Compañía de Minas Buenaventura S.A.A. (BVN) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Julie, and I’ll be your of conference operator today. At this time, I would like to welcome everyone to the Compania de Minas Buenaventura First Quarter 2017 Earnings Conference Call. [Operator Instructions] Thank you for your attention. I would now like to turn the call over to Barbara Cano of MBS Value Partners. Please go ahead.

Good morning, and welcome, everyone. Presenting on the call today is Mr. Victor Gobitz, Chief Executive Officer. Also present on today’s call and available for your questions are Mr. Roque Benavides, Chairman; Mr. Carlos Galvez, Chief Financial Officer; and Mr. Igor Gonzales, Chief Operating Officer; Mr. Raul Benavides, Vice President of Business Development; Mr. Gonzalo Eyzaguirre, General Manager of El Brocal. If you’re not received a copy of the press release, please visit www.buenaventura.com, where a webcast presentation is also available to accompany today’s discussion. Should you need any assistance, please contact MBS Value Partners in New York at 212 619-2232. Before we begin, I’d like to remind you that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that at not historical fact and are therefore subject to risks and uncertainties that might affect future events or results. Description of these risks are set forth in the company’s regulatory filings. Statements made on this conference call should be considered together with cautionary statement and other information contained within the company’s earnings release dated April 27, 2017, as well as the information contained within the company’s most recent periodic report filed with the BVL. With that, I will now turn the call over to Mr. Victor Gobitz, Chief Executive Officer. Mr. Gobitz, please go ahead.

Thank you. Good morning to all for attending this conference call. In this regard, we prepared a short presentation on the PowerPoint, which is available in our webpage. Please go to Page 3. First quarter highlights were 1, heavy rains due El Nino did not usually affect our operation facilities. However, logistics processes were affected. 2, Tambomayo’s ramp-up has been extended due to bottleneck in the filtering process; 3, El Brocal reported its second consecutive quarter with positive operating and financial results; 4, Cerro Verde, operating and financial results were slightly affected due to a 21-day strike and the impacts of El Nino phenomenon; and 5, San Gabriel Environmental Impact Assessment was approved on March 21. Please go to Page 4. Financial highlights. Total revenues in the first quarter of this year was $278 million which is 22% higher in comparison to a year ago. Net income was $71 million, which is 37% higher in comparison to a year ago. Our EBITDA related to our direct operations were $80.7 million, which is 30% higher in comparison to a year ago. The adjusted EBITDA that includes our affiliates was $178.1 million, which is 21% higher in comparison to a year ago. Please go to Page 5, As you know, Buenaventura is a precious metals company, gold and silver producer with however with a significant participation in base metals such as copper, lead and zinc. So to illustrate and summarize our strategy, we have decided to use our logo of Buenaventura the capital B. In the vertical column, in green, you can see that the enabler of our strategy such as safety, human resources, social and environmental management, technology, energy, communications and head office. These enabler support the two drivers of value in the upper half, our portfolios of operations; and in the lower half, our portfolio of projects. As you can also see in this slide, our gold assets are represented in yellow. Our silver assets are represented in gray, and our base metal assets are represented in orange. So through these enablers and these two drivers, our portfolio operations and our portfolio of projects were delivering value to our shareholders On the right, in light gray, you can see the value of spreads in financial terms. Please go to Page 6, Attributable Production. In the case of gold production in the first quarter was 135,000 ounces of gold, which is 70% lower in comparison to a year ago, mainly explained by Yanacocha’s lower production, which is in line with its production plan. In the case of silver production, it was 6.1 million ounces of silver, which is in line with our production plan. In the case of zinc, the total production in this first quarter was 14 million tons of zinc, which is 40% higher in comparison to a year ago, mainly explained by El Brocal higher production. In the case of copper, in this first quarter was 30 million tons of copper, which is less – 3% lower in comparison to a year ago. These results of copper mainly explained by Cerro Verde lower production due to El Nino and 21-day strike. Please go to Page 7, all-in sustaining cost and cost applicable to sales. In the case of all-in costs – all-in sustaining cost in the first quarter of this year was $862 per ounces, which is 18% higher in comparison to a year ago. These increases mainly explained by lower production in this first quarter, which is in line, completely in line with our production plan. In the case of cost applicable to sales in silver terms, it was $11.44 per ounces, which is explained down to 8% higher in comparison to a year ago, which is explained by the lower production in our silver mines Julcani and Mallay. In the case of zinc, the cost applicable to sales was $0.95 per pound, which is 37% higher in comparison to a year ago and mainly explained by the increase of the stripping ratio in El Brocal open pit. And in the case of copper, the cost applicable to sales was $1.14 per pound, which is 12% higher in comparison to a year ago, in this case explained by the lower production in Cerro Verde. Please go to Page 8. In the case of our gold mines in general terms – in the case of Orcopampa, La Zanja, Coimolache, the production is in this first is was in line with our production plan. So our production guidance for the full year has not changed. Specifically in the case of Yanacocha, our production in this first quarter was affected by El Nino. However, its production guidance for the full year has not changed. Please go to Page 9. In the case of Tambomayo, as you know, it’s our new mine, new gold mine. Our initial production guidance was in the range of 130,000 to 150,000 ounces of gold and we have changed this annual guidance to 60,000 to 90,000 ounces of gold. We have found some bottlenecks in the processing plant. All of them have been clearly identified, and we are confident to solve all of them and to achieve full capacity in the first quarter of this year. Please go to Page 10. Regarding our silver mines, Uchucchacua, it’s a mine production in Uchucchacua is in line with our production plan. And in that case of Mallay, Julcani, the production in this first quarter was lower in comparison to a year ago and mainly explained because we decided to improve some safety standards in these two underground mines. However, our production plans for the full year has not changed. Please go to Page 11. Regarding Cerro Verde, the production in this first quarter of the year was 119,000 metric tons of copper, 4% lower in comparison to a year ago, mainly explained by the 24 days strike and also affected by the El Nino phenomenon. In the case of El Brocal, in terms of copper production, was more or less the total production is in this first quarter was only 2% lower in comparison to a year ago. And in the case of zinc, the production was 70,000 of zinc, which is 70% higher in comparison to a year ago, a very good result in the case of El Brocal. I will hand the call back now to the operator to open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from John Bridges with JP Morgan. John, place your question.

Thank you. Welcome, Victor. Congratulations on the results. It’s nice to see that Carlos likes you and has released some nice numbers for your first conference call. I just wondered if you could give us a sort of idea as to what sort of areas you’re going to be focusing on. Is it going to be any change of focus in your new role?

No. Thank you, John for questions. But as I was trying to present in the Page number 5, we have in Buenaventura we have a wide range of operations. We are focused to achieve – to improve our operations in general terms. We have in our portfolio of growth silver, project such as Yumpag, in the case of copper, projects have [indiscernible] for example. And in the case of gold assets, we have San Gabriel. So in these first 4 months, my main focus has been on to understand that this wide range of operational projects to apply and to support a company with my past experience more focus on the technical aspects of the mining industry.

Okay, good. And then on the financial side, it was very pleasing to see that you’d received some of your shareholder loan back from Cerro Verde. I was just wondering if that gives you a stronger idea as to when you – be seeing cash dividends coming out of Cerro Verde?

Carlos will be answering this question, John.

This is Carlos Galvez. Yes, Cerro Verde is reviewing the financial situation and considering the possibility to refinance the syndicated loan according to the way that – financial performance of Cerro Verde has been. In this regard, it is possible to modify the initial objective of reducing the external debt and even the – and to keep the shareholders loans to moving to the possibility to pay these shareholder loans and in the future go ahead with cash dividend payments. So we expect how the financial performance of Cerro Verde is and what is the new position of the banks that participate in the syndicated operation with Cerro Verde. We believe that we are positive in these new conditions.

Do you have any time as to when you may – when there may be a decision on the refinancing?

Well, the expectation is to review the financial conditions after reporting the second quarter. And to begin the initial condition of the shareholders loan that a subordinated one is not subordinated anymore, so this is a good signal for us.

Our next question comes from Tanya Jakusconek from Scotiabank. Tanya?

Yes, good morning, can you hear me?

Yes.

Yes.

Okay, good morning, everybody. I have two technical questions, if I may. The first one has to do with the Tambomayo project. Maybe someone can just review, maybe Igor can review for us what exactly is happening in the processing plant on the tailings side that is causing this delay?

Yes, this is Igor, Tanya. Let me try to explain with a little bit of detail as to what happened with the tailings. What we had initially was a poor performance of the filters that were not getting the throughput that they were designed for and therefore, we had to make a number of changes in the filters. And I will go over a few of them. We had to change, for example, the filtering sequence, the timing of the different stages of the filtering process, had to change the washing lines to be more effective. And finally, we had to change the clothes that were plugging up and were delaying the cycle because these filters have to go through cycles, a number of cycles that will in turn translate into production. So we’ve done all of that and we have reduced the cycle times to manageable numbers now and both filters have been upgraded with new clothes, with new programming and are in operation and we have supplemented that with an additional equipment in case we have trouble with the filters, with the decanter and, therefore, I think we’re over this hump of the filtering facility.

And the filters, what – are they local filters or where are they coming from? Was it a manufacturing issue with these filters, these clothes?

It was a combination of things. The filters were manufactured in Brazil and were imported into Peru by a company called, and we feel that technical support, however, it was quite – it took a lot of work to correct all the small deficiencies they have.

Okay, and so are we still using them as our main supplier? Or have you changed suppliers and are sourcing in-country maybe?

No. We’re using the same supplier, same filters and we have reduced, for example, the cycle time from 40 minutes to today we’re around 25 minutes. So the cycle time has improved significantly and we’re staying with 2 filters. However, as I mentioned earlier, we’re using also a decanter as a backup but we are also trying to get an extra filter so we have a standby unit.

Okay. And then can I just ask on that cement backfill? Is that plant working? Or is that still to be done?

No, it’s part of the mining procedures and the idea is to optimize this specific part of the mining process.

Yes, but is it built – the facility, is it built? Or are you still having to build it?

No, we have a contractor that provides the service for cement and the mixtures to do support in our operations in the different areas of the mine. And we can use that also to do any pace that we need. So there is a contractor on site working with all its equipment and it’s in operation.

Okay, that’s helpful. And my last question is, just on San Gabriel. Can someone, maybe, Igor, you can review for us what exactly is going to be happening on site during 2017, like what are the critical milestones? And then what sort of expenditures are we looking for, Carlos, on this over the next few years?

Okay. On San Gabriel, basically, what we’re going to do going forward is engineering. As you know, San Gabriel was at a feasibility level and we’re going to do basic engineering followed by detailed engineering. We are also doing – finalizing some minor agreements with the local community. We have purchased all the land as we reported in the last semester, so we’re okay in that sense. So it’s going to be basic engineering during the rest of the year. Carlos, you want to talk about?

So that means that we are not going to have an important cash demand for this project during this year. And as soon as we complete the engineering, we are ready to make a final decision to go ahead. In that regard, we expect to have the cash flow coming from our different operations and even affiliates.

Okay, and so when is the engineering finished so that we are going to be making a decision or the rest of us will get some information on your plans? Will it be early 2018 that we will know something about this?

I think in the second quarter of 2018 we will be ready to take a decision.

Okay, so for now it’s just continuing with the decline and then continuing with the engineering feasibility study work. Is that really it?

Yes, yes.

And minimal expenditures according to Carlos?

That’s the idea.

In the case of San Gabriel, we are going to have at the most $20 million expense decline in engineering, nothing else.

Our next question comes from Matthew Guinness from Somerset Capital. Matthew?

Hi, guys. This question is probably for Carlos, and perhaps Gonzalo. I was wondering if you could talk a little bit about the performance of El Brocal and whether you’re expecting to make any further improvements there? And how the profession with the consolidated company is expected to operate?

Matthew, well, as you know, Brocal has already mainly turned around the main difficulties due to this has reported 2 continuous quarters positive results with good EBITDA. Of course, Gonzalo is right here and he could add on the next steps to continue improving the operational performance. On the other hand, we are working to improve the other facilities and benefits for Brocal. As you know, we are managing the commercial area of Brocal. We have incorporated the people here and we are taking advantages of working together. This provides us, as a team, the power to negotiate and synergies to obtain additional benefits. Due to this, last year we increased in the order of – sorry, $12 million of additional commercial benefits. In this regard, we continue scouting the additional synergies we can find. And we are working together, we are making decisions in order of using the full back office of Buenaventura, incorporating people from Brocal. So this is the way they’re going to progress.

Thank you, that’s useful detail. Thank you.

Yes.

That said, that is to increase cost and the main project that we have for this year, as we have stated before, is the 13,000 tons per day that we expect to obtain by the end of the year of our copper underground mine. So that project is on the go. We are expecting that the major changes that we are doing in the underground mine and in the process plant will be done near October this year. So we can expect that production of copper will increase by the last quarter this year. Now that’s our main project. And with that project is – well, we’re only increase of production. We also have decrease in hauling distance. And why? Because we are building a new ramp inside the Marcapunta mine and that ramp is going to give us a shortcut to the process plant. So with that what we expect is to have a better margin because of the copper production, the copper production compared to the zinc production has better margin. And we’re also going to have a decrease in cost because of the lower distance.

Okay. Thank you.

[Operator Instructions] And our next question comes from Botir Sharipov from HSBC. Botir, question?

Hi, Victor and team, congratulations on solid results. I guess, limited to one question, so my question is, and I apologize if it was already answered. I joined pretty late. The question was on CapEx. It looks like it’s gone up this quarter to about $80 million. Could you maybe elaborate what that CapEx was spent on?

Yes, Botir, the CapEx is just the disbursement of the investment we had during, well, to finalize the construction of Tambomayo, which is the main part, $55 million and the new working capital we have. Besides that, another small part like – well, the sustaining CapEx of Brocal in the order of close to $10 million and – among others. Nothing special. Nothing that is higher than $2 million per operating unit.

But going forward, should we expect that CapEx to come down?

Yes. This is what we expect and our guidance of CapEx for this year is in the order of $150 million and we expect to reach this amount.

And quickly, if I can just squeeze in one more question. San Gabriel, at the Investor Day, you guys mentioned that you’re reviewing the geotechnical – you’re reviewing the block model there. You had some geotechnical issues and that model will be up for board approval or review in the first quarter. Can you maybe give us a quick update on?

Yes, as you know...

Our next question comes from Thiago Ojea from Citibank. Thiago, place your question.

Hi, thanks for the question. I just would like to ask you around capital allocation, if you are considering any M&A activity or any special dividend distribution since your balance sheet kind of afford into that, and we saw some negative free cash flow this quarter in the first quarter, when do you expect this situation to revert?

Regarding M&A, probably – here is Raul Benavides, he’s in charge of this area. You have...

Well, there is no plan of M&A right now. We are opportunistic on looking at opportunities always, but we have nothing in mind and what we want to have consolidate this year is our balance sheet, so we can be ready for San Gabriel or other opportunities.

And your second question was regarding dividends. Carlos, you can.

Yes, well, we do not consider special cash dividends and to completing the construction of the project we have, we will continue working on our stable cash dividend policy, which is to pay at least 20% of our net income, so nothing different. We will continue on that. Is this fine for you?

Our next question comes from Jens Spiess with Morgan Stanley. Jens, place your question.

Thanks for taking my question. I just wanted to make a question regarding cost, if you could give more detail because costs went up in most of your units? And you mentioned that it was mainly due to production but – so as you catch up with production in your production plan for this year, should we – is it fair to assume that those costs will come down again?

Yes. It’s Carlos. We can review the different operating units. For instance, in the case of Julcani, we reduced some of our silver production due to the safety measures we introduced that temporarily reduced productivity. This effort was completed in March, at the end of March. And for now, we have already catched up with the regular production and the cash costs will continue performing well. In the case of Uchucchacua, the cash cost was fine. There was no problem, very stable. And we expect even to improve that due to higher volumes that will be according to production profile for – on budget. Then when reviewing our gold operations, in the case of Orcopampa, we are going to add higher grade areas, so we – that will permit to reduce the cash costs. In the case of – I’m sorry, Coimolache, Tantahuatay, our mining plant considers the first and second quarters with lower level of production that will be increased during the third and fourth. So our cash costs will be better during the second half of the year due to the mining plans and the areas we are working on. Likewise in the case of La Zanja, in La Zanja, perhaps the most effective operation during the rainy season and El Niño event. Due to the fact that the due to logistics, we were not able to provide in time and we had sort of constraints. So this impacted our operations. Then, well, we have no costs in Tambomayo due to the fact that we haven’t had any production. Eventually, the first quarter of operations, the costs will be slightly higher than expected and budgeted. But we are going to resume this once we reach the designed level of production. So this is the situation. In the case of Brocal, we believe that we are going to have much better performance due to the copper production, the way we are focusing these efforts, increasing the productivity and reducing the haulage cost to the future. The area – the polymetallic area is very low grade and this is why we are orienting our production efforts to copper, and this is why Gonzalo mentioned the 13,000 tons per day throughput copper ores project because we are going to increase from 7,000 tons per throughput to 13,000 and reducing this polymetallic low-grade production. With this, the cash costs and the results will be much better.

Very clear. Just one quick followup. In El Brocal, that changed to process more of the copper ore body. What will be starting the second half of the year, what will be approximately the split between the polymetallic and the copper orebody of process?

Yes, by the end of the year, what we’re going to have is 13,000 of copper production and approximately 6,000 to 7,000 of zinc and lead production. That’s going to be the split.

Okay, great. Very clear, thank you.

Our next question comes from [indiscernible] from Credit Suisse.

Hi, thanks for the question. And just one quick question here on the reclamation costs of Yanacocha, if you could share with us, I’d be very grateful. And if you could also share the expected production by quarter on Yanacocha and Cerro Verde, that would be also helpful. Thank you. Víctor Gobitz: Yes, your first question related to the closure plan in Yanacocha. We are working to where we want to optimize this number. And clearly, we will – also to review the Quecher Main to approve the Quecher Main project at the end of the year and also to develop the sulfide project that is part of the same footprint. So these two different projects and Quecher Main and assume Yanacocha sulfide will improve the final numbers related to the closure plan, but we don’t have numbers.

This will permit a dilution of the reclamation costs in the time and as a determination, we are going to convert certain environmental liabilities into assets. So this could lead to reverse certain provisions we have already included in our financial statements.

Regarding the production variance for the full year, in our press release, you can see that the information regarding Yanacocha and Cerro Verde. Nothing has changed in these two aspects.

Okay, but do you have like a breakdown by quarter, expected production by quarter, you could share with us?

Right now, let me see if we have this information. Probably we...

We can prepare information and send to you, please.

[Operator Instructions] Our question comes from John Bridges with JP Morgan. John, place your question.

Hi, Victor and everybody. Carlos, you mentioned La Zanja, that mine was supposed to be closed some years ago, I seem to remember. But I know you keep on finding things. I’m just wondering what is going on there? Are you having success with that underground prospect? What should we expect from that?

This is Raul Benavides. Well, we have been finding some more ore in the actual open pit that we were mining, so that has given us a couple of years more. And that’s what we have found. Today, we are focusing our exploration into two areas. One is to develop some more understanding in copper – the passage that we have in La Zanja. And the other thing that we’re doing is, we’re looking under these dome structure so that we can see if we can find some more oxides. The underground exploration in Alejandra, we really didn’t found that we were looking for. So we would have to have more time to explore that in order to make it feasible. But what we expect is that La Zanja will be producing this year and next year we will have more production, and we hope that the exploration will give us some results.

Okay. Thanks for the clarification.

There appears to be no further questions. I would like to turn the floor over to Víctor.

Okay. As closing remarks, let me say that as a team we are committed to meet the 2017 results, which include achievement of commercial production for Tambomayo in the third quarter of this year. And finally, on behalf of management team, I would like to express grateful words for Mr. Igor Gonzales, who within the last almost three years was our COO. He will continue to be close to Buenaventura. As you know, he was elected member of the board. Igor, best wishes in your new job. And finally, thank you for having joined us.

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.