Companhia de Minas Buenaventura (BVN) Q4 2019 Earnings Call Transcript

Companhia de Minas Buenaventura (NYSE: BVN)
Q4 2019 Earnings Call
Feb 21, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Compañía de Minas Buenaventura fourth-quarter and full-year 2019 earnings conference call. [Operator instructions] Please note that this call is being recorded. At this time, I'd like to introduce your host for today's call, Mr.

Rodrigo Echecopar. Mr. Echecopar, you may begin.

Rodrigo Echecopar -- Investor Relations

Thank you. Good morning, and welcome, everyone. Presenting on the call today is Mr. Víctor Gobitz, CEO.

Also present and available for your questions are Mr. Leandro Garcia, vice president and CFO; Mr.Juan Carlos Ortiz, vice president of operations; Raúl Benavides, vice president of business development; and Alejandro Hermoza, vice president of sustainability. Before we get started, during today's call, we will make forward-looking statements that reflect the company's current expectations about the future plans and performance. These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties.

I encourage you to read the full disclosure concerning forward-looking statements, which is in the press release we filed on February 20, 2019. With that, I will turn the call over to Mr. Víctor Gobitz. Please go ahead.

Victor Gobitz -- Chief Executive Officer

Thank you, Rodrigo. Good morning to all and thank you for attending this conference call. We are pleased to present our results for the fourth quarter of 2019 from Compañía de Minas Buenaventura. We have prepared a PowerPoint presentation, which is available in our web page.

Before we go further, please take a moment to review the cautionary statement shown on Slide 2. Moving on to Slide 3, highlights were as follows. In the fourth quarter of 2019, EBITDA from direct operations was $73.9 million, compared to $68.7 million reported in the fourth quarter of 2018. In the fourth quarter of 2019, the adjusted EBITDA, including associated companies, reached $176.8 million, compared to $147.4 million in the fourth quarter of 2018 primarily due to improved results at Cerro Verde and Coimolache.

In the fourth quarter of 2019, capital expenditures were $38.4 million, compared to $41.2 million for the same period in 2018. In the fourth quarter of 2019, net loss was $53.7 million, compared to a net loss of $72.9 million for the same period in 2018. The company's portfolio of greenfield projects continued progressing well during the quarter. At Yumpaq, our silver project; San Gabriel, our gold project; and Trapiche, our copper project, we are declaring ore reserves in this first quarter of 2020.

In the fourth quarter of 2019, Buenaventura generated $13.6 million in incremental EBITDA through the company's debottlenecking program. The program enabled Buenaventura to increase the efficiency of its Tambomayo, Uchucchacua and El Brocal mines. Yanacocha's Quecher Main project is on budget and achieved commercial production in the fourth quarter of 2019. Cerro Verde processing plants averaged almost 400,000 metric tons of ore per day, approximately 10% above nameplate capacity.

A dividend payment of $0.027 was proposed at Buenaventura's February 20, 2020 board meeting. Moving on to Slide 4 summary. During 2019, three of our nine mining assets were below budget. You can see in the left side of the slide, using our four-tier system, we have highlighted in red, the operation that were below budget in 2019.

In the case of El Brocal, this year's production was lower than expected due to slope instability in the northern part of the pit, problems with Dominion Mill in the copper plant, and also problems with the overland belt and crusher in the No. 2 plant that process lead and zinc. The EBITDA was additionally affected by lower copper prices, unbudgeted and worse commercial conditions for lead and zinc concentrate. At Uchucchacua, production was below budget due to the strike at the beginning of the year, that lasted 21 days and lower silver grades than expected.

The EBITDA was additionally affected due to our decision to focus on upper zones with low-cost and high content of lead and zinc. The area called Cachipampa and lower silver content postponing lower zones with high silver content. However, the lead and zinc markets didn't generate the expected EBITDA. Finally, at Orcopampa, production in 2019 was lower than expected, mainly to the lack of good results through our exploration program.

However, since August 2019 due to the reduction of the headcount we obtained a breakeven point. Moving on to Slide 5. We are showing our strategic map, where we, as usual, you use, as usual, the capital B from value of Buenaventura as a visual index for the following slides. In the coming slides, we shall discuss the financial results of the company.

Moving on to the Slide 6, financial highlights. Total revenues during the fourth quarter were $235.5 million, which is 7% lower in comparison to the fourth quarter of 2018. This was primarily due to the decrease in volume sold of gold and silver. EBITDA from our direct operations in the fourth quarter of 2019 was $73.9 million, which is 8% higher in comparison to the same quarter last year.

EBITDA, including our affiliates in this fourth quarter was $176.8 million, which is 20% higher in comparison to the fourth quarter of 2018. The accumulated EBITDA including associates as of December 2019 is $620.9 million, which is 6% lower in comparison to the same period of 2018. And a net loss in the fourth quarter of this year was $53.7 million, compared to a net loss of $72.9 million a year ago. In the case of the full year, the net loss was $12.2 million, compared to a net loss of $13.4 million in 2018.

The capex has decreased to $38 million in the fourth quarter of 2019, compared to $41 million in 2018. During 2019, the capex was $103 million. This represents an 8% decrease compared to the period of 2018. This is in line with the budget target that we reported at the beginning of the year.

The free cash flow in the fourth quarter of 2019 was minus $66 million. In the whole year, free cash flow was minus $59 million. This was mainly due to the total debt reduction from $682 million by the end of 2018 to $627 million by the end of 2019. Moving on to Slide 7.

This is where you can see the quarterly award trend of the EBITDA from our direct operations, which reached $202 million in 2019. And in the lower part of this slide, you can see three different graphs showing that early down trend of the unit cost expressed in terms of U.S. dollars per metric tons, positive results as a consequence of the debottlenecking program. Moving on to Slide 8.

Here, again, you can see that capital visual index for analyzing the results of our portfolio of operations. Moving on to Slide 9 and 10, attributable production. Total gold attributable production in the fourth quarter of 2019 was 115,000 ounces, which is 18% lower than the figure reported for the same quarter of the previous year. For the whole year, total gold attributable production was 464,000 ounces, 21% lower than the same period in 2018.

This reduction is mainly explained by lower production coming from Orcopampa. However, during 2020, we expect to achieve a neutral financial situation in Orcopampa due to the headcount downsize that has improved its breakeven point. We're refocusing this production program, looking for high gold rates. Silver attributable production for this quarter was 5.6 million ounces, which shows a decrease of 3% compared to the figure reported in the fourth quarter of 2018.

In 2019, silver production was 20.1 million ounces, which is 24% lower than our total silver production in the same period of 2018. This is mainly explained by lower production in Uchucchacua as a result of workers went on strike at the beginning of January and also lower silver grade than expected. During 2019, the mining planning in Uchucchacua focused on upper zones with high content of lead and zinc and lower silver content. However, this plan was negatively impacted by lower commercial terms and base metals prices.

During 2020, we'll be focusing on zones with high silver content. In the fourth quarter of 2019, 13,600 metric tons of zinc were produced, 2% lower in comparison to the fourth quarter of 2018. During 2019, 55,600 metric tons of zinc were produced, which is 5% lower compared to 2018. The decrease was mainly due to lower production at Uchucchacua and El Brocal mines.

In the case of lead, equity production was 10,300 metric tons in the fourth quarter of 2019, which is 2% higher in comparison to the fourth quarter of 2018. For the complete year 2019, lead production was 40,700 metric tons, 10% greater than the lead production in 2018. Finally, our copper attributable production for the fourth quarter of the year was 31,400 metric tons. In the case of 2019, total copper attributable production was 116,000 metric tons, 5% lower than 2018.

We faced difficulties at El Brocal production plant that reduced our throughput. During 2020, we are going to tackle it, implementing an overhaul of the two production plants through a program designed with the system of Hatch. Moving on to Slide 11. The all-in sustaining cost from our direct operations in the fourth quarter of the current year decreased to USD 1,311 per ounce of gold, 12% lower in comparison to the same period a year ago.

The cost applicable to sales in the fourth quarter of 2019 were as follows: for gold, USD 1,002 per ounce, which is 3% lower than a year ago; for silver, USD 13.97 per ounce, which is 18% higher than a year ago; for lead, USD 1,388 per metric ton, which is 7% greater than a year ago; and for copper, USD 5,352 per metric ton, which is 8% lower in comparison to a year ago. Finally, in the case of zinc, the cost applied to sales was USD 1,983 per metric ton, which is 2% higher than a year ago. Moving on to Slide 12 and 13, the debottlenecking program for 2019. As a result of the company's debottlenecking program, we are gaining mining cost efficiency that partially offset lower production outcome.

As you can see in the year 2019, we generated $44.8 million of EBITDA with the debottlenecking program. Moving on to Slide 14. The debottlenecking program for 2020. In this slide, we are presenting the budgeted quarterly EBITDA that will be generated by this program.

For 2020, we expect, in total, $39.7 million of EBITDA generation. For this year, Orcopampa is not included. Moving to Slide 15, enhanced exploration approach. As part of our exploration strategy, we focus more in diamond drill activities to increase productivity instead of tunneling.

As you can see, we increased exploration efforts in Tambomayo and Orcopampa. In the particular case of Uchucchacua, the main effort was to convert Yumpaq's ore resources into ore reserves. Moving on to Slide 16, Buenaventura's ore reserves. In this slide, we are presenting our total reserves by metals as of December 2019.

In the case of gold, we increased significantly our ore reserves by 213% compared to 2018. This increase is mainly explained by the ore reserves declared at our San Gabriel project. Our attributable gold reserves also increased in 37% compared to 2018. In the case of silver, Buenaventura's ore reserves increased to 4% and attributable reserves increased by 2%.

And Buenaventura's, copper ore reserves also increased in 2019 with a declaration of reserves at Trapiche projects. In this sense, attributable copper reserves increased to 39%. Moving on to Slide 17. Once again, here, you can see our category B from our low used for analyzing in more detail the updated information regarding our portfolio of projects.

Moving on to Slide 18. Here, we are presenting in one snapshot the current development level for each one of our projects. Moving on to Slide 19, 20, 21 and 22. Here, it is important to highlight the following details.

In San Gabriel, we are reporting 1.7 million ounces of gold reserves. We have started the feasibility study in parallel with construction and operating permits. We expect to finish this social permit called prior consultation by the second quarter of this year. In Trapiche, we are reporting 1.4 million tons of copper reserves.

We are finishing the construction of an on-site pilot plant to support column testing throughout 2020. In Rio Seco, the chemical plant, the pilot plant was upgraded to perform industrial continuous testing. Hatch was hired to validate the metallurgical process. Samuels Engineering was hired for the design and the feasibility studies.

The Environmental Impact Assessment will be submitted in the second quarter of this year and is expected to be approved in the third quarter of 2021. As you know, throughout this project, we intend to unlock a significant value for our copper portfolio. And in Tantahuatay sulfides, we are dealing a stand-alone business case. We expect to reach pre-feasibility stage in the first half of the year, also preparing the Environmental Impact Assessment initial documentation and starting the basic engineering for the tailings dam facilities.

Moving on to Slide 23. Thank you for your attention. I will hand the call back to the operator to open the line for questions. Operator, please go ahead.

Questions & Answers:

Operator

Thank you. We will now be conducting a question and answer session. [Operator instructions] Our first question today will come from Thiago Ojea of Goldman Sachs. Please go ahead.

Thiago Ojea -- Goldman Sachs -- Analyst

Hi, thanks, everyone. I would like to -- for you, if you can discuss a little bit about the debottlenecking and the cost, the difference on CAS that was reported. We saw the CAS in several operations going up, but still, the overall CAS for the company going down and how this is related to debottlenecking. And we saw as well in the fourth quarter negative free cash flow, so the total net debt now rose to above $400 million.

How do you see that in terms of capital allocation for the future? Thank you.

Victor Gobitz -- Chief Executive Officer

Thank you, Thiago, for your two questions. The first one is regarding the debottlenecking program. One part is related to the – specifically related to the technical part. And the second part regarding the differences between our information, we expressed in terms of EBITDA and also in terms of production costs, U.S.

dollars per metric tons, not in terms of cash. The first part will be answered by Juan Carlos.

Juan Carlos Ortiz -- Vice President of Operations

Hello, Thiago. This is Juan Ortiz from operations. The evolution of the debottlenecking program was, given the result was expected in the last quarter of 2019. One of the main evolutions was in Tambomayo, we consolidated the change in the processing of the ore, reducing the cost of cyanidation.

And on the cyanidation on the concentrate, we don't make 100% of the core profit but only on about 5% of the mass that they concentrate. So we achieved that, consolidated that result in the last quarter, and it's a real cash. It's a saving and cost is the same recovery with lower expenses. And also, the consolidated reduction in meters, they need to develop meters for exploration.

We consolidate the strategy to do more drill holes, longer drill holes that are cheaper to do than the tunnels, and we consolidate that the structure and the strategy also in our minds, particularly in Tambomayo and in Uchucchacua.

Victor Gobitz -- Chief Executive Officer

Yes. The second part of your question, Thiago, was the differences between them, our [Inaudible] and CAS. And also, regarding the free cash flow, Leandro García will explain that two topics.

Leandro Garcia -- Vice President and Chief Financial Officer

Yes. Well, beginning with the free cash flow. In this year, we repaid the loans in the -- the short-term loan, and also, with the payment, we have the schedule for our long term. Actually, also, we have an additional disbursement for dividends, and that make a difference of around $100 million, and explanation was $100 million in the reducing cash flow.

For the debt, you also asked for whether we are planning to lower debt. We are planning to refinance our debt facility in this 2020. In April, we should have an announcement of our refinancing debt.

Victor Gobitz -- Chief Executive Officer

Yes. We are taking advantage of the market to increase the maturity and to reduce our costs.

Leandro Garcia -- Vice President and Chief Financial Officer

Regarding the cost of -- the CAS and the operating costs we report is that basically, the difference is the accounting methods we use for the CAS and our operational costs. There are some differences between which accounts we take into account -- we take in account to report those costs. And for example, the CAS considers inventories, the initial inventories and the final inventories of our concentration on the ounces we have in containing our content. So there will be -- I think really commendable to have a reconciliation that we can send to you before to go through from our operating cost to our CAS, and we can send it to you.

Thiago Ojea -- Goldman Sachs -- Analyst

OK. But just following up, how do you see the current net debt level? How should we see the capital allocation in terms paying down debt and dividends in the future? What are the priorities for the company going forward? Thank you.

Victor Gobitz -- Chief Executive Officer

Yes. In general terms, Thiago, we are comfortable with our current level of debt. But as Leandro said, during 2020, we intend to extend the maturity of this total debt in order to be more comfortable, in order to be able to allocate part of this capital for our future growth.

Thiago Ojea -- Goldman Sachs -- Analyst

Thank you.

Victor Gobitz -- Chief Executive Officer

You are welcome.

Operator

[Operator instructions] Our next question today will come from Leopoldo Silva of LarrainVial. Please go ahead.

Leopoldo Silva -- LarrainVial -- Analyst

Hi, good morning everyone. Thanks for the opportunity. My first question is regarding reserves. In Orcopampa, I see that you have reduced reserves further from what could be explained by production in 2019.

And Tambomayo's reserves for this year are largely and, perhaps, only explained but by production on 2019. However, you should be reducing and my understanding the cutoff rate of Tambomayo. Is there any other factor on the exploration process on 2019 that made you guys put or discover less reserves on Orcopampa and not more in Tambomayo, both reserves I'm speaking of?

Victor Gobitz -- Chief Executive Officer

Leopoldo, thank you for your question. The first part is technical part. Carlos Ortiz will explain that. And the second part, all the different aspects that we have to deal with rural communities in order to expand our exploration programs, will be explained by Alex Hermoza.

Juan Carlos Ortiz -- Vice President of Operations

Hi, good morning. In the case of Orcopampa, in the last quarter, in the last month of 2019, we achieved the balance for a positive EBITDA in a new strategy with limited production and focusing on high-grade in the underground mine. This impact on the increase in the cutoff, that's the reason we need to run the reserves with a new cutoff and a reduction in the reserve, as presented at December 2019. The exploration is ongoing in Orcopampa.

We are working hard on that, but so far, we are having only mine results. Probably along the year, we can deliver more news about the exploration of Orcopampa. Regarding Tambomayo, the exploration is focusing right now at the bottom part of the mine, and we are still getting fair results. So we are not promising and not increasing any reserves so far.

There is a slight impact also in the value of the ore, particularly from the value coming from zinc and lead. As you know, the treatment charge has been increased in both markets, zinc and lead, and that generate less value from the ore coming from -- all the ore that has important value in Tambomayo in zinc and lead terms. That's the reason these blocks have been passing for reserve to excluding the resources in this year. It's small amount.

It's a gold mine, but still, though, has some section of the mine that has an important value coming from the latency. That area has been impacted by mainly this terminal treatment charge in 2019.

Victor Gobitz -- Chief Executive Officer

Yes. The second part of your question, Leopoldo, was regarding our exploration. As you know, in Peru, we have also a new rule regarding the prior consultation and Alejandro Hermoza will explain with more detail on this topic.

Alejandro Hermoza -- Vice President of Sustainability

Yes, hello. Yes, Juan Carlos explained about the mine explorations, but regarding the newer mine and district explorations, we have had some delays both from reaching agreements, land agreements with the communities involved. And on the other side, as Victor explained, we have this Peru subscribed the ILO 169 convention, which has to do with prior consultation to population around surrounding projects. And this process, which is not handled by the company, it's handled directly by the officials from the ministry, they're taking longer than we expected.

And not only in Tambomayo. In different sites, we have these delays, and we expect that after many changes that have been going on inside the ministry, changes of responsible and officers in charge-off, we expect to have that process back on track on this year, in this semester.

Leopoldo Silva -- LarrainVial -- Analyst

OK. Great. I have a follow-up question as well. So I see that you declared reserves with gold at 1,300.

If gold continues to be at these levels, at current levels for the coming years, could you give some color on how much reserves would you have or, perhaps, in terms of life of mine could you have in Orcopampa and Tambomayo, please?

Victor Gobitz -- Chief Executive Officer

Leopoldo, in general terms, when you talk about ore reserves, we try to define a long-term gold price. The long-term gold price is in order of $1,300, the current price is $1,500.

Unknown speaker

$1,600.

Victor Gobitz -- Chief Executive Officer

Sorry, $1,600. But for the long term, we have to be careful and to have a more conservative overview. And we, as a company, we use USD 1,300 per ounce of gold.

Leopoldo Silva -- LarrainVial -- Analyst

Yeah, naturally. But if prices continue to be at these levels, would you be able to continue or other zones of the peak that would be economically viable to continue and to extend the life of mine without any further exploration?

Victor Gobitz -- Chief Executive Officer

Yeah, I suppose it's a possibility, Leopoldo, but it's too early to try to calculate the amount involved in this option.

Leopoldo Silva -- LarrainVial -- Analyst

OK. Thanks very much.

Victor Gobitz -- Chief Executive Officer

You are welcome.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Victor Gobitz for closing remarks.

Victor Gobitz -- Chief Executive Officer

OK. Thank you, everyone, for joining our conference call this morning. On behalf of Buenaventura's management team, I would like to express our commitment of maintaining our plan of developing the full potential of our existing assets, prioritizing the long-term perspective in order to give more predictability in terms of production and profitability. In this respect, we consider that 2019 was a transitional year, essential to achieving this goal.

Just to let you know, we are attending the BMO's Global Metals and Mining Conference next week in Miami. And finally, we are glad to invite you to our investor day that will take place on Monday, March the 9th, in New York. Please contact our IR team for further information. Thank you again and have a wonderful day.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Rodrigo Echecopar -- Investor Relations

Victor Gobitz -- Chief Executive Officer

Thiago Ojea -- Goldman Sachs -- Analyst

Vctor Gobitz -- Chief Executive Officer

Juan Carlos Ortiz -- Vice President of Operations

Leandro Garcia -- Vice President and Chief Financial Officer

Leopoldo Silva -- LarrainVial -- Analyst

Alejandro Hermoza -- Vice President of Sustainability

Unknown speaker

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