Companía de Minas Buenaventura's (BVN) CEO Roque Benavides on Q2 2016 Results - Earnings Call Transcript

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Barclays PLC (ADR) Compania de Minas Buenaventura SAA (ADR) (NYSE:BVN)

Q2 2016 Earnings Conference Call

July 27, 2016 11:00 AM ET

Executives

Rafael Borja - i-advize Corporate Communications

Roque Benavides - Chairman and CEO

Carlos Galvez - CFO

Analysts

Felipe Hirai - Bank of America

John Bridges - JP Morgan

Carlos de Alba - Morgan Stanley

Botir Sharipov - HSBC

Tanya Jakusconek - Scotiabank

Operator

Good morning. My name is Brandon and I'll be your conference operator today. At this time, I would like to welcome everyone to the Buenaventura conference call. All lines have been placed on mute to prevent any background noise. After the presentation we will conduct a question-and-answer session. Instruction on how to ask the question will be given at that time. Thank you for your attention.

I would now like to turn the call over to Rafael Borja of i-advize Corporate Communications. Please go ahead, sir.

Rafael Borja

Thank you and good morning everyone. Welcome to Compania de Minas Buenaventura's second-quarter 2016 earnings conference call.

Please be advised that today's call is for investors and analysts only, therefore questions from the media will not be taken.

I would like to introduce our speakers. And joining us from Lima, Peru are Mr. Roque Benavides, Chairman and Chief Executive Officer; Mr. Carlos Galvez, Chief Financial Officer; and members of the Company's management team. They will be discussing the results per the press release distributed yesterday. If you have not yet received a copy of earnings report, please visit www.buenaventura.com where there is also a webcast presentation to accompany discussion during this call.

If you need any assistance please contact i-advize in New York at (212)406-3693.

Before we begin, I would like to remind you that during this call comments made by management may include forward-looking statements which are subject to various conditions and uncertainties based on a variety of factors. These forward-looking statements may differ materially from actual results. Thus we ask that you refer to the disclaimer located in the earnings release prior to making any investment decision.

And now it is my pleasure to turn the call over to Mr. Roque Benavides, Chairman and Chief Executive Officer of Buenaventura, for his presentation. Mr. Benavides, please go ahead.

Roque Benavides

Thank you, Rafael, and welcome to all of you to this quarterly conference call of Compania de Minas Buenaventura. May I start by giving a short brief on what is going to happen tomorrow, I meant the change in government after the presidential elections. Mr. Pedro Pablo Kuczynski will take office as President of Peru starting July 28th, tomorrow. And we are very optimistic about the future, the political future of Peru, the economic future of Peru.

Mr. Kuczynski is a well-known financier. He used to work for first Boston Bank and he also has been a fund manager for many years. He has selected excellent people for the different ministries, and we look forward to a much better environment from an economic, political and social environment for Peru. We as Peruvians, we are very pleased that the elections were held democratically. There is a group of Congress people that has control of Congress and those are the followers of Ms. Keiko Fujimori that is also a very sensible person and that after the speech of the newly elected President of congress Ms. Luz Salgado, where she mentioned that they will not be obstructive to the work of the executive.

We look forward with optimism to what is going to happen in the next five years in Peru. The environment is therefore more economic development and that will certainly contribute to the development of mining in our country.

I will follow the presentation which has been sent and it's in our webpage on the second quarter 2016 results. And I will mention the page in which I will be presenting. We are in page number 3. And we have stated a number of objectives. And we are essentially on track to achieve the guidance of what we have mentioned. We want to ensure safety and sustainability throughout our organization. To us the most important aspect of our organization is our people and in that respect safety is fundamental to us.

We have met the production guidance and we will continue giving guidance to the market in order to, so that you can follow up our Company. We are reducing cost applicable to sales and all in sustaining cost. And in that respect we have done great effort, all our technical people and our executives have been working on reducing cost and by doing that being more efficient.

Our Tambomayo Project is on schedule and on line with budget. We were visiting Tambomayo last Thursday. Things are going well in a very difficult environment for the 800 meters delivered and to arrive there you have to go through 5,300 meters over sea level. That is the type of difficult environment in which we have to develop these projects.

At San Gabriel, we had a very successful public audience and I was helping last month. And essentially it was a breaking point because in San Gabriel is the first audience that has been done in Spanish and Quechua which is the native language of the area. This has been very, very positive and very well taken. And we were successful in raising the $275 million long term debt to refinance our short term debt.

In page 4, we mention the, how we have improved in terms of safety, investor safety. 39% lower frequency rate compared to 2015. And we will continue working. This is a constant effort that we have to continue doing in passing the message.

In page 5, our financial highlights, we have improved in terms of our total revenue both in the quarter comparing 2015 and 2016, and in the six months period we have also improved and we are showing $513 million in total revenues for the first six months. Our EBITDA has improved substantially and it has continued also to reduce the leverage in which Buenaventura was involved. For the first six months of this year $171 million.

Our net income for the first six months of 2016 has been $107 million. And this has to do with the reduction of cost and obviously with the increase [indiscernible] and somewhat in some of metals because prices have also helped. EBITDA including our affiliates increased 42% for the first six months of this year, adding to $335 million.

In Page 6 the new debt profile, $275 million syndicate loan. Senior unsecured syndicated term loan facility at an interest rate of Libor three months plus 3%, five years maturity, two years grace period and this is for general corporate purposes. Our net debt to EBITDA have been reduced to 2.5 times. And this, as I mentioned, is not only because of the longer-term period but also because our EBITDA has been increased.

In Page 7, we show the cost reduction efforts, and our all-in sustaining cost has reduced 48% if we compare this to third-quarter 2015. This is not only the case because in terms of gold we reduced our cost applicable to sales in 13%, in terms of our silver production 21%, and in our zinc production 6%, 35% in copper. And this has to do with the very efficient operation at Cerro Verde, and we are very pleased that that is going extremely well.

In Page 8, our attributable production in -- if we compare to the second-quarter 2015, it has reduced somewhat essentially because of the reduction in production at the Yanacocha. And at the June 30th, our total production 311,000 ounces of which 165,000 ounces are overall our own direct operations. Our silver production has increased 37% quarter to quarter and for the six months 2016 12.2 million ounces of silver, this is a record production for Buenaventura in its 53 years of existence. In zinc we have also increased 30% with the contribution of Brocal. And in copper 119% increase quarter to quarter and 62,000 tons of copper for the first six months of the year.

In Page 9, our gold mines, Orcopampa, had a small decrease quarter to quarter. And we expect to be producing close to 200,000 ounces in this year. Our costs have maintained level and it's an increase of 1%, for all practical purposes it's flat. In the case of La Zanja, we also have a small reduction in production, we are herding for 130,000 to 140,000 ounces of gold this year. And the cost reduction in La Zanja has been very important. I think there has been an effort in reducing cost and we are very pleased about that. It has also to do with some larger increase or some more production in the quarter, but essentially it has been the cost reduction in La Zanja.

In Coimolache, we have also reduced our cost by 6% and we are heading for a full-year production 145,000 to 155,000 ounces. We are very pleased with the performance of Coimolache. In Yanacocha, the quarter to quarter there was a decrease of 28%, and we are heading for 630,000 to 660,000 ounces for the year. We also are looking forward to the production coming from Tambomayo that will contribute to our gold production.

In Page 10, our silver mines. Uchucchacua is doing very well, 57% increase quarter to quarter and we are expecting to reach 15.5 million ounces to 16.5 million ounces as of the end of the year. We have been able to reduce our cost by 29%. I think it is very important to mention the effort that we are doing in reducing cost and generating efficiency in all forms. In Mallay we have increased our production by 45% quarter to quarter, and we are expecting to produce in excess of 1.5 million ounces in these mines. Our cost has been reduced by 7% and showing the same trend as the other mines. In Julcani mine we have increased 7% quarter to quarter, expecting to be producing in excess of 3 million ounces for the full year 2016. And our costs have been reduced by 2%, also an important effort.

In terms of our copper and zinc production, in page 11, Brocal has increased its copper production by 22% quarter to quarter, expecting to produce some 35,000 tons to 45,000 tons of copper as of the end of the year. We have a reduction in cost of 9%. Cerro Verde, the star, if I may say of our portfolio has increased 169% quarter to quarter, expecting to be well over 500,000 metric tons of copper by the end of the year with a cost reduction of 36%. The efficiencies obtained by the increase in production has been substantial. We have to mention that there have been some shipping delays in Cerro Verde. And probably that reflects that the results, economic result of Cerro Verde are not as positive as we were expecting. More production from Brocal in terms of zinc, has also been increased by 18%. And costs are essentially flat.

In Page 12 and we are speaking after Newmont and we know that some of you follow also the conference call of Newmont. And Yanacocha has some important and very positive guidance. Our Estudio Integral prefeasibility study is underway to further optimize the sulfide development. Quecher Main, the oxides extend the life of mine with 200,000 ounces average annual production until 2024 and the potential to extend profitable production starting 2022. This is a world class district and we expect to have more production coming from Yanacocha in years to come.

In page 13, Tambomayo Project, the production is expected for the first quarter 2016. As I mentioned, we will visit you, Igor Gonzales and myself, the project last week. The overall project progress was 81% as of July 2016. Exploration and mine development 100%. You can, I have witnesses how well the mine and the underground works are being taken. The construction of the facilities are 70% built and we have some pictures in the presentation.

Detailed engineering currently at 100% of development and Capex is expected to be in the order of $340 million of which we have disbursed $232 million. Exploration and mine development $122 million, civil work and equipment is $218 million. Tambomayo will produce 120,000 ounces to 150,000 ounces of gold and 2.5 million ounces to 3 million ounces of silver in 2017. A little bit of production will be in place in the November and December this year. You can see on page 14 a picture of how we are progressing in the construction of this project.

With this we are open to any questions that you may have. I have been joined here in this presentation by Carlos Galvez, our Chief Financial Officer; Igor Gonzales, our Chief Operating Officer; Raul Benavides, our Vice President for Business Development, and Mr. Leandro Garcia our Comptroller. Any questions that you may have, we are open to answer. Thank you.

Question-And-Answer Session

Operator

At this time, we will open the floor for questions. [Operator Instructions]. And the first question will come from Felipe Hirai, with Bank of America. Please go ahead.

Felipe Hirai

So I have two questions from my side. First, Roque, you mentioned a little bit about the new government and how they are not likely going to obstruct the investments in the mining sector. But I would like to know if you have any expectations, what kind of new project the Company could start to develop and what kind of help the government would give to you if that is kind of the first of this new wave of projects coming in the country? The second question is related to your cost, we noted that most of the declining cost that we saw on a quarter-on-quarter basis was essentially because of the higher [indiscernible] credit, so we were just wondering if you could tell us a little bit on how you are expecting to see cost going forward, excluding this [deposit] credit? Thanks a lot.

Roque Benavides

Thank you, Felipe. I will ask Igor Gonzales to answer the declining cost in leasing, but I will answer the new government and new projects. I think Mr. Kuczynski has been very emphatic is showing that he is all for reducing all the bureaucratic restrains that we have had in the past. And I think that his government is going to work on that. And in that respect, I think projects not of Buenaventura but projects as Quellaveco, La Gransa and maybe Tia Maria could fly.

On our front I think we are evaluating San Gabriel and Trapiche. And the vision of going ahead will certainly be influenced by the positive environment that we may have for investment, but also mostly by the returns on investment that any of those projects may have. We will continue working and essentially we are very positive towards what will be happening. Igor, would you answer the question?

Igor Gonzales

Yes, sure. Yes, the cost reduction is mostly a combination of things and we have increased throughput in most of our plants, operations other than Orcopampa. We also have efficiency improvement such as recovery, maintenance, shorter downtimes and also have the direct reductions such as contract negotiations. So it's a combination of all three elements that add to the cost reductions and then also there is the element of metal price.

Operator

Thank you for the question. Our next question comes from John Bridges with JP Morgan. Please go ahead.

John Bridges

Many thanks for the presentation, it's very helpful, we really appreciate that. Roque, in your introduction you mentioned something about shipping delays at Verde, I seem to hear. Could you give us a little bit more detail on that and what's going on with the ramp up and cost structure and that sort of thing?

Roque Benavides

Sure. May I ask Raul Benavides to answer that question please.

Raul Benavides

Yes, John, well, the plant is operating, and the -- for instance, this month we have an average production improvement of 250,000 tons per day. And we are getting adjusted to the -- the availability, the mechanical availability. They think that should improve from the lower 80s to lower 90s. So we can foresee some increase in throughput in the next few months. And the missions for the production figures are that we have the lower [indiscernible] and there has been some major achievements that don't show the numbers that we would like to see in sales but it's a small revision from what's predicted.

Roque Benavides

May I just add that the first results of cash cost in the case of Cerro Verde are giving us $1.20 per pound of copper and that certainly is treated as a lot.

Raul Benavides

Well, and just to mention, I mean these cash costs that has been done of $1.2 are remarkable.

John Bridges

Yes, I was going to say you can't have many big problems with $20 cash cost, but I suppose that's what you get when you build the world's biggest concentrated plant, right?

Roque Benavides

Yes.

John Bridges

Just for modelling purposes, Carlos, maybe do you have the tonnage throughput at Brocal and the split between the copper and the zinc streams?

Carlos Galvez

Carlos Galvez. In the case of Brocal, you know that Brocal has already achieved their full year throughput at 18,000 tons per day. And is -- sorry, do you -- I don't know which -- the information. We have throughput rate of 0.69 ounces per metric ton of silver, 2.78% zinc, and 0.82% lead. And on the other hand 2.16% copper. The recovery is performing good metal and we expect to maintain the June and July average of level of operations, it's more than in terms of throughput but grades and recoveries with this and following the current prices that we try to take advantage of, the higher operations from time to time show us in the market we expect to get for full year with positive cash flow. By the way the EBITDA during this quarter in Brocal was $5 million but we expect to improve this in an important way.

Operator

The next question will comes from Carlos de Alba with Morgan Stanley. Please go ahead.

Carlos de Alba

The question I have, the first one is, you have had very good results in the first half of the year, the guidance on EBITDA right now stands at 180 million to 220 million for the year but you're already there basically, so I wonder if you are considering revising that guidance or what can you tell us in terms of expectations for performance in the second half of the year. And clearly you don't control prices but in terms of volumes and cost particularly if you can make any comments that will be great. The second question has to do with an update on the sales of the discontinued operations. The market clearly has improved in terms of gold prices and silver prices. So perhaps there is more opportunities now, more willing buyers. And then finally, could you give us a guidance of your expectations for silver production at Brocal?

Carlos Galvez

Well, regarding the guidance of EBITDA you will have to remember that in March when we released our information to the market we mentioned that the EBITDA was going to improve at the level of $200 million, $210 million. If you take the average prices of year 2015, show that -- they show that market has helped and if we continue attaining the prices that we have, the EBITDA to our direct operations should be in the order of $400 million this year. And it will include the affiliates. This EBITDA should be in the order of $700 million. Regarding also our.

Unidentified Company Representative

Silver.

Carlos Galvez

Silver production, well, the grades in silver have, has a decline in Brocal. And, one minute, let me see what we have. 2.7 million ounces. Yeah, well, the guidance should be in the order of 2.7 million ounces, 2.8 million ounces during this years. And I don't know, Raul, do you have?

Raul Benavides

Yes, this is Raul Benavides. Currently we're in the process of selling Antapite and Recuperada. The rest of the operations are practically long term. In the case of Chile, we are selling the installations in the facility that it's essentially a closure. So, yes, we have some people interested in Antapite. We are under [indiscernible] with potential buyers. And in the case of Recuperada we have three people interested but that's less [indiscernible] operation that has less interest than Antapite.

Operator

Thank the next question will come from Botir Sharipov, of HSBC. Please go ahead.

Botir Sharipov

Congratulation on set of good results Roque and the team. Few questions from me, and if you don't mind I'll ask them one by one. You mentioned synergies in La Zanja and Tantahuatay, could you maybe specifically specify what you guys have done so far in terms of those synergies and if there's a room for improvement further down the line in costs at those mines?

Raul Benavides

Well, one very specific synergy is that today Ricardo Huancaya is in charge of both operations. If I may say, the administrative costs will be diluted. And what we are doing is managing the two mines from one single head. And I think that's where we can find a lot of synergies which have given us substantial results.

Unidentified Company Representative

To complement Roque's comments, we have created a small office in Cajamarca where we have combined all the support services for both mines and [indiscernible] those services from the mines themselves. We are also sharing staff in a number of areas, safety and environmental, even metallurgy where we're sharing staff knowledge and also in all the [indiscernible] and support services. So that's having a good impact in not only in cost but also in performance.

Carlos Galvez

Yes, [indiscernible] will be implemented in the area of [indiscernible] and Mallay together acquired in the [indiscernible] accounting, [indiscernible] human resources, logistics and so on.

Unidentified Company Representative

If I may add about Cajamarca, a very good thing that has been done is that we have only one social area [indiscernible] their management of a very difficult social environment in Cajamarca. So it's not only the synergies in cost but the improvement in the information that we have about social movements.

Botir Sharipov

Okay, thank you. And I guess second question is on CapEx at Cerro Verde, it is a bit loaded. CapEx was about $140 million in the second quarter, how much of it is expansion, how much of it is sustaining? And I think a couple of quarters ago the message was that sustaining CapEx for Cerro Verde was about US$250 million annually, and looks like we are tracking above that. Can you shed some light on that as well?

Unidentified Company Representative

Yes, the final numbers for the topics for the expansion, it is $4.514 billion. And in capital for the second quarter you have $70,397,000. And the project or everything from now on will be charged in the operations.

Unidentified Company Representative

The thing is the budget was US$4.6 billion and we have at the end -- then this is -- the final figure is $4.5 billion, so it has been under the budget and on time, so we are very pleased to report that.

Botir Sharipov

So would you say going forward $70 million per quarter is roughly the sustaining CapEx for Cerro Verde?

Unidentified Company Representative

I would say that will be in that order or magnitude, but yeah, it's -- that order of magnitude.

Botir Sharipov

Okay. Good. And my last question is on your future in Yanacocha. Obviously great news there with [indiscernible], specifically on the sulphites on project [indiscernible], my understanding is there are two main sort of sub-projects one is a copper [indiscernible] sulphite and the other one is Chaquicocha underground. Can you confirm those? I guess, any other additional deposits that are being evaluated right now by you and your partner?

Unidentified Company Representative

Well, I think part of the evaluation that is being done is essentially the copper sulphite and that a huge potential. But I will say that those two that you have mentioned, the Chaquicocha underground and the bio-leeching are [indiscernible] are the main projects. But still we are finding a number of areas that are very mineralized and the copper sulphite have the limitation in some places of arsenic content that we think that could have also a solution in the near future.

Botir Sharipov

Right, and the Chaquicocha has native sulphur in it, right? I think.

Roque Benavides

Yes, well, in Chaquicocha we have built the ramp and now we are starting to drill and we are getting some interesting results, higher grades, and I think that will show us the way how to develop Chaquicocha.

Operator

[Operator Instructions] The next question will come from [Rinan Crusio] with Credit Suisse. Please go ahead.

Unidentified Analyst

My first question is regarding the expansion of the Yanacocha. The presentation from Newmont mentioned that there is a pending IRR of 15%, can you elaborate where -- what are the assumptions to get the IRR or if you can comment on expected costs, is it the same of the Yanacocha currently? That will be highly appreciated. And the second question is only if you can provide us the expectations for CapEx this year and onwards. That's it on my side.

Roque Benavides

Capital for which project, please?

Unidentified Analyst

The expansion of Yanacocha.

Roque Benavides

So I think it's early day to, for us at least to say an IRR for different project, but if Newmont has given guidance of 15% I would imagine that that is the case. I don't have more to comment on that. And in terms of the CapEx for all these projects, I would reckon that it will be in the order of $500 million, but in that order of magnitude.

Operator

Thank you. The next question will come from Tanya Jakusconek of Scotiabank. Please go ahead.

Tanya Jakusconek

Yes, good morning everybody and congratulations on a good quarter. Just wanted to come back, if I could, maybe with Igor on the costs and then Carlos maybe for some guidance on the costing side. Igor, I understand you mentioned that increased throughput, efficiency, you touched on maintenance and you touched on negotiation, recovery, all helping that. Can we get down to when, on the labour side is it negotiation of contracts or is it combination of also reduction of labour at your operations?

Igor Gonzales

No, it's mostly a review of a contract for suppliers, that's what I meant, not contract with labour. However, we have enclosed some of our negotiations with labour, but the savings are not coming from contracts with labour, mostly from re-negotiating contracts with suppliers.

Carlos Galvez

Yes, but if I may add, one important change has been modifying the exploration method from current fields to tension fields and this improved the productivity, reducing the cost in our underground operations. So this is an important modification.

Roque Benavides

You can see that this is a team. The financier is talking about operations and the operations guy is talking about finance. Good.

Tanya Jakusconek

Okay, so that I can understand correctly, so Carlos was mentioning that we've had increased productivity, which I appreciate, obviously surprising. And Igor mentioned that the -- there's the consumables, I guess, where you re-negotiated pricings, that have helped that portion of the cost structure in addition to maintenance, is that correct?

Carlos Galvez

Yes, I will give you an example. For example, we have standardized all the support materials for our underground mine. Then by standardizing that now we have a larger package to negotiate with the suppliers, and we did that. And as a result of that we have fewer elements to bid and a bigger package and of course we have better pricing on that. So that's one example. The other example that I was also mentioning is that we focused on the maintenance part of things. And what we did is we applied some maintenance scheduling techniques to reduce the maintenance time and therefore downtime, and so that also helped us in the process. And something that is impacting well is the fact that we renegotiated with the suppliers prices in reagents and so on. And this is a true quarter that [indiscernible] reduction of prices impacted in our consumers and suppliers pricing costs.

Roque Benavides

We have also negotiated with contractors. We have contract mining in a number of operations where we have been reviewing contracts with the contractors and we have been able to reduce somewhat, some other costs they were all charging to us.

Tanya Jakusconek

Okay. So that's appreciative. So is it safe to assume that your cost of sales this quarter was about $116 million. Carlos, is that a good run rate? Of course eliminating impacts of currency and/or other metal pricing. But are we going to see further reduction from this $116 million level cost of sales for the quarter or we are at normalized level? Just so that I am understanding whether there is more to come.

Carlos Galvez

Well, we expect to have some lower cost of sales due to the fact that in the second quarter normally we have the impact of the renegotiation of our, with our unions. That has [indiscernible] immediately, that has impact actually in May and June. So after that we are not going to have any other package for bonuses to our blue collars. So the cost of sales could be lower.

Tanya Jakusconek

And we're talking like what sort of magnitude lower so that I can understand what impact the tier II costs had on the union packages and bonuses?

Unidentified Company Representative

Well, this could be about 3% to 5% in the labour cost.

Tanya Jakusconek

Okay. And are you comfortable going forward that this is something that is sustainable, you renegotiated, you've got your productivity, you've got your efficiencies and throughput recoveries, et cetera, so its sort of a normalized rate that you're comfortable at?

Unidentified Company Representative

Yes. What we're trying to do is we're not only talking the cost reduction per se and just renegotiating, we are also going doing, making an analysis of element of cost and going to the root cause and analysis of what's generating the higher cost and then we're making a plan to address those elements and reduce the cost permanently. And so that's an ongoing effort because we want to make this cost reduction sustainable in time and we don't want them to be just one short. And so we continue to do that. We just concluded what we call our operational review in all of our operations just about a month ago where we identify a number of opportunities to further improve our cost and each one of the opportunities has a plan to follow and big and responsible people to make it happen, so -- and with the detailed analysis of the improvement, so that's going to continue throughout the year.

Tanya Jakusconek

Okay. And just can you remind me what role that currency play in your cost of sales this quarter versus what you had budgeted?

Unidentified Company Representative

It is a minor impact. The exchange rates have not moved in this quarter so it is very limited.

Tanya Jakusconek

Okay. So I think the exchange rate moved about 4% and, okay, so it was a minimal impact for you?

Unidentified Company Representative

Yes.

Tanya Jakusconek

Okay. And fuel is minimal anyways. Okay, thank you.

Operator

Thank you for the question. [Operator Instructions] We're showing no further questions. Mr. Benavides, I'll turn the conference back over to you.

Roque Benavides

Well, thank you for attending this quarterly conference call of Buenaventura. You can be sure we continue working very hard. And heading for Peruvian National Day tomorrow and for a new government with new impulse and very positive news. So keep an eye on Peru. I think this is a country that is going to continue to be a star in Latin America. Thank you for attending the conference. Bye-bye.

Operator

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect your lines.

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