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Edited Transcript of MINi.LM earnings conference call or presentation 20-Aug-19 3:00pm GMT

Q2 2019 Minsur SA Earnings Call

Lima Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Minsur SA earnings conference call or presentation Tuesday, August 20, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Diego Molina Henríquez

Minsur S.A. - CFO

* Juan Luis Kruger Sayán

Minsur S.A. - General Manager

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Conference Call Participants

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* Omar Avellaneda;Prima AFP;Analyst

* Santiago Sevilla Prado

Inteligo SAB, Research Division - Analyst

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good morning, and welcome to Minsur's Second Quarter 2019 Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and good morning, everyone. I'm very pleased to welcome you to Minsur's Second Quarter 2019 Earnings Call. Today from Minsur, we are pleased to have the senior management team, who will be discussing the company's second quarter 2019 consolidated results after the press release distributed on Thursday, August 15. If you have not yet received a copy, please contact i-advize in New York at (212) 406-3693, and we will immediately send you one. Please note that today's call is for investors and analysts only, therefore, questions from the media will not be taken at this time. If you are a member of the media, please contact the company directly after the call.

Also, please be advised that forward-looking statements may be made during this conference call and they do not account for economic circumstances, industry conditions, the company's performance or financial results. As such, the forward-looking statements are based in several assumptions and factors that could change, causing actual results to materially differ from the current expectations.

For a complete note on forward-looking statements, please refer to the last page of the earnings release.

Joining us from Lima, Peru, we have Mr. Juan Luis Kruger, Chief Executive Officer; and Mr. Diego Molina, Chief Financial Officer.

Thank you for your attention. At this time, Mr. Juan Luis Kruger will initiate his presentation. Mr. Kruger, please go ahead, sir.

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Juan Luis Kruger Sayán, Minsur S.A. - General Manager [3]

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Good morning, everyone, and thank you again for joining us today to review our second quarter 2019 results and for your continued interest in Minsur. Before jumping into results, let me take you through some of our major achievements and highlights for the first half of the year. As in all our quarterly calls, I would like to begin with safety.

During the second quarter, we registered 4 lost-time injuries. 2 of them were reported at our Taboca, where we have reinforced our safety standards and procedures in line with our commitment to world-class performance. The other 2 lost-time injuries were reported at our Mina Justa project. By the end of June, we have achieved 6.2 million man-hours worked, and the workforce at the Mina Justa project exceeded 5,000 people, including our own workforce and multiple contractors. Despite the 2 LTIs reported during the quarter, Mina Justa's safety performance is remarkable as the LTI frequency rate or the lost-time injury frequency rate remains at a world-class low of 0.32 for a project of this complexity and given the significant number of people involved. Still, safety remains a challenge and is our key priority of the project.

Another very important highlight in safety was the achievement of 3.7 million hours worked at our B2 project without any lost-time injury. This is a major achievement and a testimony of our commitment to safety as this project has not reported any lost-time injury through all the construction phase.

Before moving now onto the second quarter results, I would like to give some comments regarding the context of the base metal markets. Compared to the first half of 2018, metal prices decreased significantly, reflecting much higher volatility during the quarter, with tin prices fluctuating between $18,800 and $21,600 per ton. This reflects a weakened tin demand derived from the uncertainty originated by the U.S.-China trade war along with trade tensions between Japan and South Korea, impacting as well demand for tin salt.

Following the June quarter closing, the tin price has experienced a very strong decline, reaching levels only seen back in 2016 when we were at the low end of the cycle. As per yesterday's closing, tin was around $16,400 a ton. Significant cost-cutting measures are underway in order to assure that we can preserve our cash for financing our future projects.

In this global context, also the price of gold was very volatile but on the opposite direction, ranging from a low of $1,270 per ounce to a high of $1,430 per ounce during the quarter, proving to be a natural hedge for our portfolio.

Moving now into our operating results. I would like to start with our operating results for San Rafael. Overall, I will have to say that our operating results were mixed when compared to Q2 2018. Gold production was higher, 6% higher, while tin and ferroalloys production were 8% and 31% lower, respectively, but in line with our production guidance and budget for the quarter and for the full year. We maintain our production guidance as most of this difference are related to scheduled maintenance work that happened during the second quarter and that will not impact the expected annual production results.

More details on production and cash costs for operations are provided in the earnings release. However, let me highlight a few important points. At San Rafael, tin production reached 5,072 tons for the quarter, which is a 5% increase compared to the same period of the previous year mainly explained by the higher volume of ore treated in our ore sourcing or preconcentration plant and by higher recoveries achieved in our process.

The preconcentration plant remains a key contributor of value to our San Rafael mine and keeps over-performing quarter-over-quarter. Despite the increase in production at San Rafael, refined tin production at our Pisco smelter decreased by 9% in comparison to the same quarter last year and this was mainly due to fewer operating days during the quarter because of the annual scheduled maintenance as well as because of the depletion of concentrate stocks in Q2 2018, which gave us a onetime boost in production last year.

In 2018, the scheduled annual maintenance stoppage was performed in February, while in 2019, we were able to extend the Ausmelt's furnace campaign until the second half of March. Therefore, maintenance works were finished by mid-April, reducing our operating days at the smelter in the second quarter.

Cash costs at San Rafael closed 1% lower than in Q2 2018, closing at 62% -- sorry, at $62 per ton treated mainly due to the higher volume processed coming from the ore sourcing preconcentration plant.

Moving on now to our exploration projects near San Rafael, happy to report that the drilling campaign and the tunnel construction to reach the San German orebody continues as planned. Also at Nazareth, our drilling campaign is progressing according to our current plan. The objective of this exploration program is to identify new resources to replenish the current depletion of the mine and to improve as well the accuracy of our inferred resources, increasing our conversion to the measured and indicated categories.

Let me now switch to Pucamarca, where production for the quarter closed at 27,087 ounces of gold, which is 6% higher than the same period of the previous year. This increase was mainly due to the higher grade of ore placed in the leaching pads during the quarter. Cash costs for the second quarter closed at $5.70 per ton treated. That's a 34% increase over the same period in 2018 mainly explained by the advanced earthworks required to optimize our geotechnical parameters at the waste dumps in the mine. In other words, we have pushed forward earthworks that were required to be performed later in order to improve our geotechnical parameters. As a result, our cash cost per ounce closed at $406 per ounce, which is 16% higher compared to the same quarter of the previous year.

Notwithstanding this temporary cost increase, Pucamarca remains amongst the lowest-cost gold mines in the world.

Moving on to Taboca. During the second quarter, refined tin production reached 1,585 tons, which is a 5% decrease compared to the same period on the previous year. This decline was due to lower volume of concentrates fed into the furnace mainly reflecting the lower mine production because of problems with the availability of mine equipment during the quarter. I would like to highlight the new mine equipment has been already acquired at the Pitinga mine and delivery of the new mine equipment is scheduled to happen within the second semester of this year.

Ferroalloys production at Pitinga closed at 677 tons in the second quarter, which is a decrease of 31% compared to the same period last year. This decrease was not related to operational problems. It was mainly due to the maintenance stoppage at the metallurgic plant that took place during the quarter as scheduled.

The production outlook for the year remains in line with the annual guidance. Cash costs at Taboca closed at $20.7 per ton treated, 8% higher than the second quarter last year. This was partially as a result of greater use of diesel for power generation during the lower -- due to lower rainfall at our hydroelectric power plant in Pitinga and also due to lower volume of ore treated, which resulted in a higher overhead and fixed cost per ton treated.

EBITDA for the year as of the end of June at Taboca closed at $18.2 million, which is a $3 million decrease compared to the previous year. However, it reflects the very strong financial performance of these assets and the consolidation of the turnaround that was executed last year.

Moving on to our growth projects. Our B2 project has some important achievements to report during the quarter. First, and as mentioned earlier in the call, there were no lost-time injuries reported, neither in the quarter, nor project to date. In terms of progress of the construction phase, the construction of the concentration plant achieved 97% progress by the end of June. The earthmoving works for tailings and water recovery achieved 98% progress, and at the end of June, 63% progress was achieved at the pre-commissioning of the plant.

By the end of July, B2 total progress was at 96% versus 97% planned. The [Comm-1], which is the second stage of the commissioning process has an advance or a progress of 52%, and during this period, the flotation, reagents and tailings transportation systems were tested. Total CapEx expenditure remains within budget for the project and in line with the definitive estimates. We remain confident that the project will begin production during the last quarter of this year as planned.

Switching to Mina Justa. As of June 30, total progress reached 39% versus 35% planned ahead of schedule. The main highlights for the quarter include over 20.3 million tons of prestripping already moved out of the mine. The project headcount reached slightly over 5,000 people. Construction at the Marcona core facility has began, the foundation for the grinding area was completed and we started the mechanical assembly of the steel structures at the sulfides and oxides plants, amongst others. We remain in line with the project schedule and budget.

With that, I conclude my presentation. And now let me turn the call over to Diego Molina, our Chief Financial Officer, for his discussion of the financial results for the quarter.

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Diego Molina Henríquez, Minsur S.A. - CFO [4]

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Thank you, Juan Luis, and good morning to everyone. During the second quarter, net revenues reached close to $190 million, which represented a 5% increase compared to the same period 2018. This was mainly explained by higher tin and gold sales volume, partially offset by lower ferroalloys volumes. Regarding prices, tin was lower 6% compared to the second quarter 2018, whereas gold price remained in line compared to the same quarter. We expect this positive difference in revenues to decrease by the end of 2019 considering current tin price level, although partially offset by higher gold price. As Juan Luis commented, developing trade conflicts are impacting tin demand, and we do not foresee first semester price levels to be coming back for the rest of the year.

Gross profit was $68.8 million, a 14% decrease compared to the same period 2018, explained by higher costs during the quarter in Pucamarca and Taboca, partially offset by higher sales volumes. As a result, gross margin decreased to 36% in the quarter compared to 44% same period last year. Administrative expenses were $12.6 million, a decline compared to the same period last year due to lower consulting fees.

Given base metal price context, we are increasing our efficiency efforts and preparing extraordinary saving plans. Exploration and sustaining CapEx expenses -- sustaining project expenses totaled $12 million, a 28% increase compared to the same period last year, which reaffirms our commitment to exploration programs in the vicinity of our operating units. However, we might have to prioritize some of our exploration programs given current market declines.

EBITDA reached $64.7 million, a 7% decline or $4.8 million compared to the same period 2018 mainly explained by lower gross profit. Net financial expenses were $6 million compared to $10.4 million reported for the same quarter of 2018, explained by interest capitalization from the B2 project.

Financial expenses from Mina Justa project financing are registered as part of the project cost as well. The results from subsidiaries and associates reached $0.2 million, $3.1 million lower compared to the same period last year explained by Cementos Melon results.

Taxes were close to $15 million, 59% lower compared to the same quarter of last year mainly due to favorable deferred income tax as a result of the soles exchange rate variations.

In terms of net income, Minsur registered $13.6 million in the quarter, an increase of $27.5 million compared to the same period last year, explained by a lower exchange rate loss and a lower income tax due to the already mentioned favorable deferred income tax. Adjusted net income, which excludes results from subsidiaries and associates as well as the exchange rate variation, reached $20.6 million for the second quarter of 2019, which is $18.7 million higher than in the second quarter of 2018 mainly due to the lower income tax as previously explained.

In terms of capital expenditures, the company invested $186.3 million during the quarter, out of which almost $150 million were allocated to Mina Justa and $26 million to B2 project. Regarding liquidity, Minsur concluded the quarter with $554.6 million in cash, a 16% decrease compared to December 2018. This is mainly due to an investment cash flow of $373 million that we have had in the first semester, offset by operating cash flow of $31.7 million and a net financing cash flow of $234 million. This financing cash flow from January to June mainly included $252 million from Mina Justa project finance, $35.5 million contributions from our partner, Alxar and the outflow of $66 million of a divided payment made in March this year.

In terms of debt, total financial debt as of June 30 reached $896 million, 40% higher than the total debt reported at the end of 2018 of around $340 million mainly due to the disbursement of the Mina Justa project finance.

Consolidated net debt over last 12 months EBITDA ratio reached 1.3x by the end of June compared to negative 0.1x at the end of 2018. Minsur remains focused on continued enhancement of operational as well as financial performance, while at the same time, on ensuring our growth through the execution of the project underway.

Thank you so much for your attention. And at this point, we are ready for your questions. Operator, please if you can proceed with the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Omar Avellaneda with Prima AFP.

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Omar Avellaneda;Prima AFP;Analyst, [2]

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I have two questions from my side. The first one is about Taboca, I was wondering if you can tell us what was the impact of the high values of diesel at Taboca? And my second question is more general. It's about the balance of demand and supply of the tin market. Can you comment on that, please?

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Juan Luis Kruger Sayán, Minsur S.A. - General Manager [3]

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Let me -- Omar, let me start with the tin market. The tin market remains on very, very tight in terms of tin concentrates, especially tin concentrates coming into China. Tin production in China has been decreasing. But we have also seen a slight contraction and expect a slight contraction in tin demand. However, what we expect is that from a fundamental perspective, still we are expecting a slight deficit in the market in the year. But again, it all will depend on how demand behaves in the coming months. Although we have not really seen any significant indication of contraction in the demand. What we do see is an overall slowdown of China. From a supply perspective, I think the most important highlight is that Myanmar, who has been a very significant source of ore -- tin ore into the smelters in China, has been decreasing their production by 36% so far this year. So what that implies is that a significant source of tin ore coming out of Myanmar into China, and this was very low-cost tin ore, is starting to decline, and that is putting a lot of pressure into the Chinese tin supply.

There have been also a few tin mines in China that have been shut down because of environmental issues. And so far, we have not seen these mines starting again. And with the current decline in price, what we expect is more mines, especially the smaller, high-cost mines in China, Indonesia and Malaysia to start shutting down operations as we have seen in the past. We have to remember that tin is a very, very narrow market, and as such, we can expect price drops that are quite quick but we also should expect rebounds that are quite quick because the top quartile of the cost curve remains at an average cost of somewhere between $16,500 and $17,000 a ton.

So at current prices, there could be some volume that will start to be dropping in the market.

The other thing we have seen is a significant increase in LME stocks and this is basically reflecting the fact that exports from Indonesia had been banned for mainly most of the first half of the year, and some producers in Indonesia were finally able to get export licenses approved in the last month or 1.5 months and what that has created is the capacity of them to start pushing some volume into the LME warehouses and that has increased the volume.

However, through the year, we believe -- or so far in the year, production from Indonesia -- reported production from Indonesia has been coming down as well. So from a demand perspective, we see an overall lower growth in China, however, demand has not been really impacted. At least so far, we have not seen a contraction.

From a supply perspective, we see China productions coming down, mainly because of Myanmar, and that creates a very tight concentrate market in China. We see Indonesia starting to export part of the stocks that they have been increasing because of the export ban in the first half of the year, and we see some production -- some new production coming from Africa but it's not really that material. Overall, I think that the market will remain pretty much balanced or with a slight deficit in 2019.

Then you had a question in Taboca. The impact of the higher cost of diesel in Taboca, if I got the question correctly, was $5 million of additional cost for the full year, which has been partially offset by the devaluation of the real. But all in, basically, it's $5 million of increased costs. However, as you have seen, given the higher volume, we are not translating all these cost increases into our cost per ton treated at all, only a part of it.

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Operator [4]

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(Operator Instructions) And your next question comes from Santiago Sevilla with Inteligo.

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Santiago Sevilla Prado, Inteligo SAB, Research Division - Analyst [5]

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So given the capital expenditure for the first semester of this year, which has been $385 million, I would like to know your CapEx estimate for the whole year, and if you can, for the next 2 years, especially regarding Mina Justa.

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Diego Molina Henríquez, Minsur S.A. - CFO [6]

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Yes. Just to give you some indication of what is our expected CapEx for the full year, it should be around -- bit over $1 billion and that includes Mina Justa and also B2 and our sustaining CapEx program. Particularly, we should be investing in Mina Justa particularly. This year should be, for Mina Justa, a bit over $800 million, $830 million but it will depend on how much of a progress on the payment itself will happen but that's our current projection for the year.

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Santiago Sevilla Prado, Inteligo SAB, Research Division - Analyst [7]

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Okay. Perfect. And for the next 2 years, could you tell?

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Diego Molina Henríquez, Minsur S.A. - CFO [8]

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We don't provide that kind of a long-term projection. But I mean as we have mentioned before, our CapEx estimate for the Mina Justa project remain in line with our plan and is material $1.6 billion CapEx. And B2 project should be ending this year, therefore, what we'll expect to see 2020 and going forward, it's mostly finishing Mina Justa together with sustaining CapEx for the rest of the units.

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Juan Luis Kruger Sayán, Minsur S.A. - General Manager [9]

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Perhaps, just to further complement that, Santiago, basically, our expansion CapEx -- our overall expansion CapEx, and this is on a 100% basis, this is not attributable, it is $1 billion, a little bit over $1 billion for this year. Next year, I think it's going to be between $650 million and $700 million that expansion, so that's mainly Mina Justa, B2 and another few of our growth projects.

And then in terms of sustaining CapEx, if you're running some projections, I think you should work -- this year, we should be around $90 million and next year, probably around the same, $90 million to $100 million. And in order for you to plug into your model, we also have some exploration expenditures expected for this year around $35 million. And next year, we shall decrease that probably by half of that. So that will give you, I think, a little bit more insight.

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Operator [10]

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(Operator Instructions) And there are no further questions at this time. I'd like to turn the call back to Mr. Kruger for any closing remarks.

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Juan Luis Kruger Sayán, Minsur S.A. - General Manager [11]

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So thank you very much for your continued interest in our company. And as always, if you have any further questions, please don't hesitate to contact me or Diego Molina, our Chief Financial Officer, and look forward to talking to you again for the Q3 results coming in a few months. Thank you very much.

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Operator [12]

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And this concludes today's call. Thank you for your participation. You may now disconnect.