A look at the great Peruvian mining company of gold-copper Buenaventura

By: Yro Sune Cortez Ramos,

April 2020.

The purpose of this analysis is to assess the current context, market capitalization, risks, the performance of its share price, and, in general, the challenges facing the Minas Buenaventura company due to the diversification of its production in precious metals and base metals. It has a "natural" hedge to the volatility of the price of metals, an essential requirement to reduce risk in any investment portfolio, and it could also have a higher bullish momentum of its share price in the following months.

 1. INTRODUCTION

Compañía de Minas Buenaventura (BVN), is a Peruvian mining company that performs exploration, mining, and processing of Gold and Silver minerals as well as Copper, Lead, and Zinc. The company operates 7 mines in Peru and keeps a shareholding in major gold mining fields in Peru such as Yanacocha in Newmont with (43.6%), and copper mines such as Cerro Verde in Freeport McMoRan with (19.5 %).

COVID-19 increased volatility levels since 02/24 by more than 400% closing borders, causing loss of life and threatening to drive the world economy into a recession of epic proportions. In the last few weeks alone, applications for unemployment assistance in the United States increased from weekly averages of 280,000 to historical highs of 6.8 million.

Graph # 1: VIX volatility index rose from averages 15 to highs of 85 (Source: TD Ameritrade).

Graph # 2: Requests for assistance in the USA increased from 282 K to maximums of 6.8 MM per week in April. (Source: FED St Louis).

In this scenario, which has collapsed due to health problems and caused global uncertainty, the best backup investment asset is Gold, and on 04 / 13 prices broke up to the levels of US$ 1700 / Auoz.

Perhaps, the gold prices will reduce their value in the short term, if reopened the American Market, however, due to these processes of changes in the economy, expectative positions are forecast will be seen in the medium and long term, for a new bullish rally. We thought that due to high global levels of public debt and private as well as probable inflationary pressures in the medium long term after the quantitative easing program announced by the US administration.

2. THE GOOD SIDE.

The Buenaventura Mining Company has 65 years of mining operations in Peru, and this company has assets in both precious metals Gold, Silver, as well, in base metals, like Copper, Lead, and Zinc. This diversification of sectors is a “natural” hedge for its cash flow, with which it has positions rather stable in the face of volatility in metal prices.

Table # 1: 2018-2019 financial results (Source: FY 4Q Reports 2019 Compañía de minas Buenaventura).

Table # 2: 2018-2019 cost of sales (Source: 4Q FY 2019 Reports Compañía de minas Buenaventura).

Costs at BVN, have been intelligently managed, they developed an optimization plan, called debottlenecking which helped their costs under control by a drop in production.

Buenaventura has responsible, debt management, its Net Debt / EBITDA ratio is 0.5. The industry range is 2-4, which leaves you the right margin for managing new debt in current contexts of a 0% interest rate.

Its solid participation in Copper companies, such as Cerro de Verde in Peru putting it in a unique position will depend, in part, upon how long the global recession lasts, and how quickly global capital flows return to normal due to COVID-19 and China, once economic growth is recovered, at the moment, seems uncertain.

Buenaventura also has a participation in the former world gold producer, Yanacocha, in 2019 it reported productions excellent than 500 KAuoz and is consolidating its plans in the future.

3. OPPORTUNITIES FOR IMPROVEMENT

The 2020 guidelines are expected to see the production strategies, the capital expenditures, and plans for the future for the company in a market gold price on the day 04/13, which shattered the US$1700 upwards. / oz.

In the medium-long term, the demand for the golden metal is expected to continue to grow as a result of the negative effects of the downturn, job losses, high public and private debt, and global uncertainty due to COVID-19.

Buenaventura has declared negative earnings per share (EPS) in the last 2 years (-0.05 US $ / share), which has impacted the price of its common shares.

The company's gross sales have decreased by 25% (867.8 MM US $ in 2019 vs. 1,150.7 MM the US $ in 2018) due to lower production of Gold, and silver, however, its better prices in those metals helped to mitigate a greater impact on Buenaventura cash flows.

The company's gross operating margin is lower on an industry average weighted average cost of capital. In 2019 it obtained 38%.

4. STOCK MARKET CAPITALIZATION

At AXL Capital, we believe that Buenaventura and its 65 years of mining experience could take on new and excellent challenges outside of Peru. The 2020 guidelines are expected to see its organic and inorganic growth strategies hand in hand, perhaps with joint ventures, acquisitions of juniors, or consolidated exploration companies.

BVN's stock market capitalization, as of the date of this report is hit at 64% of its book value with just US $ 1.8 trillion (253.9 MM acc X 7.1US $). Historically, 2011 reached an average PER of 10.

Considering the current moment of the company and projecting only 30-50% of the historical PER, the market capitalization could be between 3–5 trillion US $, with which the stock price could reach a range 12-19 US $ / acc. In this scenario, an investment opportunity is then open.

A more brainy analysis could be carried out through the DCF discounted cash flow method, based on its next 2020 guidelines.

5. THE RISKS

The liquidity ratios, current ratio, and quick ratio decreased for 2019, on average 40% to 1.15 and 0.97, respectively, which could represent a threat for the short term. The industry range is 1.5-2.

The company in its preliminary report increased, its direct Gold reserves (without considering Yanacocha) from 1.16 MM Auoz in 2018 to 2.7 MM Auoz in 2019. The San Gabriel project contributes proven and probable reserves of 1.7 MM Aauoz. The issue, of course, is the strategy to bring to production those reserves that need not only time and money, but will also present uncertainty in risk management.

The higher loss risks have also been associated so far with the uncertain lifting of restrictions due to COVID-19, the Company's plans and the future production, and the fulfillment of its expected earnings per share (EPS).

Buenaventura's EBITDA (including subsidiaries, such as Yanacocha and Cerro Verde) has remained above 600 MM, however, its free cash flow has been detrimental, and for the year 2019, it decreased from 346 MM to 47 MM. As of the date of this report, the company has cut its dividends to preserve cash. Not very pleasant news for the market, however at the end of Friday 17/04, they remained at 7.1 US $ / share.

6. PERFORMANCE OF THE PRICE OF SHARE PRICE (STOCK EXCHANGE)

Buenaventura's share price is quoting at 64% of its book value (US $ 7.1 vs. the US $ 11), and for YTD 2020 it is in ranges of US $ 7 to 9, directly impacted by the decrease in the production of gold-silver, the Covid-19 and by slowed results of its earnings per share.

Graph # 3: Historical performance of BVN US $ / share. The year 2010 reached all-time highs of 57 US/share, and the year 2015 reached all-time lows of 3 US $ / share (Source: TD Ameritrade).

The chart below shows the performance of Buenaventura's stock price compared to Gold prices and versus the GDX Gold index. The BVN share price has depreciated value in the last 9 months.

Chart # 4: BVN vs Gold price and GDX index (source: Tradingview and AXL capital).

7. FINAL WORDS

At AXL Capital we think that strategies concerning a next big step for the company are perhaps through a merger or purchase of another high-quality mining company, those synergies that would occur in all economic, productivity, social, Debt management, corporate governance and management that come with it, could push the share price to expectation values ​​above the average of the last decade.

The company's 2020 production guidelines, its capital investment plan, and its liquidity management, as well as the Gold, Silver, and Copper prices projected in its reports, will allow us to have a better scope in the short term of Buenaventura's future.

The company's 65 years of mining experience, a solid production, investment, and cash flow plan. A holistic organic and inorganic growth plan with a determined social vision and innovation, its solid management team, as well as the potential upward cycle of gold, and silver prices without detriment to Copper could take Buenaventura's market value to its next record highs.

So, the table's set.

Greets you,

Yro S. Cortez Ramos

Mining Business Development Manager

AXL Capital Management

yro.cortez@axlcapitalmanagement.com

Disclaimer: The results issued by AXL Capital Management are carried out with a deep level of analysis, however, they are subject to potential global macroeconomic variations that have a high level of uncertainty, so those results must be used only for information and do not represent purchase recommendations. / sale or short, long-term investments for the global Gold market, its derivatives, ETFs, or shares of mining companies or any other type of investment.