Buenaventura Mining Company Inc. — 2017 Form 20-F Summary
Business context and reporting period
This is Compañía de Minas Buenaventura S.A.A.’s annual report for the fiscal year ended December 31, 2017, filed April 30, 2018. It is not a standalone fourth-quarter report; the filing presents full-year results. Financial statements are prepared under IFRS as issued by the IASB and reported in U.S. dollars.
Buenaventura explores, mines and processes gold, silver and other metals in Peru. It consolidates controlled operations and accounts for significant investments in Yanacocha (45.95%), Cerro Verde (19.58%) and Coimolache (40.10%) using the equity method.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total operating income | US$1,274.4 million | US$1,068.8 million |
| Gross profit | US$294.1 million | US$243.8 million |
| Operating profit | US$105.5 million | US$132.2 million |
| Net profit (loss) | US$64.4 million | (US$327.8 million) |
| Profit attributable to parent owners | US$60.8 million | (US$323.5 million) |
| Operating cash flow | US$212.6 million | US$391.4 million |
| Capital additions to mining assets | US$259.5 million | US$366.8 million |
| Cash and cash equivalents, year-end | US$214.6 million | US$80.5 million |
| Financial obligations, year-end | US$633.1 million | US$592.3 million |
Revenue growth reflected higher metal sales and Tambomayo’s startup. Operating profit declined despite higher gross profit, partly because of 2017 impairment, contingency provisions, a stripping-asset write-off and reversal of prior-year other income. Cash from operations fell 46%, as higher receipts from sales were offset by increased supplier and employee payments and substantially lower dividends received. The filing reports a current ratio of no clear value in the selected financial data; the balance sheet lists current assets of US$701.9 million and current liabilities of US$521.2 million.
At year-end, total assets were US$4.33 billion, total liabilities US$1.27 billion and shareholders’ equity US$3.06 billion. Gross margin was approximately 23.1%, operating margin 8.3% and net margin 5.1%, calculated using total operating income. These are derived ratios, not company-reported measures.
Material changes versus prior comparable period
- Net sales of goods rose 21% to US$1.224 billion. Gold sales increased 16%, silver 6%, lead 62%, zinc 32% and copper 20%; realized prices and sales volumes both contributed, with variation by metal.
- Operating costs increased 19% to US$980.3 million, including a 26% increase in cost of goods excluding depreciation and amortization. Tambomayo’s ramp-up and higher costs at Uchucchacua and Orcopampa were significant factors.
- Operating expenses rose 69% to US$188.6 million. Items included a US$21.6 million La Zanja impairment, US$13.9 million of contingency and other provisions, and a US$13.6 million write-off of Colquijirca stripping activities following a wall landslide and mine-plan change.
- Equity-accounted results swung from a US$365.3 million loss in 2016 to US$13.2 million of income in 2017. Buenaventura’s share of Yanacocha’s loss narrowed to US$76.6 million from US$455.6 million, while its Cerro Verde share of income was US$68.5 million.
- Buenaventura’s attributable gold production increased to 643,678 ounces from 588,451 ounces, including Tambomayo’s first operating contribution; silver production increased to 26.46 million ounces from 23.04 million. Reported consolidated production includes 100% of controlled subsidiaries’ output, not just Buenaventura’s economic share.
- Proven and probable reserves attributable to Buenaventura declined 9.6% for gold to 3.20 million ounces and 6.2% for silver to 196.61 million ounces.
Outlook, commentary, risks and unusual items
- For 2018, management budgeted US$180–220 million in capital expenditures and planned US$85–95 million for exploration at operating units and US$25–35 million for non-operating exploration. It expected to fund requirements through internal cash, cash on hand and associate dividends, while noting funding is not assured and is sensitive to metal prices.
- Tambomayo reached its 1,500-ton-per-day capacity in August 2017. Its 2018 production outlook was 110,000–130,000 ounces of gold and 3.0–3.5 million ounces of silver.
- Yanacocha’s Quecher Main project was expected to begin production in early 2019, with commercial production in fourth-quarter 2019; it is intended to extend mine life to 2027. Conga remains suspended and management did not expect development in the foreseeable future absent social acceptance and acceptable economics.
- Buenaventura and its wholly owned subsidiaries are unhedged for gold and silver prices. El Brocal had copper hedges covering 36,000 metric tons for 2018 at an average fixed price of US$6,479 per ton. Commodity prices, costs, reserve estimates, permitting and community relations are central risks.
- Cerro Verde recognized US$393 million of net charges in 2017 related to disputed historical royalty assessments and potential related assessments. It had not recorded a further US$385 million of possible penalties and interest, and intended to seek a waiver. Additional assessments remained disputed.
- Other significant exposures include Peru tax disputes, environmental and closure obligations, regulatory change, labor action and community opposition. Buenaventura reported 89 reportable injuries in 2017, including five fatalities, compared with 67 injuries and three fatalities in 2016.
- Buenaventura recorded a US$200.2 million mine-closure provision. Total contractual cash obligations were reported at US$1.092 billion, including debt, capital leases and other obligations. A subsidiary, El Brocal, obtained waivers for potential financial-covenant breaches through December 31, 2018.
- The auditor issued an unqualified opinion on Buenaventura’s IFRS financial statements and internal controls over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Most important facts for investors to verify
- Review the audited cash-flow statement and debt notes, including repayment timing, floating-rate exposure, lease obligations and El Brocal covenant waivers.
- Assess the status, financial accounting and possible outcomes of Cerro Verde’s royalty dispute, including the US$393 million charge and unrecorded potential penalties and interest.
- Check whether Buenaventura’s production, cost and reserve assumptions support the 2018 outlook, especially at Tambomayo and Yanacocha.
- Monitor reserve replacement, La Zanja impairment exposure, closure-cost estimates and the effect of metal prices on asset values and liquidity.
- Track permitting, water-management requirements, social acceptance and operational disruptions in Peru, including Conga and Yanacocha projects.