Fitch Assigns IDRs of 'BBB' to Buenaventura; Outlook Stable
CHICAGO -- July 10, 2013
Fitch Ratings has assigned a long-term foreign currency Issuer Default Rating
(IDR) of 'BBB' to Compania de Minas Buenaventura S.A.A. (Buenaventura). The
Rating Outlook is Stable. A complete list of ratings is provided at the end of
KEY RATING DRIVERS:
Decade of Very Low Debt; Low Leverage Envisaged Going Forward:
Buenaventura has a strong historical track record of low leverage. The company
has held a net cash position every year since 2004 with the exception of 2008,
corresponding to an average net debt-to-EBITDA ratio of negative 0.7x over the
period. The company's low indebtedness was maintained through various stages
in the gold cycle and displays a conservative management philosophy. As of
March 31, 2013, the company exhibited a net debt-to-LTM EBITDA ratio of just
During the recent environment of lower gold prices, the company could choose
to slow down spending on its capital expenditures and use mostly internal cash
flows for investments. Fitch's Base Case for Buenaventura under this scenario
and on a direct-operations basis indicates a total debt-to-EBITDA ratio of
around 1.0x, and a net debt-to-EBITDA ratio of below 1.0x, in 2013 and 2014,
Should the demand for gold improve above current prices, which are around
$1,200 per troy ounce, Fitch would expect Buenaventura to continue with its
investments using a combination of operating cash flows and additional debt
for funding. Under such a scenario, Fitch's Base Case on a direct-operations
basis indicates a total debt-to-EBITDA ratio in the range of 2.2x in 2013,
peaking at 3.2x in 2014, while maintaining a net debt-to-EBITDA ratio of below
1.0x over this timeframe.
Dividends from Investments:
Buenaventura has historically received dividends from its equity stakes in
minority investments that averaged around USD235 million per year from 2005 to
2010, with over USD1.5 billion being received by the company since 2003. In
2012, dividends were minimal at USD16 million following no dividends during
2011. This coincided with the discontinuation of dividends by Minera Yanacocha
S.R.L (Yanacocha) and Sociedad Minera Cerro Verde (Cerro Verde) in
anticipation of large expansion projects.
The company owns 43.65% of Yanacocha, a gold mine partnership with Newmont
Mining Corporation; 19.58% of Cerro Verde, a copper venture with Freeport
McMoRan (Freeport; Fitch IDR 'BBB'; Stable Outlook) and 49% of Canteras del
Hallazgo S.A. at Chucapaca, a partnership with Gold Fields.
Yanacocha is the largest open-pit gold mine in the world, and is 51.35%
majority-owned and operated by Newmont. As of 2012, this operation had a life
of mine of 20 years based on reserves and resources, including Conga.
Cerro Verde is on course to be ranked as one of the largest copper mines
globally by 2017 with over 1 billion pounds of annual copper production and 25
million pounds of annual molybdenum production following its planned
expansion. In 2012 the company produced 615,083 million pounds of copper, with
the planned expansion effectively doubling its size. Cerro Verde is a publicly
traded company listed on the Lima Stock Exchange that is majority owned and
operated by Freeport.
Fitch does not anticipate Buenaventura receiving any dividends over the next
few years because of the expansions taking place at Yanacocha and Cerro Verde.
As a result, Fitch's analysis is based on the company's directly-owned
operations only. While dividends are not expected in the medium term,
Buenaventura's stakes in these minority investments represent significant
economic values that are positive to the credit.
Peru's Largest Precious Metals Mining Company:
On a direct-operations basis, the company currently operates 12 mines, eight
of which are underground and four are open-pit, located across five different
regions of Peru with high historical EBITDA margins of 40% to 50%.
Buenaventura is Peru's largest publicly traded precious metals company and a
major holder of mining rights in Peru with a track record of operations
spanning 60 years.
In addition to Buenaventura's position in precious metals, the company has a
significant and growing presence in base metals that will offer a natural
hedge between precious and base metal prices. As of 2012, gold accounted for
59% of revenues, silver 18% and copper 19%, with zinc and lead comprising 4%.
By 2017 the sales mix is expected to be 60% precious metals and 40% base
metals, should the company's planned investments proceed.
Buenaventura was ranked as the 13th largest producer of gold globally and
largest in Peru by Wood Mackenzie in 2012 with production of 1,033 million
troy ounces. This compares to Barrick Gold Corp at no.1 with 7,421 million
troy ounces and Newmont Mining Corp. at no.2 with 4,977 million troy ounces.
Buenaventura also ranks as the 8th largest global producer of silver with 18.3
million troy ounces in 2012.
Strong FCF Generation:
Buenaventura's free cash flow (FCF) generation has been strong historically,
with positive FCF during 2009, 2010 and 2011. In 2012, FCF was negative USD305
million as a result of USD443 million of capex mainly related to expansion
projects and dividends of USD198 million. Should capex proceed at a pace
similar to levels seen in 2012, Fitch anticipates negative FCF of
approximately USD150 million during 2013, returning to positive territory in
This level of cash flow generation is aided by Buenaventura's position in the
second quartile of the cash cost of the production curve for gold according to
studies by Wood Mackenzie, with USD584 per troy ounce reported by the company
in 2012. This compares to Newmont at USD675 per troy ounce, Kinross Gold Corp.
(Kinross; IDR 'BBB-'; Stable Outlook) at USD693 per troy ounce, and AngloGold
Ashanti at USD862 per troy ounce in 2012.
Fitch expects FFO to decrease from USD383 million in 2012 to around USD250
million in 2013 as a result of the lower price environment for precious
metals. The company's FFO in 2012 was down from USD618 million in 2011 mainly
as a result of lower gold prices and cost inflation. Working capital outflows
of USD48 million in 2012 resulted in CFFO of USD336 million for the year,
compared to USD567 million in 2011.
Including its minority investments, Buenaventura's weighted average reserve
life is 20 years, or 15 years when excluding the postponed Conga Project. The
company also owns 1 million hectares of concessions across Peru providing
significant scope for further growth. Regarding its core directly operated
gold mines, Orcopampa and Uchucchacua, the company reports reserve life as two
years and five years, respectively.
This low reserve life is a feature common within the underground gold and
silver mining industry, as reporting longer reserves for these mines is
uneconomical. These reserve levels have been replenished every year since
2005, and the mines have been operating since 1967 and 1975, respectively.
Buenaventura's diversified location of mines across Peru provides it with
protection against localized disruptions. The company has 18 unions affiliated
with a national mining union. Only 32% of the company's payroll workforce was
unionized in 2012. The most recent strike action took place in April 2013 and
was a 10-day strike in Uchucchacua due to contractors' workers claims for
additional benefits. This was swiftly resolved and had a negligible impact on
production levels because the non-unionized workforce continuing working.
Commodity prices falling to levels that would result in sustained negative FCF
generation and lead to sustained net debt-to-EBITDA levels over 2.5x on
average could lead to a rating downgrade. Significant erosion in the company's
profitability as a result of cost inflation and lower gold, silver and copper
prices would also be detrimental to the ratings.
Strong FCF generation, growth in the revenue share of base metals to provide a
natural hedge against precious metals, cost reduction leading to sustained
EBITDA margins above 40%, and maintaining total debt to EBITDA below 1.0x
could have a positive effect on the company's ratings.
Fitch assigns the following credit ratings to Buenaventura:
--Foreign Currency Long Term IDR 'BBB';
--Local Currency Long Term IDR 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
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Dan Kastholm, CFA
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