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“The company announced that it has bought back all its hedges for 2007, 2008 and 2009. The net effect of the de-hedging is that Buenaventura sold 488,000 ounces of gold at $351/oz., far below market price, but comfortably above its cash costs of $246 per ounce. “The difference between the open-market price and the contracted price shows up on the books as a loss, but it is not an actual reduction in cash, but rather an opportunity cost, measuring how much more the company could have received had it not engaged in the hedging activity. In other words, these are non-cash charges against earnings. Cash flow is still excellent. “BVN still has more than 900,000 ounces of gold hedges to work off before it can start making the full price on its production of gold; so, that part of operations will probably take another six quarters to reach full potential. “However, its zinc and silver operations don’t suffer that drawback, and the company continues to throw off loads off cash. Once the gold hedges are gone, the stock should really take off. So far, it’s treating us well enough anyway. Our first position is up nearly 39% in 13 months, and our second is up more than 20% in 11 months. "Incidentally, the workers at the 43.7% company-owned Yanacocha mine reached contract terms this week, averting any danger of a strike. Buy Compania de Minas Buenaventura on pullbacks below $33.” |
"Buenaventura is taking positive steps to increase shareholder value. The company recently unwinded a portion of its gold hedge book, which will allow it to take advantage of rising gold prices. Earnings estimates for this year have risen 21 cents to $3.28 per share over the past 90 days. Next year's estimates have jumped an even more impressive 54 cents to $3.32 per share. The stock has a terrific ROE of 28%.
Full Analysis
Compania de Minas Buenaventura S.A.A. (BVN) engages in the exploration, mining, and processing of gold, silver, and various metals in Peru and internationally. It primarily produces refined gold, and various metal concentrates, including silver-lead concentrate, silver-gold concentrate, zinc concentrate, and lead-gold-copper concentrate.
The company operates four mines comprising Julcani, Recuperada, Uchucchacua, and Orcopampa; and holds controlling interests in mining companies, which own the Ishihuinca, Antapite, Shila-Paula, and Colquijirca mines. Compania de Minas Buenaventura also owns an electric power transmission company; an engineering services consulting company; and interests in various mining companies.
BVN reported solid first-quarter results that grew 38% on an operating income basis. Net income fell, but only due to an un-winding of 483,000 ounces of gold from the hedge book in March. This has a one time negative effect of $55 million.
In 1Q07, net sales were US$150.8 million, a 47% increase when compared to the US$102.7 million reported in 1Q06 mainly due to higher volumes of lead and zinc sold, as well as an increase in the realized prices of gold, silver, zinc and lead.
In late-May, the company completed an additional partial reduction of its gold hedge book by unwinding a total of 248,000 ounces for all of its 2009 gold commitments. Total payment for this transaction was US$87 million, which will be partially financed via local debt. On May 15, 2007, the Company eliminated all of its 2007 and 2008 gold commitments (240,000 ounces).
The total reduction in gold commitments for both transactions totals 488,000 ounces, which represents 35% of the total Hedge Book. This is important because it should be accretive to earnings and also accretive to the company's net present value in an environment where gold is rising.
“Compania de Minas Buenaventura had a weak fourth quarter, with earnings down 19%, due mostly to lower yields and output at its Yanacocha joint venture with Newmont Mining. This news overshadowed the 48% increase in EPS for the year.
“The drop in earnings from Yanacocha is definitely a concern. There were work disruptions at the mine in addition to lower grade ore. Since the work stoppages have ceased, it remains to be seen how earnings come in next quarter.
“In any case, at $3.36 in earnings per diluted share, the stock is dirt cheap, trading at less than 8-times earnings. New production coming on line from Buenaventura’s affiliates should offset some or all of the Yanacocha shortfall going forward. The risk-to-reward ratio here is still excellent. Buy BVN up to $33.”
