Finding Gold On The Inca Trail: Peru's Compania De Minas Buenaventura

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Spanish conquistadors converged on Andean South America, Spain's economic final frontier, on missions of plunder. They scoured the high Andean mountain passes in search of the mythical city of El Dorado, the fabled lost city of gold. But rather than finding their fortune many perished in the process. Today Andean South America represents one of the world's last economic frontiers with the Andean economies of Peru, Colombia and Ecuador only recently opening up to the global economy. By a strange twist of history it now seems that there was a glimmer of truth about the ancient legends of El Dorado, with noteworthy gold and other precious metal discoveries attracting foreign investment to the region. This is creating an influx of modern-day conquistadors, gold miners seeking the gold reserves of the Andes. However, they are very different from the conquistadors of history, as they are equipped with large amounts of capital; sophisticated technology and astute geological awareness allowing them find the secret of South America's gold riches.

This new gold rush has been triggered by the soaring gold price, which has risen by over 384% during the last decade, to now be at around $1,650 per ounce. Much of this rapid rise in the gold price has occurred since the advent of the global financial crisis, which shook investment markets and developed economies to their core, causing investors to flee and seek safe-haven investments. As a result in September 2011, gold hit a record high of around $1,920 per ounce and despite pulling back since then it has still gained 12% over the past 12 months.

The ongoing market volatility and economic uncertainty triggered by a slower than expected U.S economic recovery and the continuing effects of the eurozone sovereign debt crisis, have continued to fuel the demand for gold. In Europe alone in 2011, investors concerned by the impacts of the sovereign debt crisis increased their investment in physical gold coins and bars up by 26%, making Europe the largest 2011 market for physical gold investment products. Central banks also increased their purchases of gold by 470% in 2011 with a combined purchase of 15 million ounces of gold, which was the most gold purchased by central banks since 1964. There was also a 15% increase in Chinese demand for gold used in the fabrication of jewelry, growing to a new record high of 496 tons.

It is predicted that all of these will remain key drivers in the demand for gold in 2012, which will continue to push support a rising gold price. As a result it is predicted that gold will reach $2,000 an ounce by the fourth quarter of 2012. The President and Chief Executive of Newmont Mining (NEM) Richard O'Brien recently stated that gold will reach $2,000 an ounce in 2012. This is in line with the forecasts of Bank of America-Merrill Lynch's (BofA-ML) commodity analysts, Sabine Schels and Michael Widmer who stated: "We remain bullish on gold with a 12-month price target of $2,000/oz and see upside for the gold miners." The growing gold price has seen miners margins expand increasing their profitability and as the gold price pushes onto the $2,000 mark their profitability can only increase.

The mountainous Andean nation of Peru has emerged to become the sixth largest gold producing nation with in the world and first in Latin America with an estimated 21 million ounces of gold reserves in mines currently under operation. Two of Peru's gold mines, Yanacocha and Pierina, are among the most productive and profitable gold mines in the world. It is also a Latin American economic success story with a relatively high growth rate compared to many of its peers in the region, low debt, and growing integration with the global economy. In 2011 Peru had a GDP growth rate that for the first five months averaged 8% and for 2012 the IMF has forecast a GDP growth rate of 5.6%. This is more than triple the estimate of 1.8% for the U.S and is the highest 2012 GDP forecast for South America.

In addition, compared to many South American countries, it has relatively low country risk making it even more appealing to foreign mining companies and foreign investors. Peru has an OECD country risk rating of 3, where 0 is the lowest and 7 is the highest and this is the second lowest rating in South America after Chile which has the lowest risk rating of 2. In comparison both Argentina and Venezuela have the highest 2011 country risk ratings with both receiving a 7.

As an indicator of corruption, in 2011 Peru was ranked 80th on the Transparency International Corruption Perception Index, out of the 184 countries rated. For 2011 the least corrupt country rated as New Zealand which was rated 1st and the most corrupt were Somalia and North Korea with both being rated at 184th. As a point of comparison the U.S was rated 24th, Canada 10th and Mexico 100th. The best rating in South America was 22nd for Chile and the worst was 172nd for Venezuela. Peru also has a sovereign credit rating of BBB, which is above the minimum investment grade rating of BBB-. This is the second highest credit rating in South American and is equivalent to Brazil's, but is lower than Chile's which has the highest credit rating on the continent being awarded an A+ by Standard and Poor's. As a point of comparison it is also equal to Mexico's BBB but lower than the U.S's AA+.

However, there are still some risks as the country does have a high poverty rate and unemployment rates outside of the main cities. This is evidenced Peru's Gini co-efficient of 48.1, which while lower than Brazil's 54.7 and Colombia's 55.9, does indicate there is still a disparate gap between the rich and poor. This has the potential to manifest itself in crime, worsening security and popular unrest. Peru is also still dealing with the remnants of a decade long civil conflict, although the key belligerents the Shining Path are virtually a spent force.

For investors seeking to access the Peruvian gold rush, they can invest in a multinational gold company with extensive Peruvian operations such as Newmont Mining, South Africa's Goldfields (GFI) or the world's largest gold miner Barrick Gold (ABX). The other option for investors is to consider investing in Peru's largest domestic gold miner Compañia de Minas Buenaventura (BVN).

Newmont operates the Yanacocha mine in partnership with Peru's largest precious metals mine. Newmont Mining owns 56% of the mine while Buenaventura, Peru's biggest precious-metals producer, owns 44%. Newmont is estimated to have probable and proven reserves in Peru of 10.75 million ounces of gold, which is 11% of Newmont's total proven and probable gold reserves. For 2011 Newmont's Peruvian operations accounted for 771,000 ounces of gold which is 14% of total ounces of gold produced and revenue of $2 billion, which is 19% of Newmont's total 2011 revenue. Peru is Newmont's second lowest cost gold producer after its African operations.

Goldfields operates the Cerro Corona mine and is estimated to have probable and proven reserves in Peru of 6 million ounces of gold, which is 7% of Gold Field's total attributable reserves. For 2011 their Peruvian operations accounted for 356,000 ounce of gold which is 10% of total production. Finally there is Barrick Gold, which operates the Lagunas Norte and Pierina mines. Barrick Gold is estimated to have probable and proven reserves in Peru of 6.2 million ounces of gold, which is 4.4% of Barrick Gold's total proven and probable gold reserves. For 2011 Barrick Gold's Peruvian operations accounted for 763,000 ounces of gold which is 9.9% of total ounces of gold produced.

Buenaventura is listed as an American Depositary Receipt (ADR) on the NYSE and in my opinion represents a solid investment opportunity for investors seeking to diversify their gold exposure into Latin America. Buenaventura's price has risen by 6.7% since the start of 2012 and is now trading at around $42, which is almost double gold's price rise of 3.5% for the same period. Buenaventura is estimated to have reserves in Peru of 10.2 million ounces of gold and in 2011 produced 1 million ounces of gold.

For the fourth quarter 2011 Buenaventura exceeded analysts' consensus forecast EPS of $0.88 reporting EPS of $0.91. The company also reported for this period an 8% fall in revenue to $402 million and a 10% rise in net income to $228 million. In addition, its balance sheet weakened with cash and cash equivalents falling by 4% to $481 million and long-term debt rising 19% to $105 million. For 2011 Buenaventura delivered a credible full year result reporting revenue of $1.6 billion, which was 41% higher than 2010, and net income of $859 million, which was 30% higher than 2010.

In addition, Buenaventura's key performance indicators establish that the company is performing well even in comparison to its larger multinational competitors as the table below shows.



Profit Margin


Debt to Equity Ratio











Gold Fields





Barrick Gold





Based on the PEG ratio, Buenaventura appears to be expensive in comparison to its main competitors operating in Peru. However, it does have a substantially higher profit margin and return on equity, both of which are in double figures and over 20%. This certainly bodes well for continued revenue and net income growth as the gold price rises.

I also like Buenaventura's very conservative debt to equity ratio of 0.03, which is substantially lower than its competitors and is a good indicator of the overall degree of risk associated with investing in Buenaventura. A conservative debt to equity ratio such as Buenaventura's indicates a strong balance sheet with company operations primarily funded by equity. This reduces the risk of cash flow disruptions due to rising interest rates should there be sustained economic recovery, or breaches of lending covenants, should the stock price drop.

Buenaventura doesn't pay a particularly spectacular dividend, with a yield of around 1.5%, though it does have a very conservative payout ratio of 17%, which as a quick and dirty measure of dividend sustainability indicates that Buenaventura is able to maintain this dividend yield. Foreign investors also need to consider that withholding tax of 4.1% is levied on the dividends paid by Peruvian companies to foreign investors, which will obviously reduce the gross yield.

It is also important to get a solid feel for Buenaventura's forward valuation and how this compares to its competitors. With a current trading price of $41.50 and analysts' 2012 consensus forecast EPS of $3.73, the company has a forward PE of 11. Newmont is trading at $47 and analysts expect 2012 EPS of $4.90, giving it a forward PE of 10. While the consensus 2012 forecast for Gold Fields is EPS of $1.46, which with a current trading price of around $13 gives it a forward PE of 9. Finally Barrick Gold has a 2012 consensus forecast EPS of $4.93, which with a current trading price of around $42 gives it a forward PE of 8. Based on these forward valuations Barrick Gold is the cheapest of the four companies trading at 8 times its 2012 earnings. However, all four companies have conservative price to earnings ratios of between 8 to 11.

Buenaventura's cost of goods (COGS) for 2011 was $507 million, which as a percentage of total revenue is 33%. Newmont's COGS for 2011 was $4.03 billion, which is 39% of total revenue, while Gold Field's COGS for 2011 was $3.5 billion, which is 66% of total revenue. Finally Barrick Gold had 2011 COGS of $6.3 billion, which is 44% of total revenue. From this we can see that Buenaventura is the lowest cost gold producer of the four companies. In addition, during 2011 Buenaventura embarked on a program of reducing general and administrative expenses, which for 2011 were 43% lower than 2010.

I find Buenaventura an attractive investment, not only due to its low production cost but also because it has a strong exploration and project development pipeline in Peru, with a broad portfolio of local mining projects. It is estimated that the exploration projects at this time have probable reserves of 7.6 million ounces of gold. The company is also conservatively valued, currently trading at 11 times its forecast 2012 earnings. In addition, the company has no hedges in place meaning it is able to take full advantage of the rising gold price, which is forecast to reach $2,000 per ounce by the fourth quarter this year. The company has a strong balance sheet with $480 million in cash and cash equivalents available for further exploration and mine development. However, investors should be aware that the company does not have the scale and geographic mine diversification of an international gold major such as Barrick Gold, Gold Fields or Newmont. Overall, as a low cost gold producer it represents a credible investment opportunity that is well positioned to take advantage of the 2012 forecast 21% increase in the price of gold and deliver robust investor returns.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BVN over the next 72 hours.