Buenaventura(BVN) - 2018 Q4 - Annual Report

Introduction Presentation of Financial Information The company prepares its consolidated financial statements in accordance with IFRS using U.S. Dollars - Financial statements are prepared in accordance with IFRS as issued by the IASB[10] - Investments in Yanacocha and Cerro Verde are accounted for using the equity method, with 43.65% and 19.58% interests respectively[10] Forward-Looking Statements The report contains forward-looking statements subject to risks like commodity prices and political instability - Forward-looking statements cover estimates of future costs, exploration and production results, capital expenditures, and operational commencement dates[11] - Significant risks that could affect future performance include commodity price fluctuations, political risks, anti-mining protests, and inaccurate reserve estimates[12] Key Information Selected Financial Data This section presents five-year selected financial and operating data for the company and its key equity investees Buenaventura Selected Financial and Operating Data (US$ in thousands, except per share data) | Indicator | 2018 | 2017 | | :--- | :--- | :--- | | Total operating income | 1,167,381 | 1,274,378 | | Operating profit (loss) | 53,755 | 105,516 | | Net profit (loss) | (11,654) | 64,435 | | Basic and diluted profit (loss) per share | (0.05) | 0.24 | | Gold Production (oz.) | 338,508 | 405,646 | | Silver Production (oz.) | 26,778,190 | 26,624,431 | Yanacocha Selected Financial and Operating Data (US$ in thousands) | Indicator | 2018 | 2017 | | :--- | :--- | :--- | | Revenue from sales | 635,393 | 645,176 | | Income (loss) for the year | (81,517) | (175,454) | | Gold produced (oz.) | 514,564 | 534,692 | Cerro Verde Selected Financial and Operating Data (US$ in thousands) | Indicator | 2018 | 2017 | | :--- | :--- | :--- | | Sales of goods | 3,054,026 | 3,202,931 | | Profit for the year | 119,710 | 349,881 | | Copper Production (thousands of lbs) | 1,049,430 | 1,062,210 | Risk Factors The company faces significant risks from commodity price volatility, political instability in Peru, and capital intensity - Financial performance is highly dependent on fluctuating market prices of gold, silver, and copper, and the company is largely unhedged against these price changes[27] - Operations are subject to political and social risks in Peru; protests related to environmental impact have led to disruptions, notably the suspension of the Conga project[44] - The Benavides Family holds a significant ownership stake (16.49% as of March 31, 2019), which could allow them to exercise significant influence over corporate matters[65] - The business is capital-intensive, and the ability to fund necessary capital expenditures is not guaranteed, depending on cash flow and access to financing[36] Information on the Company Buenaventura This section details the company's strategy, operations, properties, and the Peruvian regulatory framework for mining History and Development Buenaventura is Peru's largest publicly traded precious metals company, focused on expanding reserves and production - The company operates the Orcopampa, Uchucchacua, Julcani, Mallay, and Tambomayo mines and has controlling interests in the Colquijirca-Marcapunta, Tantahuatay, and La Zanja mines[71] Capital Expenditures (US$ in thousands) | Category | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Total | 366,834 | 259,507 | 111,270 | - The company has budgeted approximately US$80 to US$120 million for capital expenditures and US$60 to US$100 million for exploration in 2019[77][76] Business Overview The overview covers production volumes, exploration spending, unhedged sales strategy, and the complex Peruvian regulatory environment Total Production by Metal | Metal | 2018 | 2017 | | :--- | :--- | :--- | | Gold (oz.) | 338,508 | 405,646 | | Silver (oz.) | 26,778,191 | 26,624,431 | | Zinc (t) | 80,270 | 74,560 | | Lead (t) | 46,740 | 44,976 | | Copper (t) | 46,400 | 45,289 | - In 2018, the company spent US$36.3 million on exploration in non-operating areas and US$90.3 million on exploration in operating units[77] - Approximately 52.18% of concentrate and gold bullion sales in 2018 were sold outside Peru to key customers including Asahi Refining, Glencore Peru, and Trafigura Peru[93][95] - The company and its wholly-owned subsidiaries are completely unhedged for gold and silver prices, while its subsidiary El Brocal uses derivatives for base metals[95] Organizational Structure The company operates through wholly-owned subsidiaries, controlled companies, and key equity participations like El Brocal and La Zanja - The company holds a 61.43% controlling interest in Sociedad Minera El Brocal S.A.A., which operates the Colquijirca and Marcapunta Norte mines[124] - Buenaventura owns 53.06% of Minera La Zanja S.R.L., an open-pit gold and silver mine[124] - A 40.10% interest is held in Compañía Minera Coimolache S.A., which owns the Tantahuatay mine, operated by Buenaventura[124] Properties and Reserves The company's proven and probable reserves include 4.39 million ounces of gold and 265.72 million ounces of silver Proven and Probable Reserves by Metal (Equity Share, as of Dec 31, 2018) | Metal | Reserve Amount | | :--- | :--- | | Gold | 4.39 million ounces | | Silver | 265.72 million ounces | - Reserve calculations for 2018 used prices of US$1,300/oz for gold, US$17/oz for silver, and US$6,000/t for copper[178] 2018 Production and Reserves for Key Wholly-Owned Mines | Mine | Key Metal | 2018 Production | Proven & Probable Reserves (t) | | :--- | :--- | :--- | :--- | | Orcopampa | Gold | 115,887 oz | 922,300 | | Uchucchacua | Silver | 15,420,102 oz | 11,940,975 | | Julcani | Silver | 2,482,907 oz | 251,186 | | Tambomayo | Gold/Silver | 129,172 oz Au / 3,929,808 oz Ag | 3,391,052 | Yanacocha Yanacocha, South America's largest gold mine, is extending its mine life with the Quecher Main project History and Development of Yanacocha Buenaventura holds a 43.65% interest in Yanacocha, which produced 514,564 ounces of gold in 2018 - Yanacocha is owned by Newmont (51.35%), Buenaventura (43.65%), and a Sumitomo subsidiary (5%)[132] Yanacocha Gold Production | Year | Gold Produced (ounces) | | :--- | :--- | | 2018 | 514,564 | | 2017 | 534,692 | Business Overview (Yanacocha) The Quecher Main project extends mine life to 2027, while the Conga project remains suspended due to social opposition - The Quecher Main project extends Yanacocha's operational life to 2027, with expected average annual gold production of approximately 200,000 ounces between 2020 and 2025[135] - The Conga project remains suspended due to a lack of social acceptance and political support, with no development anticipated[44][136] - Yanacocha is in a tax dispute with Peruvian authorities with potential liability up to $83 million[139] Properties and Reserves (Yanacocha) Yanacocha's proven and probable gold reserves increased significantly to 7.4 million ounces in 2018 Yanacocha Proven and Probable Gold Reserves (in thousands of ounces) | Year | Proven & Probable Reserves | | :--- | :--- | | 2018 | 7,420 | | 2017 | 3,830 | - The significant increase in reserves in 2018 is mainly due to the Quecher Main project, which extends the mine life to 2027[180] - 2018 reserves were calculated using an estimated gold price of $1,200 per ounce[182] Operating and Financial Review and Prospects Buenaventura - Operating and Financial Review Net sales decreased 8% to US$1.12 billion in 2018, resulting in a net loss of US$11.7 million Financial Results Comparison (US$ in thousands) | Item | 2018 | 2017 | | :--- | :--- | :--- | | Net sales of goods | 1,122,995 | 1,223,942 | | Operating profit | 53,755 | 105,516 | | Net income (loss) | (11,654) | 64,435 | - The decrease in 2018 net sales was mainly due to lower volumes of gold sold from the Orcopampa and La Zanja mines and lower average realized prices[210] - Share in the results of associates swung from a gain of US$13.2 million in 2017 to a loss of US$1.1 million in 2018, due to lower results from associates[215] Cash Flow Summary (US$ in thousands) | Cash Flow | 2018 | 2017 | | :--- | :--- | :--- | | From Operating Activities | 346,260 | 212,582 | | Used in Investing Activities | (117,559) | (138,150) | | Provided by (Used in) Financing Activities | (74,052) | 59,575 | Yanacocha - Operating and Financial Review Yanacocha's net loss narrowed to US$81.5 million in 2018 due to lower non-cash reclamation expenses Yanacocha Financial Summary (US$ in thousands) | Indicator | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Gold sales | 658,653 | 670,905 | 791,766 | | Loss for the year | (81,517) | (175,454) | (1,043,752) | - The net loss for 2018 narrowed significantly due to lower non-cash reclamation charges compared to 2017[277] - Cash from operations increased to US$161 million in 2018 from US$95 million in 2017, driven by lower operating costs[284] - Cash used in investing activities increased to US$161 million in 2018 from US$49 million in 2017, mainly for the Quecher Main project[285] Cerro Verde - Operating and Financial Review Cerro Verde's net income decreased sharply to US$119.7 million due to significant mining royalty charges Cerro Verde Financial Summary (US$ in thousands) | Indicator | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Sales of goods | 3,054,026 | 3,202,931 | 2,384,154 | | Profit for the year | 119,710 | 349,881 | 340,907 | - Net income decreased by 66% in 2018, primarily due to recording charges of US$408.9 million for disputed mining royalty assessments[295][310] - Net cash provided by operating activities decreased to US$809 million in 2018 from US$1,615 million in 2017, due to higher supplier and tax payments[314] Directors, Senior Management and Employees Board of Directors and Senior Management The board is chaired by Roque Benavides, with several family members holding key director and executive positions - The Board of Directors is chaired by Roque Benavides and the President and Chief Executive Officer is Victor Gobitz[319] - Several members of the Benavides family hold key roles, including Roque Benavides (Chairman), Raúl Benavides (VP Business Development), and José Miguel Morales (Director)[319] Compensation Aggregate compensation for all directors and executive officers was approximately US$12.9 million in 2018 - Aggregate compensation for all directors and executive officers was approximately US$12.9 million in 2018[324][335] Board Practices The company has an Audit Committee composed entirely of independent directors, with a designated financial expert - The board has established an Audit Committee, a Compensation Committee, and a Nominating/Corporate Governance Committee[325][327] - The Audit Committee is composed entirely of independent directors: Messrs. Suárez, Ortiz-de-Zevallos, and de la Torre[325] Employees The company employed 3,450 people directly, with 42% unionized and entitled to an 8% profit share - As of year-end 2018, the company had 3,450 direct employees and utilized 12,228 workers from independent contractors[328] - Approximately 42% of the permanent employees are represented by 13 different labor unions[328] - Employees are entitled to an 8% share of annual pre-tax profits, mandated by Peruvian labor law[328] Share Ownership As of March 2019, directors and executive officers as a group owned 16.50% of all outstanding shares Share Ownership of Key Directors (as of March 31, 2019) | Shareholder | % of Total Shares | | :--- | :--- | | Roque Benavides | 5.48% | | Jose Miguel Morales | 5.57% | | Raúl Benavides | 5.44% | | Directors & Officers (Group) | 16.50% | Major Shareholders and Related Party Transactions Major Shareholders Major shareholders include Van Eck Associates (13.44%), the Benavides family, and Fidelity Management (5.02%) Major Shareholders (>5% as of March 31, 2019) | Shareholder | % of Total Shares | | :--- | :--- | | Van Eck Associates Corp | 13.44% | | Blanca Benavides de Morales | 5.57% | | Roque Benavides Ganoza | 5.48% | | Raul Benavides Ganoza | 5.44% | | Fidelity Management & Research Company | 5.02% | - As of March 31, 2019, an estimated 83.34% of Common Shares were held in the U.S.[333] Related Party Transactions Key related party transactions include royalty income from Yanacocha and dividends from Cerro Verde and Coimolache - The company received royalty income of US$20.4 million in 2018 from Yanacocha via its subsidiary Chaupiloma[335] - In 2018, the company received cash dividends of US$39.16 million from Cerro Verde and US$7.6 million from Coimolache[335] Financial Information Legal Proceedings The company is not party to any material legal proceedings, other than those previously disclosed for Yanacocha - Other than legal proceedings related to Yanacocha described elsewhere, the company is not party to any other material legal proceedings[338] Dividends and Dividend Policy The dividend policy targets distributing at least 20% of net income, with a total of US$0.120 per share paid in 2018 - The dividend policy is to distribute at least 20% of net income from majority-owned operations, plus 20% of attributable net income from associates that pay dividends[339] Total Dividends per Share/ADS (in US$) | Year | Total Dividend | | :--- | :--- | | 2015 | 0.000 | | 2016 | 0.087 | | 2017 | 0.060 | | 2018 | 0.120 | The Offer and Listing Offer and Listing Details The company's ADSs are listed on the NYSE under the symbol 'BVN', with shares also traded on the Lima Stock Exchange - The company's ADSs trade on the NYSE under the symbol "BVN", with each ADS representing one Common Share[349] ADS Annual High/Low Prices (in US$) | Year | High | Low | | :--- | :--- | :--- | | 2017 | 14.96 | 10.87 | | 2018 | 16.80 | 11.67 | Additional Information Memorandum and Articles of Association Corporate governance is defined by Peruvian law, which includes mandatory takeover bid rules for acquisitions over 25% - The Board of Directors is composed of seven members elected for a three-year term[353] - Under Peruvian law, a "Takeover Bid" (Oferta Pública de Adquisición) is mandatory for any individual or group acquiring over 25% of a listed company's voting shares[364] - Peruvian law requires companies to identify and report their final beneficial owners who ultimately own or control at least 10% of the company[369] Exchange Controls Peru has no exchange controls, allowing for the free repatriation of dividends and capital by foreign investors - There are no exchange controls in Peru, allowing for the free repatriation of dividends and capital by foreign investors[370] Taxation This section details Peruvian and U.S. tax consequences, including a 5% withholding tax on dividends for non-residents - Cash dividends paid to non-resident shareholders are subject to a 5% Peruvian withholding income tax for profits earned from January 1, 2017 onwards[373] - Capital gains from the sale of shares by non-residents are taxed at 5% if the transaction occurs on the Lima Stock Exchange, and 30% if it occurs outside of Peru[376] - For U.S. Holders, dividends are generally includible as ordinary income, and gains from the sale of ADSs or shares are treated as U.S. source capital gains[383][384] Quantitative and Qualitative Disclosures About Market Risk Commodity and Market Risk The company's primary market risk is commodity price fluctuation, as gold and silver sales are completely unhedged - The company's revenues and earnings are highly influenced by world market prices for gold, silver, zinc, and lead[391] - Buenaventura and its wholly-owned subsidiaries are completely unhedged for gold and silver sales[391] - The subsidiary El Brocal had outstanding hedging commitments for 2,000 metric tons of copper for 2019[391] Controls and Procedures Controls and Procedures Evaluation Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2018 - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were effective at a reasonable assurance level[401] - Management's annual report on internal control over financial reporting concluded that such controls were effective as of December 31, 2018, based on the COSO (2013) framework[402] - The independent auditor, Paredes, Burga & Asociados S. Civil de R.L., issued an unqualified opinion on the effectiveness of the company's internal control[404] Other Information Audit Committee Financial Expert The Board of Directors has identified Mr. German Suárez as the Audit Committee financial expert - The Board has determined that Mr. German Suárez is the Audit Committee financial expert[406] Code of Ethics The company has adopted a written code of business conduct and ethics applicable to all employees - A code of business conduct and ethics has been adopted and is publicly available on the company's website[406] Principal Accountant Fees and Services This section details the fees paid to the independent auditor for the fiscal years 2017 and 2018 Accountant Fees (in US$) | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | 1,029,235 | 1,089,169 | | Tax Fees | 35,970 | 47,129 | | All other fees | 86,080 | 88,003 | | Total | 1,151,285 | 1,224,301 | Corporate Governance The company's corporate governance practices follow Peruvian law, which differs from NYSE listing standards - As a foreign private issuer, the company follows Peruvian corporate governance practices, which differ from NYSE standards for U.S. companies, particularly regarding board independence[410] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm The independent auditor issued unqualified opinions on the consolidated financial statements and internal controls - The independent auditor issued an unqualified opinion, stating the financial statements are fairly presented in accordance with IFRS[427] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[427] Consolidated Financial Statements This section contains the audited consolidated statements of financial position, profit or loss, and cash flows Consolidated Statement of Financial Position (US$ in thousands) | Item | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Assets | 4,217,221 | 4,332,813 | | Total Current Assets | 761,134 | 701,862 | | Total Non-Current Assets | 3,456,087 | 3,630,951 | | Total Liabilities | 1,187,656 | 1,269,186 | | Total Current Liabilities | 399,182 | 521,194 | | Total Non-Current Liabilities | 788,474 | 747,992 | | Total Shareholders' Equity | 3,029,565 | 3,063,627 | Consolidated Statement of Profit or Loss (US$ in thousands) | Item | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total operating income | 1,167,381 | 1,274,378 | 1,068,791 | | Operating profit | 53,755 | 105,516 | 132,196 | | Profit (loss) from continuing operations | (4,451) | 74,533 | (308,741) | | Profit (loss) for the year | (11,654) | 64,435 | (327,814) | Consolidated Statement of Cash Flows (US$ in thousands) | Item | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 346,260 | 212,582 | 391,401 | | Net cash used in investing activities | (117,559) | (138,150) | (364,876) | | Net cash provided by (used in) financing activities | (74,052) | 59,575 | (24,500) | | Increase in cash and cash equivalents | 154,649 | 134,007 | 2,025 |