release distributed yesterday evening. If you have not yet received a copy or wish to join the mailing list, please call us in New York at (212) 406-3694. Before we begin, I'd like to remind everyone that any forward-looking statements made today by Buenaventura's management are subject to various conditions and may differ materially. These conditions are outlined in the company's press release in a disclaimer and we ask that you refer to it for guidance. It's now my pleasure to turn the call over to Mr. Roque Benavides. Mr. Benavides, you may begin.

Thank you, and welcome to the second quarter conference call with our investors. Net income in the second quarter was $152 million, which was 23% lower than the figure reported in the second quarter of 2011. EBITDA from Buenaventura's direct operations was $113 million, 38% lower than the figure reported in the second quarter 2011. While EBITDA, including affiliates, decreased 16% from $406 million in the second quarter 2011 to $342 million in the second quarter 2012, these results were mainly explained by the higher costs and exploration costs at non-operating mine sites and lower metal prices in some of the metals that we produce. During the second quarter 2012, net sales were $332 million, similar to $327 million reported in the second quarter 2011. Higher silver, zinc and lead volumes sold positively offset lower silver and base metal prices, as well as decline in gold sales. Royalty income increased 17%, from $16 million reported in the second quarter 2011 to $18.7 million in the second quarter 2012, due to higher revenues at Yanacocha. In terms of our production and operating costs, Buenaventura's equity production in the second quarter 2012 were 107,000 ounces of gold, 11% lower than the 120,000 ounces reported in the second quarter 2011, mainly due to a decrease in Orcopampa and Poracota production. Silver production in the second quarter 2012 was 4.5 million ounces, a 32% increase when compared to figures reported in the second quarter 2011. Equity production in the first 6-months period 2012 was 225,000 ounces of gold and 8.5 million ounces of silver. This represents a 5% decrease in gold and 13% higher silver production compared to 2011. At Orcopampa, our production from the Chipmo mine in the second quarter 2012 was 56,762 ounces, 18% lower than the 69,335 ounces reported in the second quarter 2011 due to 15 days strike and 15% lower grade, you can see in Appendix 2. The old tailings treatment produced 3,984 gold ounces. And as a consequence, total production in the second quarter 2012 was 60,700 ounces, 19% lower than the same quarter in 2011. Cash operating costs in the second quarter 2012 was $551 (sic) [$541] [ph] per ounce, 23% higher when compared to the same quarter in 2011. This was due mainly to 18% decrease in gold ounces produced, 12% increase in reagents, basically explained by an increase in cyanide and sulfuric acid prices, and contractor costs also increased 32%. At Uchucchacua, we had a very good second quarter. Total silver production was 2.7 million ounces, 33% increase when compared to 2 million ounces in the second quarter 2011, due to higher tonnage treated and higher recovery rates. At Julcani, Gregorio's [ph] mine, the mine which Buenaventura started, total production in the second quarter 2012 was 602,000 ounces of silver, 1% lower than the same quarter 2011. Silver cash costs at this mine was $12 per ounce. At La Zanja, total production was 27,600 ounces of gold, 25% decrease when compared to second quarter 2011. But the accumulated gold production for the first 6 months was 54,000 ounces, 13% lower than the first 6 months of the previous year. At Tantahuatay, we are facing the first full year of production in the second quarter 2012. We produced 39,000 ounces of gold. In the first 6 months of 2012, gold production was 66,000 ounces of gold. Cash operating cost, $385 per ounce and $433 for the first 6 months. El Brocal, Sociedad Minera El Brocal where we own 54%, zinc production for the second quarter, 14,000 metric tons, a 46% increase when compared to second quarter 2011. Silver production increased 18%, from 1.1 million ounces in the second quarter 2011 to 1.3 million ounces in the second quarter 2012. General and administrative expenses in the second quarter 2012 was $25 million, 28% higher than the figure reported in the second quarter 2011 due to a provision for early retirement contingencies and metallurgical research studies. For the first 6-months period 2012, general and administrative expenses were $54.8 million compared to $36.5 million in 2011. Exploration costs at non-operational mine sites, which includes care and maintenance in 2012, were $26.4 million, a 118% increase compared to $12 million reported in the second quarter 2011. Buenaventura's main exploration efforts were focused at the Trapiche, Tambomayo, San Gregorio, Chancas and Breapampa projects. Our operating income from the second quarter 2012 was $79.4 million, 46% decrease compared to $148 million reported in the second quarter 2011. This decrease was mainly due to 32% increase in operating cost, while revenues increased 2%. Accumulated in the first 6-month period 2012, operating income was $211 million versus $326 million in 2011. During the second quarter 2012, Buenaventura's share in associated companies was $122 million, in line with $123 million figure reported in the second quarter 2011. Yanacocha's contribution to these results increased 33% from $64.9 million in 2011 -- in the second quarter 2011, to $86.6 million in the second quarter 2012, while Cerro Verde's contribution decreased 49% from $65.9 million in the second quarter 2011 to $33.9 million in the second quarter 2012. For the first 6-month period, Buenaventura shares in associated companies was $258 million, 9% higher than the $236 million reported in 2011. We have figures here for Yanacocha, which you have probably heard from the conference call of new month for Cerro Verde. May we only mention that the lower income from Cerro Verde was due to a strike and weather conditions in the first quarter of this year. We have also reports on Canteras del Hallazgo, our joint venture with Gold Fields, and we have been investing in the development of this project. In Coimolache, which is Tantahuatay, we have an attributable contribution of $9.6 million for the first year, as this is the first year of production. And this makes Buenaventura's second quarter 2012 net income of $152 million, at $0.60 per share, a 23% decrease compared to $197 million reported in the second quarter 2011. Accumulated net income for the first 6-month period 2012 was $360 million, 15% lower compared to 2011. We have been working in a number of project developments. In La Zanja, we have included the development of a new open pit, expansion of the current leach pad and improvements to the operation's road access. Construction began in the second quarter 2011. As of June 30, 2012, total project's expenditure was $39 million. We expect to complete by the first quarter 2013. At Tantahuatay, we are including a Leach Pad's Stage II development of the Cienaga Norte Pit and an access road between the leach pad and the open pit. Total CapEx totaled $20 million. At Mallay, the new mine that we put in operation in April, during the second quarter 2012, we produced 138,000 ounces of gold -- of silver sorry, of silver. And currently, we are exploring brownfield in the Chancas-Chiptaj area. We are expecting to -- awaiting full production to produce in excess of 1 million ounces of silver from Mallay. Rio Seco manganese sulfate plant. Buenaventura continued with the construction of the manganese sulfate plant with a total budget of $76 million. As of June 30, total expenditure was $44.5 million. Project includes an acid leaching facility, a sulfuric acid production plant and a manganese sulfate crystallization plant. The leaching process facilities are expected to be completed by the end of the fourth quarter 2012, by the end of this year. The construction of the sulfuric acid and the manganese sulfate plants is expected to be ready by the fourth quarter 2012 and construction and start-up tests at both plants are scheduled by the end of 2012, most likely first quarter 2013. At -- in Breapampa, as of June 30, Buenaventura's total investment was $40.3 million, representing 84% of the entire budget. We expect to put into production this mine by the third quarter -- by the end of the third quarter of 2012. Huanza hydroelectric plant continues the final stage of construction. As of June 30, construction progress included Water Conduction Tunnel, 10,074 meters of excavation, 100% completed. PowerPlant civil works, 85% completed. The Pallca Dam, 78% completed. Electromechanical equipment are nearly complete and will be delivering on schedule. Equipment assembly is 13% complete. Yesterday, we had a board meeting, and we accepted the resignation of Mr. Luis Coleridge who is 75 years old. And as you know, we have a policy that board members retire at 75, after 12 years on the board and being president of the Audit Committee, in accordance with Buenaventura's policy. We want to highlight that Mr. Luis Coleridge, before he was a board member, he was part Arthur Andersen and was also related to Buenaventura. Over 40 years of dedicated work for the development of Buenaventura, and we want to praise Mr. Luis Coleridge for that. And he's replaced -- we appointed Dr. Jose Miguel Morales as a new board member. And Mr. Morales was the Secretary of the Board and he has resigned from that. Also was, we appointed Mr. German Suarez as President of the Audit Committee, replacing Mr. Coleridge. And Mr. Carlos del Solar was included in the Audit Committee as a member. In replacement of Dr. Jose Miguel Morales as board secretary, was appointed Mrs. Gulnara la Rosa as General Council. She has been working for Buenaventura for a number of years and she's a very competent lawyer and will contribute to the development of Buenaventura as well. With this, we are open to any questions that you may have. Thanks.

[Operator Instructions] Your first question comes from the line of Carlos de Alba with Morgan Stanley.

My first question is regarding the impact of the strikes that you had in the second quarter. If you can quantify the impact that the strikes might have had in terms of output, achievements and cost so that we can understand just to what extent the results that came lower than we expected were affected by that? And the second question, if I may, is regarding the Yanacocha cost of production, or cash cost, were really low, and the performance has been great in that operation. Do you expect that to continue in the second half of the year and in 2013?

Yes, Carlos, this is Carlo Galvez. Well, the impact this 15-day strike in Orcopampa impacted not only Orcopampa but also Poracota. And [indiscernible] 13,000 ounces, which have made a difference in not only when comparing the production quarter-to-quarter, but also is the main impact in the cash operating cost. Of course, the lower rate has its own component, but this is due to the sort of the days that [indiscernible] with the prioritization of the operations, we had to reduce and to exploit what we had on hand. Regarding your second question, the Yanacocha's cash cost, of course, having the good performance that today, during the first half of the year, and the second quarter specifically, Yanacocha has exploited [ph] according to the mining plan. Remember that for comparison, when reporting last year, the negative effect of the La Quinoa [ph] pit difficulties we had that imposed to the company to modify the mining plan, are reducing the grade. Well, of course, by comparison, results show that we have a much better performance. We expect to continue producing the same cash cost. It's slightly higher, because according to our guidance, Yanacocha should produce in the year in the order of 1.3 million ounces, and we have already produced in excess of 140 -- or sorry, let me confirm the information. We have already produced 156,000 ounces. So we are going to use some production in Yanacocha during the second half and this will impact something on the cash cost.

Your next question comes from the line of Felipe Hirai from Bank of America.

So I have 2 questions. The first one is that given what we saw in terms of the strike in Orcopampa and the strong productions in your other operations, what is your current expectation for gold production for the year? And if you could already say something about 2013? And my second question is related to the political conditions in Peru, specifically the Conga Project. If you could just give us some update on what's the current situation there and the recent developments?

Yes, well, regarding the strike in Orcopampa, it was part of the negotiation with the union. The important thing is that being this is one of the most important operations -- direct operations of Buenaventura, it was important for us to have a serious negotiation and reaching to an acceptable agreement with the union, because this was going to become the benchmark for the rest of our operations and negotiation agreements. This [indiscernible], in spite of the fact that we suffered 15 days of strike in Orcopampa, this permitted not to have a strike in Uchucchacua. But it was announced to begin the same day we reached an agreement with the union of Orcopampa, and the strategy worked. On the other hand, it was mentioned in the strike in Cerro Verde. Yes, this is approved but that happened during the first quarter of the year. The main impact -- I will take the opportunity to clarify some of the information. The main impact in Cerro Verde results has 2 components. First of all is the price of copper, that it was from $2.97 per pound, as compared with $3.88 we got during the second quarter of last year. On the other hand, being this a reduction as compared with the first quarter, we have to report not only the sale revenues of Cerro Verde with this lower price, but also, we have adjust the prices for those shipments that had opened the probational period . On the other hand, the sales delivered during the second quarter was a lower deliver of copper in the order of 26.7 million pounds which affected [ph] $80 million, and a lower delivery of moly and silver, which impacted sort of close to $22 million. So if you adjust the figures, we have reported a very regular quarter.

In terms of your second question on the political front, it is not easy to explain. But essentially, we have to realize that we are in a full democracy. The first year of Mr. Humala has shown that he is respectful of democracy and that he is following that trend. That he has had a crisis, obviously, yes, and that has meant that the 2 Prime Ministers had to resign, and we are in the third Cabinet. But it's composed essentially by the same people, with a couple of comments that I believe are very positive. Nobody has mentioned that the Ministry of Agriculture, the new minister comes from Proinversion which is the agency -- the Peruvian government's agency to promote investment. So he is a very market-economy-oriented person, and will be a big support for Mr. Castilla, the Minister of Economy. And the new Chief of Interior and Defense, 2 civilians have been appointed, and that has been taken also very well. These 2 civilians have replaced 2 retired military, and it is part of the promises of Mr. Humala during his campaign. And then Mr. -- the new Prime Minister is a lawyer. He was the Minister of Justice. He seems to be an orderly person, and he is taking the right steps for -- I hope working tables, and not only dialogue tables, but we believe that this contributes to a better situation in the political front. We believe that they have received a lot of support from Congress and hope for the better.

[Operator Instructions] Your next question comes from the line of John Bridges with JPMorgan.

I was surprised positively by what came out of Uchucchacua this quarter. I've always thought that you're going ahead with the project to upgrade the concentrates because the situation, the available easy material was running down. But is this a one-off this quarter? Or could you sort of characterize why things are so much better there?

Well, John, it's Carlos. In Uchucchacua, we continued progressing with better grades and we are improving our operations, not only in terms of selecting the holes we exploit and improving our procedures and controlling our metallurgic, and this is why we had these better results. And we are preparing the mine and the infrastructure for the future operation in order to take advantage of the various so called facilities, these manganese sulfate plants that will permit to modify the philosophy and the concept of our exploitation. It's going to be massive exploitation. Now, Roque eventually could share some information about the new areas and ore bodies, how wide those are and how important grades they have, despite of the fact that they have an important manganese content. But this is the future of Uchucchacua, and this is why we are working [indiscernible].

I think Uchucchacua has shown to be very continuous mineralization. And the fact that we are working on the manganese sulfate plant is to add value to the whole production, in addition to Uchucchacua in the area of Yumpac [ph], which is the brownfield exploration of Uchucchacua, we are finding also substantial resources. I'm afraid that's with higher manganese content, but also with silver content. So I think that is very, very important. And it's showing to be a district. And I'm sure that Cesar, as a geologist, can comment on that as well.

All I can say, in addition to what Roque had already said, is the Yumpac [ph] prospect is 4 kilometers to the northeast of the underground -- the Northeastern most underground development of Uchucchacua. It's a corridor with very strong structural preparation. And we have a mine on the one end, given the good results, you can read in the press release in this conference call. But on the other end, we have a current prospect with very high silver and very high manganese, so there may be a continuity. We have done some geophysical work because it's common [ph] ground on the surface, and the evidence is ambiguous. But we'll have to drill, and of course, we are developing in that direction. So it's not just an added prospect to the mine, it may be a corridor, a continuous corridor, 4 kilometers. It's a long shot, but the prospectivity of Uchucchacua has, I would say, doubled, with the discovery of Yumpac [ph] . And it's only early days, but it's the same kind of ore, 4 kilometers away from the underground development and is going to be part of the district, as Roque said.

Interesting. And then, so perhaps through the second half of this year, what can we expect in Q3 and Q4? Is this level of production from Uchucchacua going to continue or is it going to slip back?

We expect to reach in excess of 10 million ounces for the year in Uchucchacua, which is in line with what we mentioned early in the year, no? So yes. And as you can see from our report in this quarter, we are investing heavily in addition to what we used to in exploration. So I think we will certainly have additional results. But at this point in time, Uchucchacua will be producing the 10 million ounces for the full year.

What encouraged you to spend more heavily on exploration? Was it the fact that the metal prices have been higher and have enabled you to do that, your strong balance sheet?

Well, that is part of the culture of Buenaventura, if I may say. I think we are different to many other companies in the sense that we are committed to exploration. If we want to have sustainable mining, we need to reinvest in exploration, especially if we operate underground mines. In the case of Orcopampa, for instance, we want to get back to the level of production that we used to have, and so, that we need to explore, additionally. In the case of Uchucchacua, because we have the area of Yumpac [ph] and we have targets there. And the thing is, this is the name of the game in mining in our mind. If we have more targets, we have to invest more in exploration.

If I may add, John, it is important to report that we have a certain figure [ph] that we are leading in the different prospects and projects. For instance, in the case of Trapiche, we have invested $3.9 million in exploration, but we are working on a scoping study and we are enhancing the resource. So we are foreseeing a new project that we would like to deliver in the future, 100% property of Buenaventura, and this could be the first copper operation of Buenaventura that we are pursuing in a [indiscernible] value project. On the other hand, we have the San Gregorio project. Did you know that after 15 years of living with the community, we have the opportunity to integrate [ph] and to work on the geological [ph] study. And this is what we are working on a fast track and this the opportunity we have to take to go ahead. In the case of Tambomayo, the discovery we had during the second half of last year, this is a very good opportunity in a deposit that we would like to put into value, and this is a signal [ph] with a certain gold content that we will replace the reserves we exploited in the past. Chancas, being the surrounding part of Uchucchacua and being part of the brownfield of Mallay, this is where we expect to add silver content to pass through our floatation [ph] plant. And of course, in Breapampa, in preparation to our new operation, this is the opportunity to accelerate our exploration in order to have a certain [ph] new operation.

Interesting. And then Roque, you mentioned the targets -- the production targets for the year. Has anything changed there after this quarter in terms of gold, silver, lead, zinc production, copper?

Not really. We gave some guidance on the production and we continue at that same track.

Okay. Just finally, I see grades are coming off at La Zanja, and you are investing in the new leach pad. Can we expect grades to be at this lower level until the leach pad -- new leach pad comes on?

La Zanja was a very peculiar situation, because last year, we produced in excess of 130,000 ounces and the expectation was 100,000 ounces. Then we had higher grades. It was a -- it came almost like as a surprise. What we are targeting in La Zanja is 100,000 ounces, which was the target -- the initial target.

In terms of the operation, you can review the figures we reported during the first quarter this year. We have increased the stripping by 10% -- the stripping ratio by 10%, and we downgraded by 10%. So this is a balance that permitted La Zanja to pursue the forecast. So this is what we are obtaining, and this explains basically the variation of this cash operating cost.

Okay. And then probably a 1 final, final comment. Verde, I know there would -- you were saying that with these shipment issues, but there's also a comment that the grades have been coming down. Again, what sort of grades should we look forward to? Will that be at lower levels until -- or production be at lower levels until the expansion comes along?

Well in the case of Cerro Verde, what we expect it to continue producing with the [indiscernible] according to the guidance of -- reported by Freeport. So something that happened only because of there were certain difficulties or lack of chips [ph] to deliver is something that impacts the figures in the paper. But of course, we continue producing and delivering the production on the schedule during the year. So it is progressing very well. The cash operating cost is very competitive. The grade is good. And perhaps, copper price will add to this equation.

And we are targeting the 330,000 tonnes of copper per year until the expansion.

Your next question comes the line of Tanya Jakusconek with Scotia Bank.

I just have 2 questions to do with the guidance, and I'll start with the exploration. You did mention on your quarterly that exploration expenditures this quarter had an impact on your earnings. And I think from your previous guidance, you had provided $120 million this year from non-operating expenditures and then $60 million from operating, so that would be $180 million in total. And you've already done $113 million for the 6 months. So maybe some guidance on what you see your exploration expenditures this year.

Let me try to explain our expenditures. At least I call them investments. This is a long-term investment. But certainly, they are accounted as expenses. Well, the figures you are seeing for the first semester, and it had been spelled out in terms of the first or more important 5 projects, are all minings that are investments in advance for exploration projects. Trapiche has got 6 weeks during interim drilling and expansion or extension drilling. Tambomayo has got 3 rigs on 4 underground levels, not just exploring, but developing and making ores accessible. San Gregorio, as Carlos explained, after 15 years of no drilling, we have 40 positive holes in that order. Now, we're adding 200 holes, the start of an interim drilling program. The ore body is there. We have to know how rich it is and what it will take, engineering and metallurgically, to make it a positive economic open pit mine. Chancas' brownfield to Mallay. It's a well-known district in the past. We are opening up some of the tunnels and drilling. And Breapampa, of course, is having a small open pit heat gauge [ph] operation in production. So you see that 60% of the semestral expenditures in exploration are not the greenfield or just the romantic look for a new ore body. It's delineating more deposits with a chance to be economic, and that makes the bulk of this reinvestment, which is probably going to remain higher than the prediction for the whole year.

Okay. So it's going to be higher than that $180 million combined?

Probably not much. But we are already, in this first semester, gone a little bit over.

Okay. So maybe we all -- I'll move it up, then. And then just on this, my second question has to just do with the overall cash cost. John asked about the production levels, Roque, from the beginning of the year, for gold, silver and copper. I'm just wondering if the guidance for cash cost level for the gold and the $580 to $630 per ounce, is that still the case for gold this year?

Yes, we expect to continue producing the cash cost, we have reported different than the case of Orcopampa, because Orcopampa incorporates a deviation. But in the case of La Zanja and Coimolache, for instance, those should, in average, report the cash cost to deliver $400, $450, according to our guidance. In the case of Yanacocha, where I mentioned at the beginning, it should include some due to the fact that to achieve the guidance of 1.3 million ounces, we will reduce some the production in the second half and this will impact on the cash cost.

Just so that I'm sure, the $580 to $630 guidance that was given, that excludes royalties. Does that include Yanacocha in there with their royalties?

Yes, in the case of Yanacocha, so royalties, the commercial royalties are included. But the royalties to the state are not because this is part of the -- an additional income tax.

Yes. No, I understand that. But is Yanacocha in the $580 to $630 guidance range?

Yes, yes, yes.

Yes? Okay. Perfect. and just for my calculation because I need to report cash costs with royalties. If I take the royalty payments you made in the quarter, and I divide it by your equity production, it comes to about $87 an ounce. I'm assuming that's all gold. It's probably not, but would that be a safe assumption? Or maybe you can help me on that.

You are talking about the royalties of Orcopampa. Orcopampa is additional gold.

Yes, I was just talking about the -- just trying to get a cash cost for you with the royalties.

Well, when talking about the Orcopampa for royalty, will probably be separated. This is not included in our cash operating cost.

[Operator Instructions] At this time, we have no further questions. I'd now like to turn the floor back over to Mr. Benavides for any closing remarks.

Thank you very much for attending this conference call. For those of you based in London, I will be in London next week attending the constructive industries transparency initiative on Tuesday. And if any of you want to get in touch with me, I'll be in London 2 or 3 days there next week. And then obviously, we are open to any additional questions that you may have by Internet or telephone call whenever you feel like. Thank you for attending. And hope you have a great day. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.