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Compañia de Minas Buenaventura (NYSE:BVN)

Q2 2014 Results Earnings Conference Call

July 31, 2014 11:00 AM ET

Executives

Maria Barona - i-advize Corporate Communications

Roque Benavides - Chief Executive Officer

Carlos Gálvez - Chief Financial Officer

Raúl Benavides Ganoza - Business Development VP

Analysts

Santiago Perez Teuffer - Credit Suisse

John Bridges - JPMorgan

Pablo Abraham - Morgan Stanley

Karel Luketic - Merrill Lynch

Operator

Good morning and welcome to the Buenaventura Second Quarter 2014 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be question-and-answer session.

I would now turn the call over to Maria Barona, on behalf of i-advize Corporate Communications. Ma’am, please go ahead.

Maria Barona

Good morning. This is Maria Barona with i-advize. Today from Compania de Minas Buenaventura in Lima Peru, we have Mr. Roque Benavides, CEO of the company and Mr. Carlos Gálvez, Chief Financial Officer.

They will be reviewing the quarterly report that was issued for the second quarter period. At this time, these gentlemen will begin their speech and we will take questions and answers after the presentation.

Thank you very much for your attention. Mr. Benavides, please begin sir.

Roque Benavides

Thank you and welcome to the quarterly conference call of Compania de Minas Buenaventura. This quarter has been much better quarter than the first quarter of this year.

EBITDA from our direct operations increased 89% compared to the second quarter 2013 and 41% compared to the first quarter in 2014. Net Income increased 22% compared to second quarter 2013 and improved significantly compared to the 16.1 million loss in the previous quarter.

Stronger results were driven by higher silver and copper volume sold, from Uchucchacua and El Brocal production, respectively. Yanacocha’s contribution to results was a loss of $12.9 million, mainly due to a $21.3 million leachpad write-down. Gold production is expected to ramp up in the second half of 2014 to reach guidance of over 900,000 ounces.

Equity gold production from direct operations to recover in the second half of 2014 to achieve annual guidance of 420,000 to 430,000 ounces of gold. Accessing new areas closer to surface in Orcopampa will allow a 2014 production of 200,000 ounces. La Zanja and Tantahuatay are expected to produce 140,000 ounces of gold each one in 2014. And Breapampa will produce 80,000 ounces of gold in this year.

Uchucchacua is expected to increase ore treated volume in third quarter 2014 due to new permitting that has been obtained. Ore extraction will be focused in the Socorro mine with high silver-manganese content that will be held by the Rio Seco manganese sulphate plant in operation. The Public Audience at Tambomayo project was successfully held last week. And the Environmental Impact study has been filed and approval is expected by the end of 2014.

Our Huanza Hydroelectric plant commenced full commercial operations and should be generating 95 megawatt in excess of the 90.1 megawatt that we were expecting due to higher capacity in the turbines. El Brocal plant expansion to 18,000 tons per day was completed and full operation should start in September. The plant will operate in August at 14,000 tons per day capacity.

During 2014 our net sales were $298 million, 9% increase compared to $273 million in the second quarter 2013. This was explained by higher copper and silver sales. In 2004, in the second quarter 2014 Buenaventura's gold equity production from direct operations decreased 4% mainly due to lower production in Orcopampa, but was positively offset by higher production from Breapampa.

Gold including associated companies decreased 20% due to lower production in Yanacocha. At Uchucchacua, total silver production in the second quarter 2014 was 3 million ounces, 10% higher than 2.7 million ounces reported in the second quarter 2013, mainly due to higher tonnage and ore grade despite all the problems that we have had in the operation.

At Mallay, total production in the second quarter was 302,000 ounces of silver, 4% lower than the second quarter 2013. At Julcani, total production in the second quarter 2014 was 763,000 ounces of silver, 39% higher compared to the second quarter 2013 due to higher ore treated and in the second quarter 2013 we had a strike.

At Breapampa, total production in the second quarter 2014 was 21,228 ounces of gold, 10% higher than when compared to the figure reported in the second quarter 2013. At La Zanja, total production in the second quarter was 36,685 ounces of gold, 1% increase compared to the same quarter last year. At Tantahuatay, total production in this quarter was 35,000 ounces, 1% lower than the figure of the same quarter last year.

At El Brocal, copper production was 11,300 metric tons versus 5,050 metric tons reported in the second quarter 2013. Exploration in non-operating area during the second quarter 2014 was $14.8 million compared to $4.1 million credit reported in the second quarter 2013. During the period, Buenaventura's main exploration efforts were focused on the following projects: La Zanja underground, $3.5 million; Tambomayo, $3.1 million; and San Gregorio at El Brocal $2 million.

Our share in associated the company during the second quarter 2014, Buenaventura's share in associated companies was $20.2 million, 59% lower when compared to $48 million reported in the second quarter 2013.

At Yanacocha, during second quarter 2014, gold production was 190,600 ounces of gold, 35% lower than the second quarter of 2013. Net income was negative $46.5 million compared to $54.5 million in the second quarter 2013, driven by a $21.3 million write-down of leach inventory value from La Quinua pad.

At Cerro Verde, during second quarter 2014, copper production was 56,683 metric tons, an 8% decrease compared to the second quarter of 2013. During the second quarter of this year, Cerro Verde reported net income of $138.3 million, 30% higher compared to $106.3 million reported in the same quarter of last year.

At Coimolache, attributable contribution in the second quarter of this year was $6.1 million, $2.1 million in the second quarter of 2013. Our net income for this quarter was $23 million 22% higher when compared to $19.0 million in the same quarter of last year. It is important to mention that we have continued with important projects such as Huanza that I mentioned earlier, El Brocal expansion that also mentioned and the Tambomayo project in the Province of Arequipa which is continue to be developed and that we hope to be in production by 2016.

With this we are open to any questions that you may have.

Question-and-Answer Session

Operator

Thank you, sir. At this time we will open the floor for questions. (Operator Instructions). Our first question comes from (inaudible) from Merrill Lynch.

Unidentified Analyst

Good morning, everyone. Thank you for the questions. My first question is regarding the guidance for the second half of this year, you are quite emphatic on reiterating the guidance for 2014 which basically implies a strong volume growth both in your direct operations and also Yanacocha, could you help us understand what level is there of growth are you expecting for the second half and where it is coming from. And also most importantly how should that impact your cost levels. On that also on Yanacocha, we noticed you have lowered the guidance for Yanacocha this year. What level of cost is sustainable for Yanacocha on the, let's say on a recurring basis going forward? Those are my questions.

Roque Benavides

Well, in terms of the guidance for our production during the second half of this year, we expect to catch up with our objective for the year in terms of silver production as delivering to Yanacocha close to 20 million ounces. So that means that we should produce a load of 11 million ounces during this second half.

In terms of gold production, the 202 as gold production should be in the order of 460,000 ounces of gold, due to the fact that we have arranged short production for the second half of the year for Orcopampa and we will continue with the objectives that we had in La Zanja and Tantahuatay and Breapampa.

On the other hand, the range the guidance of production of Yanacocha was pretty wide between 875,000 ounces to 985,000 ounces for the year. So, they are reviewing but, still they are going to produce in excess of 900,000 ounces approximately. So, this is why we believe that we are going to be able to comply with our initial guidance.

In terms of the cost, this is the main concern during the first half of the year, specifically in the case of Yanacocha, due to the very high astatine and lower ounces of gold produced. When increasing the ounces of gold produced during the second half and reducing the astatine we should obtain Cost Applicable to Sales that should be in the order of $800, $850 per ounce.

Unidentified Analyst

Okay. That’s great. Thank you.

Operator

Thank you. Our next question comes from Santiago Perez Teuffer from Credit Suisse.

Santiago Perez Teuffer - Credit Suisse

Hi, good morning. Thanks for the question, Carlo and Roque. My first question is related to El Brocal. Can you give us some color on its ramp up in terms of production volumes probably for the next three years and also on where our cash costs and margins you’re expecting from each?

Carlos Gálvez

Yes. Well in the case of Brocal what we explained during the Brocal’s speech. Well the good production was delayed for certainty the gold is in there, crushing equipment. Now we’re producing at the level of 14,000 tons per day, 700,000 tons per day in the (inaudible) related to the metallic and 7,000 to copper. Beginning September and October concluding the solution of these crushers, we should produce 18,000 tons per day considering the 11,000 tons per day for metallic and 7,000 tons of copper ores. With this we are going to be able to produce at the rate of, let me say in terms of copper will be 11,000 tons of concentrates per month in Brocal plus 4,000 tons per month of concentrate of lead and 12,000 to 13,000 tons of concentrate of zinc.

So this is going to be the average (inaudible).

Roque Benavides

If I can add I think the start up of the expansion project has been far more competitive than what we expected. In that kind of the equipment that Carlos mentioned the primary crusher was met in the performing as we expected and obviously we did expect that coming from first class company in Sweden we would receive a crusher that will work perfectly.

But this is something that happens in the expansion projects of this size and we are suffering from that. But starting September, we do expect to have all the expansion in place.

Santiago Perez Teuffer - Credit Suisse

Thanks (inaudible) for that. And if I may going back to the question how do you expect cash flows and margins after this stabilizes?

Carlos Gálvez

It's going to be pretty complicated to talk about the cost in Brocal due to the fact that we are talking about three different concentrates. But in terms of the copper, the figure we have in the top of my mind is less than $5,000 for a ton of copper as further cost applicable to sales in Brocal from September onwards and I am (inaudible) we could reduce these details zinc and lead layout.

Roque Benavides

If I may add also we are working on developing the non-technical area in Brocal. This will add a lot of value to Brocal, because as you realize with energized arsenical copper, we are being panelized by the smelters. And when we get to this street copper we call with no bargaining, we will be able to produce at far lower cash costs and costs in Brocal. In addition to that we have signed a new contract for the arsenical copper that are in better conditions than the previous one. So we are looking forward to a much better performance in Brocal.

Santiago Perez Teuffer - Credit Suisse

Perfect, thanks a lot. And just lastly on the Uchucchacua mine. How will the Socorro mine change this little heavily encharged ore rate of the mine or will it impact recovery?

Carlos Gálvez

Yes. Well, the good news is that we are getting into Socorro mine, which is why the structure with higher grade of silver that will permit us to assure in excess of 13 or 13.5 ounces per short-term grade to be explored for now and in addition to that we are going to be ready to treat (inaudible) terms per day short-term per day instead of 3,000 tons per day as we have produced until now, due to the [news].

And in addition to that we are improving the recovery that for instance in the led silver concentrate, with above 69% recovery of silver; we are obtaining in average 75% and eventually pretty higher recovery. With this, we expect to achieve our objective of producing higher than 12 million ounces during this year in Uchucchacua

Santiago Perez Teuffer - Credit Suisse

Thanks a lot.

Operator

Thank you. Our next question comes from John Bridges of JPMorgan. Mr. Bridges your line is open.

John Bridges - JPMorgan

I forgot to mute off. Thanks Roque, Carlos; thanks for the progress on the results. I was just wondering on the copper at Brocal, I saw you were in the relatively at material and rest of the stuff was tougher. So those clean ore ahead of you?

Roque Benavides

No, we are currently exploiting the energy and that is high arsenic. We are preparing the mine in the area that has lower arsenic. And so towards the future, we will be producing copper concentrate with lower arsenic, but not at this point in time.

Carlos Gálvez

Well, during the first half of the year John, Brocal was able to click not only copper ores for Marcapunta and as energy that Roque mentioned but also some copper ores with high grade of silver obtained from the open pit that was in a stockpile. So, this is what permitted, we use the arsenic content and increasing the silver production in Brocal.

John Bridges - JPMorgan

So, which deposit is this clean copper going to come from?

Roque Benavides

John, this is Roque Benavides. From Marcapunta West we are developing around to access this ore that has lower arsenic, lower energy as compared to rest of the bucket.

John Bridges - JPMorgan

It seems a bit backward, why you are mining the easy ore last?

Roque Benavides

Well, it's not easier, because it's bitter and it’s underground. And cleaner ore is spotty. So, it has been very difficult to locate it and be able to measure it. So finally after putting all the geologies together, we have been working very hard on that. We have been able to measure, indicate spots of coppers with less arsenic in the deposit and this is to the west of Marcapunta. And we were mining Marcapunta North where you have 100% energy and we were also mining as Carlos said, from the northern part of the -- the southern part of the pit. And there we have some copper with high grade silver, relatively high grade silver.

John Bridges - JPMorgan

Okay, great. Thanks for the clarification. And then there is a lot of interest at the moment in zinc and you’re spending at San Gregorio, what’s sort of timeline do you expect for that? Could you bring San Gregorio over the next few years?

Carlos Gálvez

We have received some positive news in terms of community relations in the case of San Gregorio. But we have to still do all the engineering and development and the permitting. So, I don’t see San Gregorio being in production at least in the next five years or so, I don’t think it will be later that. But we continue working on the exploration; and important thing is its social front has improved substantially. We are very pleased with that.

John Bridges - JPMorgan

Yes. I know you’ve had lot of progress there. At La Zanja underground, I know you’ve been spending money there. What do you think you’re going to have there when you have property details, what the reserve is?

Roque Benavides

Well, the things is I think we are very excited about the La Zanja underground, the veins are certainly high grade and we are developing, we have already started, I don’t know how many meters, 150 or 160 meters of run. And we expect to putting value all those results to justify the construction of our flotation plans and produce ounces. Initially will be offside that will go to the leach path and then after on a floatation plant. May be Raul can expand on La Zanja.

Raúl Benavides Ganoza

Yes the idea of La Zanja is to develop the Alejandra Bay. We have 200,000 ounces in outside. These are highly really 20 grams, in a wide sense, I’d say it's over 4 million in (inaudible) And we think that this all we will crush and we will crush it to half an inch and put it in heap leach in order to make a fast recovery.

We won’t be able to recover the core from there, we hope that we will justify the plant and then we can process its ores in order to gain the value from the ore. So and then by the end of 2015 we should have enough ore to justify the plant and this will be (inaudible) flotation and timing plants of 1,000 tons per day.

John Bridges - JPMorgan

Okay, okay sounds like some of these other plants. And then would the heap-leach still be operating or would that be closed by then?

Roque Benavides

Well hope we have had very good experience on this deposit that the kind of grow bigger when after we remind them and the grades are higher. So it leads up in Pampa Verde and where it’s possible and in La Zanja we may have enough ore to keep on volume with the heap leaching. But in (inaudible) we will run out of these resources by the end of 2017, but obviously we will continue exploring and we increased all the time. If you explore you normally find additional ore. We believe that La Zanja has a huge potential this Alejandra again have shown there that's a lot of resources to be found in that area of Peruvian.

John Bridges - JPMorgan

Okay, perfect. And then just finally, you guys have the expert underground minus new launch been talking a little bit about huge Chaquicocha underground. I know there is some talk about going after the offside underground. What potential do you see there?

Roque Benavides

Well, I'm not say that we have been in 15 on Chaquicocha underground, we have been in 15 at Yanacocha should not feel going underground, and we believe that there is a huge potential in Chaquicocha, it is also high-grade and I think it will help as to understand further the deposits. Yanacocha is not over, Yanacocha has a lot of potential and not only in copper, but also in gold underground. And Chaquicocha is a clear, clear way to produce some gold underground. As you know, we count with this gold new that with a few flotations held we will be able to treat that sort of four. So it is not major investment proper investment it will be we believe a good idea to go underground sooner than later. We are discussing this matters with our partners of Newmont and we will come up with strategic plan for Yanacocha in the short-term.

John Bridges - JPMorgan

What is the metallurgy of that Chaquicocha material?

Roque Benavides

I think we have to do some more metallurgy but it doesn’t seem to be refractory or anything like that it seems to be quite straight forward.

John Bridges - JPMorgan

Okay, brilliant. That’s great news, thanks again and well done on the progress.

Operator

Thank you. Our next question comes from Pablo Abraham from Morgan Stanley.

Pablo Abraham - Morgan Stanley

Hello, good morning, Roque good morning Carlos. I have a couple of questions the first one is if you could explain also with more detail dynamics of Yanacocha related to write downs, we really do not understand it because the gold price has been relatively stable for the past six months and this is a fifth consecutive write down of Yanacocha? The second question is if you could give us more color regarding the almost 16 million stock mining cost, which mine did you close it is one-off or it will be recurrent? Thank you.

Roque Benavides

Regarding the write downs, it is something that we have to review with our partners you know quarterly, this is in basis of the inventory, we are already in process in the leachpad. And the variation on not only the price of gold, but also the cost to recover including the variation, depreciation and amortization that you may know in terms of the life of mine. So, to the extent that we have reduced the life of mine temporarily in this area we are adjusting gradually to these values or increasing the cost which is diluted in lower period of time.

So, we are reviewing these quarterly and this time what impacted once in the order of $21 million to our canal.

Regarding the cost of the sulphate, we made a decision to stop operations in Recuperada, Shila-Paula Antapite and Poracota. And we have today several issues, first of all, the layout of payment to workers to retire. Secondly to the extent that we have shutdown completely the mines, we have to continue create arsenic order or so in this area. And while we expected to sell some of those deposits we have to work on a daily certain infrastructure. But we have reviewed that and we are going to proceed on shutting down completely the 12 mines. Just trying to recover the metallurgic facilities we have in the area in order to be sold.

Pablo Abraham - Morgan Stanley

Thank you very much.

Operator

Thank you. Our next question comes from Karel Luketic from Merrill Lynch.

Karel Luketic - Merrill Lynch

Thank you, gentlemen for the follow-up. Two quick questions, the first one a follow-up on Roque. Could you provide an update on how [Conga] and Chucapaca are evolving? And also on the Yanacocha front, what are the other options in addition to the Chaquicocha that you just commented and what’s the timing that we can expect that you have final update on the growth options there? That’s my first question. My second question, if possible, could you please remind us what the CapEx for this year should be and also the recurring level for next years, please?

Roque Benavides

Yes, I’ll answer the first question and Carlos will answer the CapEx question. The [Conga] project, as you know we’re heading for regional elections in October and it is not sensible to do much work in [Conga] while we will have a clear picture of the political and social situation. We have been building the internal roads for the project and we are prepared to go ahead with the project if the conditions are given. But at this point in time, it will be speculation on our side. At Chucapaca, we essentially have been negotiating for the land acquisition and some progress has been done. And we expect to report on that soon.

And at Yanacocha in addition to Chaquicocha, there is a huge potential for copper gold ores that we are also working on the development of our strategic plans to develop all those areas. As I said Yanacocha will have production coming out from the mine for many, many years to come.

Carlos Gálvez

So regarding the CapEx guidance for us, this year remember was in the order of $285 million; we have already invested less than $140 million. So we are achieving our objectives. And after completing the main expansion project, so we have under construction deposits Rio Seco formation and Brocal.

So and for the further, we expect to reduce these CapEx to little over 250 unless we have new project to be developed.

Karel Luketic - Merrill Lynch

That's great. Thank you very much.

Operator

Thank you. Our next question comes from Santiago Perez Teuffer from Credit Suisse.

Santiago Perez Teuffer - Credit Suisse

Hi. Thanks a lot for the follow-up in case, the best case scenario, politically speaking happens in Cajamarca in October what steps would follow to develop Congo; what do you think would be the next steps to do there?

Roque Benavides

The critical aspect is to dewater the Perol Lake and build obviously the tunnel that will enable us to provide water to the farmers and all the basins. But this is a critical path if I may say is that cannot be done, we will have to revaluate and look after some other alternatives. So I don't think of anyone this point in time but there is a critical aspect.

Santiago Perez Teuffer - Credit Suisse

And then after that, what would you access the project and in terms of time. When do you see on best case scenario, we could see ounces coming out of Conga?

Roque Benavides

Raul?

Raúl Benavides Ganoza

Hi this is Raul Benavides.

Santiago Perez Teuffer - Credit Suisse

Hi Raul.

Raúl Benavides Ganoza

The people from Newmont have been the reviewing the Conga and looking to all other scenarios. So we cannot give you a straight answer for that and we don't have all these new data coming. But essentially what Roque says he is correct the main issue will be to the water that will be rolling and that would be the start-up of operation. Because the open pit will be underneath this rolling…

Roque Benavides

This role of (inaudible) will be there. Yes.

Santiago Perez Teuffer - Credit Suisse

Thanks Raul. Thanks Roque.

Operator

Thank you. Again we are now holding for questions. (Operator Instructions). At this time, we have no further questions. And I like to turn the call back over to Mr. Benavides for closing remarks.

Roque Benavides

Thank you very much. Thank you for all of you for attending this conference call. I can assure you on behalf of all the team that we are working very, very hard in turning around the whole situation that happened during the first quarter of this year. We are working with the people of Newmont to reverse the situation at Yanacocha and we expect to have better results there. We are very excited about Cerro Verde and I think we will have cash cow coming out from Cerro Verde starting the end of 2015 and look forward to solve social problems in El Brocal.

Operator

Thank you ladies and gentlemen this end today’s conference. You may now disconnect.

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