Compañía de Minas Buenaventura S.A.A. (BVN) Q4 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Compañía de Minas Buenaventura's Fourth Quarter and Full Year 2013 Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Bryan Caulkins of i-advize Corporate Communications. Sir, you may begin.

Thank you, David. Thank you, and good morning to everyone. Welcome to Compañía de Minas Buenaventura's fourth quarter and full year 2013 earnings conference call on this February 28, 2014. Today's call is for investors and analysts only, therefore, questions from the media will not be taken. Joining us from Lima, Peru are Mr. Roque Benavides, Chairman and Chief Executive Officer; Mr. Carlos Galvez, Chief Financial Officer, as well as other members of the company's senior management team. They will be discussing Buenaventura's results [Audio Gap] or the press release issued yesterday. If you did not receive a copy of the report or you wish to join the mailing list, please contact I-advize in New York at (212) 406-3693. Before we begin, I would 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 the disclaimer. We ask that you refer to it for guidance. It is now my pleasure to turn the call over to Mr. Roque Benavides, Chairman and Chief Executive Officer of Buenaventura. Mr. Benavides, please proceed.

Good morning all, and thank you for attending this quarterly end of the year conference call. During the fourth quarter, Buenaventura's operations income was $13.8 million, 84% lower than the fourth quarter 2012. Net income was negative $288 million, including $453 million noncash impairment from Yanacocha. It means that, if not for that impairment, we would have done a profit on our statement. EBITDA from direct operations was $67 million, 48% lower than the fourth quarter 2012. During fourth quarter 2013, net sales were $292 million, a 29% decrease compared to $411 million reported in the fourth quarter 2012. This was explained by lower metal prices, as well reduction in silver and copper volumes sold. Net sales for the 12 months of 2013 were $1,241 million, 17% lower than the -- than in 2012. While royalty income was $44 million in 2013, 34% decrease compared to $67 million reported in the same period 2012. Buenaventura's equity production in the fourth quarter 2013, 103,000 ounces of gold, 4% lower than the 108,489 ounces reported in the fourth quarter of 2012, mainly due to lower production from Orcopampa that had a strike. And silver production, including affiliated companies, during the fourth quarter 2013 was 4.8 million ounces, 5% higher compared to the figure reported in the same quarter 2012. At Orcopampa, as we have mentioned, we had 17-day strike in October, which has impacted the figures of the fourth quarter and of the whole of the year. The cost applicable to sales, and we are using this term for now on. The cost applicable to sales for Orcopampa in the fourth quarter 2013 was $830 per ounce, 7% higher compared to the fourth quarter 2012. The higher cost was mainly explained by the lower production due to the strike. Cost applicable for -- applicable to sales for the full year 2013 was $802 per ounce compared to $604 per ounce in 2012. At Uchucchacua, we -- total silver production for the fourth quarter 2013 was 2.9 million ounces, in line with the 3 million ounces produced in the same quarter 2012. Cost applicable to sales in Uchucchacua in the fourth quarter 2013 was $12.86 per ounce, 8% lower than the figure reported in the fourth quarter 2012. For the full year 2013, cost applicable to sales was $13 compared to $13.58 in 2012. This essentially has to do with the cost reduction and our pending efficiency that we have been waiting in the course of the year. In the case of Uchucchacua, we have reduced our costs, and we are looking forward to additional reductions. At Julcani, total production in the fourth quarter 2013, 771,000 ounces of silver, 25% higher compared to the fourth quarter 2012 due to higher ore treated explained by the increase in plant capacity from 400 tons to 500 tons per day. Cost applicable to sales in the fourth quarter 2013 was $8.33, 28% lower than the fourth quarter 2012, mainly explained by the reduction in exploration activity and concentrating our exploration in -- within the mine. And cost applicable to sales for the full -- for the total year 2013 was $10.32 per ounce compared to $12.10 in 2012. At Breapampa, we've been able to produce 81,882 ounces of gold in excess of the 65,000 that we had targeted . And the cost applicable to sale in this mine was $601 per ounce. At La Zanja, total production in the fourth quarter 2013, 33,451 ounces of gold, a 17% increase compared to the fourth quarter 2012 and was due to an increase in ore grade. And for the full year, 2013, gold production was 137,395 ounces, 22% higher than for the full year 2012. The CAS applicable to sale -- the cost applicable to sales in the fourth quarter '13 was $617 per ounce, 29% lower than the same cost of 2012. For the full year 2013, CAS -- cost applicable to sales was $643 per ounce. At Tantahuatay, total production in the fourth quarter 2013 was 33,417 ounces of gold, 5% lower than the figure reported in the same quarter 2012. Cost applicable to sales in the fourth quarter 2013 was $375 per ounce, 40% lower than the fourth quarter 2012. In terms of exploration and non-operating areas, the exploration investment or expense for full year 2013 in non-operating areas was $32.8 million compared to $95.5 million in the same period for the full year 2012, representing 66% decrease in the investment in exploration outside of our direct operation. In this case, we must say that we have focused on brownfield exploration and reducing our greenfield exploration in line with the new policy that we want to reduce our expenses in areas that could wait. We are essentially focusing on brownfield exploration and exploration within our mines. Our share in affiliated companies during the fourth quarter 2013, Buenaventura share in affiliated companies was negative $282 million compared to $105 million reported in the fourth quarter 2012. Yanacocha’s contribution towards these results was a negative $322 million due to an impairment of $453 million. Cerro Verde's contribution increased 12% from $31 million in the fourth quarter 2012 to $34 million in the fourth quarter 2013. Coimolache's contribution decreased 35% in this period. During full year 2013, Buenaventura share in affiliated companies was negative $108 million compared to $481 million reported in 2012. Buenaventura's fourth quarter 2013 net income was a negative $288 million, including $453 million non-cash impairment provision from Yanacocha compared to $154 million reported in the fourth quarter 2012. Accumulated net income in full year 2013 was a negative $101 million compared to $703 million in the full year 2012. 2013 has been a year where we have developed a number of projects, and I would like to take a few minutes in detailing this. The Rio Seco plant is in a ramp-up stage, and this facility will allow mining from accessible areas with high silver and high manganese content from Uchucchacua mine, improving the quality of lead-silver concentrates from Uchucchacua and resultant manganese sulfate concentrate with commercial value that will be sold to agriculture within Peru and elsewhere. The Huanza hydroelectric plant, the Unit 2 started generating 46.3 megawatts, while Unit 1 will start its commissioning in March. These plants will assure energy supply for direct operations and can serve to the upper market. El Brocal expansion from 6,000 tons per day to 18,000 tons per day was completed. Production will start in March to treat 11,000 tons of polymetallic ore from Colquijirca and 7,000 tons of copper ore from Marcapunta daily. Tambomayo, it’s an advanced exploration, including drilling of new structures, mine development and engineering studies are in progress. Environmental impact assessment and permitting are expected in 2014 to initiate production in early 2016. During the course of 2013, in addition to the Ishihuinca gain [ph] we have discovered a very important Paula vein with very high grade. And as of the end of the year, the reserves from resources from this mine have increased both in volumes and in grade. Yesterday, we had our board meeting, and there have been a number of resolutions. And the first one is to accept the resignation of Mr. Aubrey Paverd as board member due to age limit. He was 75 years in January, and that limit we have to -- for board members. We would like to greet him, Aubrey, a special thank for 12 years that he served and contributes to Buenaventura's growth with great advice on the geological front. And then may I just say that he was the man that led the discovery of Yanacocha in the '80s when he was working for Newmont. He had given a lot to Buenaventura, and we are very grateful to him. And we -- the board appointed Mr. Igor Gonzales as a new board member to complete the current period. Mr. Igor Gonzales was Chief Operating Officer of Barrick until July last year. He's a Peruvian. He is from Cusco, and he is a metallurgist. And I'm sure, he will contribute a lot to Buenaventura as well. The second resolution is to modify the following requirements to qualify as independent board member when the board member is an officer of the company that maintains commercial relationship with Buenaventura. A previous requirement, the company's billing to Buenaventura should lead less than $1 million and represent less than 2% of such company's revenues. The new requirement will be that the company's billing to Buenaventura should be less than $1 million and represent less than 5% of such company's revenues. This is done, essentially, for smaller companies that we sometimes use their services, and this is a minor change in the both policies. The third was to approve Buenaventura's compliance policy in anti-money laundering and counter-terrorism financing and anti-bribery policy, and this has to do with the Foreign Corrupt Practices Act. And the fourth resolution is to call for an annual shareholder meeting to be held on March 27, 2014, to approve the annual report as of the end of the year, the financial statement as of the end the year; appoint Ernst and Young as our external auditors; ratify the dividend policy amendment, which has been proposed by the Board of Directors; approve a payment in line with -- a payment of dividend in line with our policy; and elect new members of the board for the period 2014-2016. With this, we are open to any questions that you may have.

[Operator Instructions] Our first question comes from John Bridges with JPMorgan.

I'd just like to express our condolences on your recent -- yours and Raúl's recent loss. Just wondered if you could give a bit of detail on the outlook for likely production overall in 2014 and in particular for Brocal and Orcopampa.

It's Carlos, Carlos Galvez. Regarding the -- our production in Orcopampa, we expected the level of production that we have in year 2013. That means the overall is 220,000, 230,000 ounces of gold, and our expectation is to add some silver production in Orcopampa as well, and this is going to be the total. The main efforts to keep introducing the same levels or increase will come from our other operations like La Zanja, Tantahuatay and even completing the production -- the year with Breapampa.

So I just -- thank you, John, for the condolences we have received, and on behalf of my family, my mother, my brothers and sisters, I would like to thank all of those of you that have expressed these condolences for the passing away of my father, who passed away close to 20 days ago at 93 years old. He was the founder of the company. He was very active. He was very bright until the end. And for those of you that met him, I'm sure that you will remember him, and we will continuing working in Buenaventura to follow his lessons and to make Buenaventura even bigger and for the benefit of all of our shareholders. So we thank you very much for that, John.

Just following up, Orcopampa, I thought you were going to be getting into better grades at Orcopampa about now, and that would have lifted your production.

Well, the question, John, is that we continue reviewing the geology of Orcopampa, exploring the mine [ph] of Nazareno, and we continue exploring and breaking in the area of Gaya [ph] . Those are the areas where we have total institutions, but we wouldn't like to give an -- a report that we have not even formed . So this is what we have as of today.

We have -- in 2013, we have been essentially working on a long tunnel to integrate the area of Pucay, which is an important target. Last week, we were briefed that we have finally got there, and we have already intersect with tunneling some of the areas that we were looking for. And we will be reporting, obviously, the good results at some point in time. But we are very optimistic about the exploration in the area of Pucay.

Okay. And then sorry, Roque, I missed your comment in your introduction. You're talking about a new discovery, a very important new vein you discovered. Which mine is that at?

In Tambomayo. In Tambomayo, in the process of developing the mine, we had essentially one mine -- one vein, which is the Ishihuinca [ph] vein, and we had -- have intersected the Paula vein. We will visit in the mid-January, and it is an impressive vein with very high grades. And all of these have made that as of the end of the year, the resources at Tambomayo have increased both in volumes and in grades. And that is a very important fact for the feasibility of the projects.

And do you expect to have permits on the EIS in hand by the end of the year? That's amazing.

Very well, we expect to be in production -- I keep teasing Mr. Francois Muths that I would like to have the mining operation in 2015, but he thinks that -- wants to have more time to make it, but we will be in production by the end of 2015, early 2016.

[Operator Instructions] Our next question comes from Carlos de Alba with Morgan Stanley.

We're sorry for your loss, Roque. But certainly, I bet that we will remember with admiration. I wonder if you could please give us some comments on the overall guidance for gold and silver production in 2014, as well as the cash cost of those 2 main products and finally, the CapEx outlook for the year given that a lot of projects were completed already, and we should start to see CapEx coming down I believe. And by the way, I just want to congratulate the company for the very good release on Exhibit 6, much more transparency, which, I think, it will enhance the level of understanding of the company amongst investors.

Carlos. Well, the guidance of production that we have is to keep on producing for the next 2 or 3 years at the level of -- and remain 850,000 to 900,000 ounces of gold until Tambomayo begins to production in 2016. Our expectation, you know that we should incorporate about 110,000 ounces per year of gold in Tambomayo beginning this year. For sure, this will replace, perhaps, the reduction plus others in all operations production. In terms of the guidance for silver, the profile that we foresee for the future, it was less view [ph] close to 19 million ounces. In year 2014, it will be 20.2 million to 20.5 million ounces. And our expectation is as we can incorporate the high grades of Uchucchacua's cohorts into production, we now want Rio Seco plant is fully producing or treating our concentrates, we should increase another 1 million ounces. And then when Tambomayo begins production, we add close to 3 million ounces of silver per year. So we should achieve a volume of production of 24 million ounces about 2016. And then you know that we are going to increase our copper and zinc production coming from not only the new level of production at Brocal but also once Cerro Verde completes the expansion. So we are going to grow from 65,000 tons of copper year 2013 to the level of 75,000 tons of copper due to growth of copper production from Marcapunta and also Brocal and keep on producing 75,000 to reach 150,000 tons once the expansion of Cerro Verde is completed. And for sure, we expect to have additional copper production from the area of Marcapunta rig in Brocal. We will have the same production we are growing in production and will be able to achieve this year a level of 60,000 tons of zinc or 55,000 and reach it to a level we are expecting in zinc [ph] until being able to develop the new zinc deposits that we'll still continue working with the communities. In terms of the cost applicable to sales, well, you know that we improved the performance in our Uchucchacua mine. We believe that we are going to reduce some needs, cost applicable to sales to the level of about 13 or 12, 15, the cost applicable to sales for our book, which is not that good perhaps, we are going to keep on producing at an average of 600 to 650 plus the impact of the attributable gold production coming from Yanacocha that what I believe is according to the profile that we should have the guidance of production shorter than the market, we are going to produce in the order of close to 900,000 ounces of gold but perhaps with a range, drilling 900,000 ounces to 980,000 or 990,000 ounces of gold for year 2014. But during the first half of the year, probably the profile would be similar to the last quarter of year 2013. So copper, the average cash cost is going to be in the area of $1 -- or $41 or $45 per ounce until completing the expansion of Cerro Verde that we can tax with a lower rate but the higher volumes. So I don’t know. We don't have guidance or what is going to happen next time you [indiscernible].

Any comments on CapEx, Carlos?

Sorry. The CapEx is going to be in the order of $280 million. You have to bear in mind that initially we're going to complete the area of $380 million, $385 million during year 2013, including the completion of Brocal expansion. The total [ph] mid [ph] CapEx move to the fourth quarter of 2014, and this is like in Cerro, the $280 million guidance that we gave is going to be $280 million this year.

We have treated -- we have finished with a number of projects, and we expect that from now on we will certainly look up to our cash. And we are not going to have this requirement of in total projects that we have completed.

Our next question comes from James Bender with Scotiabank.

And our condolences, Roque. This -- my question is for Carlos on the quarter earnings. Can you help us get to your adjusted income of $0.65. I'd note that the big adjustment is the impairment at Yanacocha, and that would imply, if I have done my numbers correctly, your share of income from Yanacocha of about $130 million. Does that -- is that a correct number?

Well, first of all, it should totally -- to clarify that the impairment that we are accounting for Yanacocha is that because we applied IFRS reports. This performance is not applicable for those that report in real cash. This is the first question that we have to clarify because all of the cost only Yanacocha, Brocal and Buenaventura are incorporated in the reports. Secondly, regarding the figure, yes, you are in line. The amounts pushing [ph] away the impairment [indiscernible] the figure is right.

Okay. And just to clarify from the previous question asked, I am sorry, I didn't really hear it clearly. Did you say that CapEx was $480 million or $280 million?

$280 million.

$280 million.

Your next question comes from Tanya Jakusconek [ph] from Deutsche Bank.

And again, Roque, my condolences to you and your family. I just had a couple of follow-up questions if I could. Just on the capital, of the $280 million, what is sustaining in that $280 million?

$150 million out of the $280 million is sustaining CapEx.

And then may be just some other little questions. We didn't really get any of the lead guidance for 2014, or what your G&A is going to be or your exploration, or your tax rate.

The tax rate is going to be 30%. That is for sure. What is -- I'm here with Cesar Vidal. Maybe he can tell us what is the budget on -- in the exploration.

That is supposed for Greenfield activity in the order of $10 million, and for Brownfield, in the order of $37 million, an aggregate of $47 million for 2014.

$47 million, is that 4-7?

4-7, 4-7.

And then maybe your G&A and a little update on Chucapaca if possible.

G&A. What is G&A?

General and administration.

General and administration, yes.

For Chucapaca?

No, no, no, general [indiscernible] ...

No, no, general and administration for the company and then maybe separately an update on what's happening at Chucapaca.

Okay, okay. Well, regarding the G&A, we are just adjusted where we could during the year, so the G&A will be, for the year, about $70 million to $75 million. This is where we can do.

In the case of Chucapaca, we were attending this conference of Bank of Montréal in Miami, and we had the opportunity to talk to Nicole [ph] and Ernesto Balarezo who is the manager here in Peru. Talking about Chucapaca, in -- during 2013, we decided to look after the possibility of developing Chucapaca underground, and we are working in the engineering and the feasibility scoping of that alternative. Having said that, we have to check that we do not have the surface lands required to develop the project, and we have decided that we will work on that first and then after, decide what to do with the project. The thing like that, expectations of the communities can be very high, and we are not prepared to give more than what the cost of the land should be. So the thing is what we have decided is to get there to a standstill until we acquire the required land for the development of the project. The project continues to be attractive where is other areas in addition to it Cajamarca [ph] that can be explored, and Cesar Vidal, who is here with us, he is optimistic that there should be other opportunities in that integration of Chucapaca.

Okay. And then maybe just lastly the lead guidance, would that be possible?

Can you repeat that, please?

The -- your lead production for this year?

Yes, well, you know that we do not target in Chucapaca [ph] because it's a by-product of our production. And the compartment [ph] of our ratio is less than 3%. So this is not an objective that we pursue.

[Operator Instructions] Our next question comes from Héctor de la Garza with Crédit Suisse. Héctor de la Garza: I just had one follow-up question. I don't know if I didn't get it right. Could you tell us your cash cost guidance for Orcopampa, please?

Production guidance? Héctor de la Garza: Yes, cash cost guidance, please.

Our cash flows. No, I'm sorry. I did not get it. Sorry, I cannot hear you well. Can you repeat your question, please? Héctor de la Garza: Yes. Could you tell us your cash cost for Orcopampa for 2014?

Yes, the cash cost really is cost applicable to sales as we are reporting, and it will be nearly in line with what we achieved during the last quarter of the year. So if I'm not mistaken, the figure would be $800 per ounce.

We have to work with a figure of $800 cost applicable to sales.

[Operator Instructions] Our next question comes from George Birch with Somerset Capital.

Roque, can I just ask about the impairment charge and how that was calculated and yes, how you're thinking about possibility of future impairment on that project?

Well, in the case of the impairment, the way to calculate is projecting the CapEx, the production of that weakened price, which is what we need and we used the $1,800 per ounce of gold. Considering the new expectations for accounts, value for inflation that we have during the critical time, we consider the life of mine. And then, with the big difference in the calculation for the [indiscernible] of impairment, IFRS we're having to adjust [ph] is that we have to calculate the present some value of that as compared with our investment and where have to in the past. And according to deals and lead to the present value that we have to calculate with weight of the account, which, in our case, is 7.1%, up to 2x rate with what we are considering, which is $1 billion at the level of the company, 100% impacting on the Buenaventura our 43.55% [ph]. Both exercises relative to what we have done for Yanacocha's operations and for Conga's project. So in both instance, together, it may get to $1 billion.

Our next question comes from Jessica Besa [ph] with Merrill Lynch.

Actually, this is Karel Luketic. Two follow-up questions here. First, just to clarify, you mentioned costs should return back to the $650 million levels. I'm not sure I heard that right. You said on -- for 2014 on a consolidated basis, if you could just clarify that? And second, on the projects, again, just to clarify on Chucapaca, with the issues you mentioned on land acquisitions, do you think it will be able -- we'll be able to see a final decisions during 2014? Or it's going to be more towards maybe 2015? Those are my questions.

Regarding Chucapaca, we do not foresee anything happening -- anything dramatic happening in 2014. This may information [ph] when we look at communities have to be taken with great patience, and we will continue working with them. In time [ph] hopefully, during 2014, we will be able to reach an agreement at the surface land and from there on, decide where to go. But the thing is if we have people in the area working in different assets, that generates expectations that we do not want to generate. So the thing is we are going to work cautiously during 2014 and see if we are able to acquire this land that we need. The cost of $650 million, Carlos?

Yes, well, regarding the guidelines of the cost, this is the mix of our total production of gold. We are calculating an average of Orcopampa, La Zanja, Breapampa and Tantahuatay, which are all the big in a region and low cost, and we have reported certain operations with about 300 -- $340, $350 per ounce. So when you combine the blow-out [ph] guidance, this is the $350 to $380.

And if I may just, could you provide an update on Conga, when can we expect the startup of the project?

The Conga, we have been talking to a number of investors in the different conferences. Essentially, we finished the Chailhuagon reservoir in 2013. That is a showcase of what the good thing that Conga can bring to the local farmers and to the area of Conga. The next step will be El Perol reservoir that the thing is in Cajamarca and all of Peru, we are running for election of regional presidents in October this year. And so this is a political time, which we do not want to get into discussions. And so it's really the subject of Conga of being the subject of the elections. So essentially, we -- in Conga, we're in a standstill until the new authorities are elected, and then after, we see how we pursue from there. Again, this is something that we have to be extremely cautious. We do not want a confrontation with the local community. We want to show them that they are going to benefit from the projects, and that requires the socialization of the project.

[Operator Instructions] At this time, we have no other questioners. I would like to turn it back to our speakers for closing comments.

Well, thank you, again, for joining us. We will continue to be in touch. We are committed to reporting to the market, and I can tell you that the team of Buenaventura will continue to working in order to make far more efficient our operations and growing the company in the benefit of all of our stakeholders. Thank you very much for attending this conference. Bye-bye.

Ladies and gentlemen, that concludes our presentation today. You may disconnect your phone lines, and have a wonderful weekend. Thank you.