Buenaventura Mining Company Inc. (Compañía de Minas Buenaventura S.A.A.) — FY 2018 Form 20-F
Reporting period: Year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS in U.S. dollars; amounts below are rounded to millions unless noted.
Business context
Buenaventura explores, mines and processes gold, silver and other metals in Peru. It consolidates its controlled mining operations and accounts for its interests in Yanacocha (43.65%), Cerro Verde (19.58%) and Coimolache (40.10%) using the equity method. Its operating results are exposed to metal prices, production levels and operating costs.
Key consolidated financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total operating income | $1,167.4m | $1,274.4m |
| Net sales of goods | $1,123.0m | $1,223.9m |
| Gross profit | $184.4m | $294.1m |
| Operating profit | $53.8m | $105.5m |
| Net profit (loss) | $(11.7)m | $64.4m |
| Net loss attributable to parent shareholders | $(13.4)m | $60.8m |
| Operating cash flow | $346.3m | $212.6m |
| Cash and cash equivalents at year-end | $369.2m | $214.6m |
| Total assets | $4,217.2m | $4,332.8m |
| Total shareholders’ equity | $3,029.6m | $3,063.6m |
Gross margin was approximately 15.8%, versus 23.1% in 2017; operating margin was 4.6%, versus 8.3%. The company used $117.6m in investing activities and $74.1m in financing activities during 2018. Operating cash flow included $38.8m of insurance proceeds; cash receipts also benefited from $39.2m of dividends from Cerro Verde.
Reported financial obligations were $587.1m, including current and long-term amounts; current bank loans were separately reported at $95.0m. Together these reported balances indicate approximately $682.1m of borrowings and financial obligations, before considering other liabilities. Total contractual cash obligations were $964.9m, including debt, leases and other obligations. Current assets were $761.1m and current liabilities were $399.2m.
Material changes versus FY 2017
- Total operating income declined 8%; goods sales decreased 8%, reflecting lower sales volumes and weaker realized prices for several metals. Gold sales fell 19% and silver sales 10%; copper sales rose 2%.
- Operating costs were broadly unchanged at $983.0m, but depreciation and amortization increased 13% to $241.3m. Operating expenses declined 31% to $130.7m, including a $5.7m impairment reversal and a $11.2m reversal of contingency provisions.
- Operating profit nearly halved, and the company moved from net profit to net loss. Its share of associate results swung from income of $13.2m to a loss of $1.1m, principally reflecting weaker results at Cerro Verde and Coimolache, partly offset by improvement at Yanacocha.
- Operating cash flow increased 63% to $346.3m. Capital additions fell to $111.3m from $259.5m, largely because Tambomayo construction was substantially completed. Cash at year-end increased $154.6m.
- Consolidated gold production was 338,508 ounces, down from 405,646; silver production was 26.8m ounces, broadly stable. Tambomayo output increased, while Orcopampa and La Zanja production declined.
Outlook, risks and unusual items
- Guidance: Buenaventura budgeted $80m–$120m of 2019 capital expenditures, principally sustaining investment and development of San Gabriel and Trapiche. It planned $50m–$70m of exploration in operating units and $10m–$30m in non-operating areas.
- Yanacocha: Quecher Main achieved first production in late 2018; commercial production was expected in the second half of 2019. Management reported an expected mine life to 2027 and average annual gold production of approximately 200,000 ounces in 2020–2025, on a consolidated basis. These are forward-looking estimates.
- Commodity exposure: Buenaventura and its wholly owned subsidiaries were unhedged on gold and silver prices. El Brocal had copper hedges covering 2,000 metric tons for early 2019 at an average fixed price of approximately $7,349 per ton. Price declines could reduce revenue, cash flow and reserve economics.
- Cerro Verde royalty disputes: Cerro Verde recorded $408.9m of charges in 2018 for penalties and interest associated with disputed royalty assessments for 2009–2013. It was also scheduled to begin installment payments in the second quarter of 2019 on a disputed assessment balance reported at approximately $280.3m at year-end. Other assessments remained disputed. These matters materially affected Cerro Verde’s results and cash flows.
- Other contingencies: Yanacocha’s tax dispute over historical contractual rights carried potential fines and interest of up to approximately $83m; the outcome was uncertain. Buenaventura also disclosed substantial tax disputes, including possible contingencies of approximately $425m for 2007–2008 audits and $184m for 2009–2010 audits; management expected favorable outcomes and did not record provisions for those matters.
- Projects and operating risks: Conga remained suspended and in care and maintenance; management did not anticipate development in the foreseeable future. Community opposition, permitting, environmental requirements, labor, political developments in Peru, geotechnical conditions and reserve-estimation uncertainty remain material risks.
- Unusual items: El Brocal recognized a $33.7m net insurance recovery gain. Buenaventura recorded a $4.1m loss on the sale of engineering subsidiary Buenaventura Ingenieros S.A. The filing reports three fatal injuries among 465 reportable injuries in 2018.
- Audit and controls: The auditor issued unqualified opinions on the IFRS consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the 2018 dividend per share: the filing’s selected financial data reports $0.09, while its dividend history table reports $0.12 for 2018.
- Review the size, accounting treatment, payment schedule and appeal status of Cerro Verde’s royalty and tax assessments, including the $408.9m 2018 charge and reported installment liabilities.
- Check the details and status of Buenaventura’s and Yanacocha’s other tax disputes, including the potential exposures disclosed but not provisioned.
- Assess whether production and cost trends at core mines, particularly Orcopampa and La Zanja, support the 2019 exploration, capital spending and Quecher Main outlook.
- Confirm the composition and maturity of debt and lease obligations, covenant compliance, and whether operating cash flow remains sufficient after capital spending, dividends and debt service.