Earnings Call Transcript - BVN Q2 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Compañía de Minas Buenaventura Second Quarter 2022 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Please note that this call is being recorded. I would now like to introduce your host for today's call, Mr. Gabriel Salas, Investor Relations. Mr. Salas, you may begin.

Gabriel Salas, Investor Relations

Good morning, everyone, and thank you for joining us today to discuss our second quarter 2022 results. Today's discussion will be led by Mr. Leandro Garcia, Chief Executive Officer. Also joining our call today and available to your questions are Mr. Daniel Dominguez, Chief Financial Officer; Mr. Juan Carlos Ortiz, Vice President of Operations; Mr. Renzo Macher, Project Manager; Mr. Juan Carlos Salazar, Geology and Exploration Manager; Mr. Roque Benavides, Chairman; and Mr. Raul Benavides, Director. Before I hand our call over, let me first touch on a few items. On Buenaventura's website, you will find our press release that was posted yesterday after market close. Please note that today's remarks include forward-looking statements that are based on management's current views and assumptions. While management believes that its assumptions, expectations, and predictions are reasonable in the view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. I encourage you to read the full disclosure concerning forward-looking statements within the press release we filed on July 26, 2022. Let me now turn the call to Mr. Leandro Garcia.

Leandro Garcia, CEO

Thank you, Gabriel. Good morning to all and thank you for attending this conference call. Before we start this presentation, we would like to wish you, your family, and friends health and well-being at this difficult time. We are pleased to present the results of the second quarter 2022 from Compañía de Minas Buenaventura. We have prepared a PowerPoint presentation, which is available on our website. Before we go further, please take a moment to review the cautionary statement shown on Slide 2. Moving on to Slide 3, the highlights were as follows: second quarter 2022 EBITDA from direct operations was negative $19.1 million compared to $68.5 million reported in the second quarter of 2021. Second quarter 2022 operating cash flow reached $72.7 million compared to $101.7 million in the second quarter of last year. Second quarter 2022 net loss was $39.9 million compared to $37.5 million net income for the same period in 2021. Second quarter 2022 exploration at operating units increased to $18.9 million compared to $14.5 million in the second quarter of 2021. This increase is part of the company's revised strategy to increase its focus on exploration in order to extend life of mine. Second quarter 2022 capital expenditures were $30.5 million compared to $21.4 million for the same period in 2021. Second quarter CapEx includes $11 million related to the San Gabriel project and $60.3 million related to the Yumpag project. The company continued its strategy of progressively reducing fixed costs at the Uchucchacua mine to improve cost structure efficiency when the operation restarts. COVID-related expenses were reduced from $19.1 million in the second quarter of 2021 to $1.9 million reported in the second quarter 2022. Buenaventura's cash position reached $326.3 million at June 30, 2022. Net debt was reduced to $416.4 million with an average maturity of 3.8 years versus 2.2 years of the last quarter of 2021. On April 29 of this year, Cerro Verde paid a total dividend of $150 million; Buenaventura received $29.4 million relative to its stake in Cerro Verde. Huanza's current debt amounts to $90 million with a coupon rate of 5.05% per annum payable until 2027. Moving on to Slide 4, our ESG corporate strategy. Here, you can find some key indicators regarding our ESG strategy. During the second quarter of 2022, we started our carbon footprint measurement, and we conducted our human rights due diligence. In line with our ESG strategy, during the second quarter, we will apply to the Dow Jones Sustainability Index. Moving on to Slide 5, financial highlights. Total revenues during the second quarter were $150 million, which is 38% lower in comparison to the second quarter of 2021. For the first half of the year, total revenues decreased to $383 million compared to the first half of 2021. As we mentioned before, our EBITDA from direct operations for the second quarter 2022 was negative $19 million in comparison to $69 million during the second quarter of 2021. EBITDA from our direct operations for the six months of 2022 increased to $413 million in comparison to $108 million during the first six months of 2021. The increase is mainly due to the Yanacocha transaction. Also, our EBITDA including associate company for the second quarter of 2022 reached $52 million in comparison to $181 million during the same period in 2021. EBITDA including our affiliates for the first half of the year was $630 million compared to $344 million for the same period in 2021. The CapEx increased to $31 million in the second quarter of this year compared to $21 million in the second quarter of 2021. In the first six months of the year, CapEx totaled $49 million, a 43% increase in comparison to the first half of 2021. Moving on to Slide 6 and 7, our attributable production. Total gold attributable production in the second quarter of 2022 was 48,000 ounces, which is 3% higher than the year reported on the same quarter of the previous year. This increase is mainly explained by the 81% year-over-year higher volume ore treated at Orcopampa. It was partially offset by the decrease in the common rate and the 30% decrease in stockpiles on the leach pad. In the first semester of 2022, total gold attributable production was 97,000 ounces, 15% higher than the same period in 2021. Silver attributable production for this quarter was 1.6 million ounces, which shows a decrease of 51% compared to the figure reported in the second quarter of 2021. During the first half of 2022, silver attributable production was 3.4 million ounces, 48% lower than the first semester of 2021. This decrease was mainly explained primarily due to the suspension of Uchucchacua's operations as was previously announced and a change of the mine plan sequence at El Brocal. In the second quarter of 2022, 7,000 metric tons of zinc were produced, a decrease compared to the second quarter in 2021. In the first semester of the year, zinc production reached 15,000 metric tons, 28% lower than the same period in 2021. In the case of lead, equity production was 4,000 metric tons in the second quarter of 2022, which is 41% lower in comparison to the second quarter of 2021. In the first half of 2022, lead production was approximately 8,000 metric tons in comparison to 11,000 metric tons in 2021. Finally, our copper attributable production for the second quarter over the year was 28,000 metric tons. During the first half of 2022, copper attributable production was 55,000 metric tons and a 13% increase compared to the same period of 2021. Moving on to Slide 8, all-in sustaining cost and cost applicable to sales. The all-in sustaining costs from our direct operations over the first semester of 2022 decreased by 6% to $1,450 per ounce. The costs applicable to sales for the first semester of 2022 were as follows: for gold, $1,128 per ounce, which is 11% lower than a year ago; for silver, $17.65 per ounce, which is 10% lower than a year ago; for lead, $1,341 per metric ton, which is 2% higher than a year ago; for copper, $6,885 per metric ton, which is 16% higher in comparison to a year ago. Finally, in the case of zinc, the cost applied to sales was $3,167 per metric ton, which is 51% higher than a year ago. Moving on to Slide 9, pipeline of projects update. Here, we are presenting in one a snapshot of the current development level for each of our projects. Moving on to Slide 10, San Gabriel. The construction is delayed due to social matters that are being addressed. We are expecting to resume activities soon; the engineering and procurement work packages are underway, engineering at 40% completion, procurement at 61% completion. Power line bidding started; 93% of the power line land is secured, and we have 3.5 kilometers to go. Moving on to Slide 11, Trapiche. We are finishing the first on-site metallurgical column testing after 200 days of primary leaching; column temperature and flow rate control helped confirm design recovery. We have completed ore chloride leaching test in Lima, and the final report is in process. We have successfully completed the missing EIA workshop. We have signed operational agreements with two out of five communities; the remaining one is still in process. We have started power-line land agreements with three communities. Access road land agreements will be resumed after corporate agreements are finalized. Moving on to Slide 12, Tantahuatay's sulfide. Coimolache's Board approved the development of a 20,000 prefeasibility study. The drilling plan to increase resource certainty and Coimolache's land acquisitions are in progress. That's all. Thank you for your attention. I will hand the call back to the operator to open the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And the first question will come from Jens Spiess with Morgan Stanley. Please go ahead.

Jens Spiess, Analyst

Yes, thank you for taking my call. My first question is on the cash that you reported. The zinc cash was $4,000 per ton, which is above the current spot price. And the copper cash was, I think, $7.2, which is close to the current spot price. So I just wanted to know what the strategy there is going forward if you're considering, I don't know, stopping operations or what is going on with the costs that you're currently experiencing? Thank you.

Leandro Garcia, CEO

Thank you, Jens, for your questions. This second quarter for Brocal, after the landslide that we had in the last days of March, made our operations more complex. However, we have a plan, and in more detail when Carlos can answer your question, please. Juan Carlos?

Juan Carlos Ortiz, Vice President of Operations

Thank you, Leandro. Thank you, Jens, for your question. In relation to zinc at Brocal, during this quarter, following the landslide in the open pit where we extract polymetallic ore, we have been utilizing the low-grade stockpile from previous years to supply the processing plant. This is why we are experiencing low grades being processed. Additionally, the low-grade material has resulted in lower metallurgical recoveries than we have obtained in the past, which has contributed to increased costs for zinc production. We will continue to feed this material into the processing plant throughout this quarter as the rehabilitation work in the open pit progresses. By the last quarter of the year, we expect to return to normal production levels from the open pit. For copper, two factors have influenced us this quarter. First, inflation, particularly with diesel costs for our contractors, necessitates renegotiating the service costs for those working in the underground mine, where we source the copper for processing. Second, we are in the process of ramping up production in the underground mine, which involves increasing our development efforts. We have already reached stable production levels of 8,000 tons per day, up from 7,500 tons per day, and we anticipate reaching approximately 8,500 tons per day by the end of the year. In this second quarter, we have invested more in underground development and infrastructure to support the ramp-up of production, which has also impacted copper costs.

Jens Spiess, Analyst

Okay. So 800,000 tons per day versus how much would you say? And when was that lower comparison last year or last quarter?

Juan Carlos Ortiz, Vice President of Operations

At the beginning of the year, we were around 7,500 tons per day. Now we are 8,000 tons. We expect to be 8,500 tons per day by the end of this year.

Jens Spiess, Analyst

Okay, Perfect. And if I make a follow-up question. Just any color on Cerro Verde, the results were not very good as well. Were they also impacted by provisional pricing? And along those lines, just to confirm, the provisional pricing impact for you, was it around $30 million. Is that correct?

Daniel Dominguez, CFO

Sorry, Jens, this is Daniel Dominguez. The impact for Buenaventura in the quarter was $40 million.

Jens Spiess, Analyst

$40 million, okay.

Daniel Dominguez, CFO

Yes, and by the way in the reconciliation, there is a $30 million that is adding up to the loss, the $50 million loss that should be $40 million. We will correct this as soon as we finish this call.

Jens Spiess, Analyst

Okay, perfect. And over there, any color there on what's going on? Are they also experiencing higher costs, or is it mainly provisional pricing?

Daniel Dominguez, CFO

They are experiencing higher costs due to inflation, estimated at around 5% to 8%. However, we are confident that they will continue to distribute dividends. We did not anticipate higher dividends for the second quarter, which were approved at only $30 million. Nevertheless, for the second half of the year, we expect dividends to increase, totaling at least $100 million to $120 million for the entire year. Sorry, Leandro.

Leandro Garcia, CEO

Sorry, if I may add, also the embedded derivative for the copper price in the provisional invoices affected the sales and revenues for Cerro Verde.

Jens Spiess, Analyst

Okay, perfect. Great. Thank you so much.

Leandro Garcia, CEO

Thank you, Jens.

Operator, Operator

Our next question will come from Tanya Jakusconek with Scotiabank. Please go ahead.

Tanya Jakusconek, Analyst

Great. Good morning everyone. Can you hear me? Hello?

Leandro Garcia, CEO

Yes, Tanya. Yes.

Tanya Jakusconek, Analyst

I'm just going to ask some very quick questions for modeling. Just wanted to come back to three for modeling, please. On royalty income, you had none this quarter. Is this something that we should think about that you're not going to get anything going forward? Or what happened with the royalty income?

Leandro Garcia, CEO

The royalty income comes from the income we used to receive from Yanacocha through our company, Tambomayo, and we should continue receiving this revenue at a lower rate than last year because we have reduced our participation, and all the arrangements with Newmont, we split.

Tanya Jakusconek, Analyst

Okay. No worries. I understand that one. Okay. And then…

Daniel Dominguez, CFO

If I may.

Tanya Jakusconek, Analyst

Okay, go ahead.

Daniel Dominguez, CFO

Yes, Tanya, sorry, as you can see in the current line of royalties, we have zero.

Tanya Jakusconek, Analyst

Yes.

Daniel Dominguez, CFO

We have reclassified this to the others line. We continue to expect for the entire year around $8 million to $10 million, but we are reclassifying this in others.

Tanya Jakusconek, Analyst

Okay. Got it. And then, Daniel, can I also ask two other modeling questions? One has to do with CapEx. It looks like you've done $50 million for six months, and previous guidance had been $190 million to $210 million overall. Can you give us an idea if that $190 million to $210 million is still valid because you've got a lot to spend in the second half?

Daniel Dominguez, CFO

We expect to disburse this year for San Gabriel due to the delays around between $100 million and $105 million.

Tanya Jakusconek, Analyst

So $100 million and $105 million is that for all CapEx? Or is that just San Gabriel?

Daniel Dominguez, CFO

This is just for San Gabriel and for our sustaining CapEx, including the $90 million that you mentioned.

Tanya Jakusconek, Analyst

So $190 million in total. Like to put all the CapEx together, you still expect the $190 million, including the development CapEx?

Daniel Dominguez, CFO

Yes.

Tanya Jakusconek, Analyst

Okay. Thank you for that. And just, Daniel, lastly, on the modeling question before my last two questions on the assets. Just the revenue. When I looked at the revenue line and I looked at your volumes and your sales and your realized pricing, it still was much lower than I had expected. So I'm just trying to understand how going forward can we do I thought with the provisional pricing, I would have captured all of that, but it was much lower again. So I'm just wondering if there's any clarity from you guys on that, why it was so much lower.

Daniel Dominguez, CFO

The embedded derivative or the provisional pricing had an impact of $40 million in the quarter. When we sold this concentrate, the price was around $9,200, while at the end of the quarter, the price was approximately $8,200. This creates a significant gap. We anticipate this will adjust in the next period.

Tanya Jakusconek, Analyst

So should I be thinking that $52 million is coming back in the next two quarters?

Leandro Garcia, CEO

Well, it depends on the spot price. Now that the QP that we will have the final QP that we will have in our sales, right?

Tanya Jakusconek, Analyst

Okay. All right. Thank you. I'll make a stab at that. Maybe just on the San Gabriel. Can I just get an update on what are the social issues that have come about and what are they? And why do you think they will be resolved quickly in the next few weeks? And then where is the project? Where are we on some of the other items? I know you mentioned the procurement and the power line, but we've got some other critical paths to get through this year and next. So maybe just an update for me on that?

Leandro Garcia, CEO

Sure, Tanya. Thank you for your question. Allow us to clarify the question on San Gabriel. Here, we are with Renzo Macher, our Project Manager, and he will give you more color on the current situation in San Gabriel. Please, Renzo, go ahead.

Renzo Macher, Project Manager

Yes, hi, Tanya. So I guess the first thing to comment is that we are not blocked. What we have had are two events, and the first one happened in mid-June, both of them at less than six hours. It was communities or people from outside our direct area of influence requesting to be considered as part of the influence. One of the highlights to mention is that our relationship with our two communities that are part of the actual area of influence are still intact. We keep working with them to develop the project. What we are doing is we're working with the authorities to open this discussion with each of these communities on a separate table. Meanwhile, we are keeping our field operations at a minimum. That's our decision until we find a solution so we don't exacerbate this initial problem. You can actually go to the project today; it's not blocked. We don't foresee a major impact at this point since we are at the beginning of the project. Most of the activities are still engineering and procurement, and those activities have not stopped at all. The main construction will start in the second part of next year. So what we are seeing today is minor delays on preconstruction activities only.

Tanya Jakusconek, Analyst

And on the preconstruction activities, anything critical to get to that second part of next year construction?

Renzo Macher, Project Manager

Nothing that we cannot accommodate because the camp side, for example, is currently being built at the factory. The first modules of the temporary camp are still under construction on the factories; maybe some delays on when to place them on site, but nothing that cannot be accommodated at this point.

Tanya Jakusconek, Analyst

Okay. So you're just thinking that the camp is just the critical path to get that in place so that you can start construction in the second half of next year.

Renzo Macher, Project Manager

Yes. Actually preparing the footing for that camp to be placed on top. Again, we have one year to mix and match things and try to minimize things.

Tanya Jakusconek, Analyst

So there are two events from other communities. Your two communities that you influence are fine, but others outside these communities want something from you, and that has led to social issues. Is that a correct understanding?

Renzo Macher, Project Manager

Yes. That's correct. The main point is it's not blocked. You can actually walk through the project. It has been like two ways.

Operator, Operator

This concludes our question-and-answer session of today's conference call. I would now like to turn the conference back over to Mr. Leandro Garcia for any closing remarks. Please go ahead, sir.

Leandro Garcia, CEO

Thank you, sir. Before we finish today's conference call, we want to thank you very much for making the time to join us and share our information. Thank you, and have a wonderful day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.