BVN - Compania de Minas Buenaventura: A Weak Quarter With Technical Issues At El Brocal

Summary

• Revenues for the second quarter of 2022 were weak, with $150.11 million down from $240.86 million in the same quarter a year ago and down 35.6% sequentially.
• Consolidated Gold production was 41,324 Au Oz in 2Q22 compared to 35,906 Au Oz in 2Q21. Equity gold production was 39,605 Au Oz, up from 34,241 Au Oz in 2Q21.
• I recommend buying BVN between $6 and $5.45 with potential lower support at $5.20.

Introduction

The Lima-based Compania de Minas Buenaventura ( BVN ) released its second-quarter 2022 results on July 26, 2022.

Note: BVN is Peru's largest publicly traded precious metals miner and the most important holder of mining rights in Peru. This article is an update of my article published on May 9, 2022. I have followed BVN on Seeking Alpha since Dec. 2020.

1 - 1Q22 Earnings Snapshot

Revenues for the second quarter of 2022 were weak, with $150.11 million down from $240.86 million in the same quarter a year ago and down 35.6% sequentially. It was a weak quarter with lower production, notably zinc, lead, copper, and silver.

2 - Investment Thesis

The investment thesis has not changed since the preceding article. BVN is a good miner that I consider a possible investment for the long term due to its metal diversification and solid liquidity.

However, Moody's downgraded the company's debt based on potential weaknesses (higher CapEx, weaker operating profit, etc.).

Buenaventura managed to improve its liquidity after repaying the syndicated facility in February 2022; however, higher capex related to San Gabriel, coupled with weaker operating profit will drive negative fee cash flow eroding liquidity in 2023 onwards. While the company has a balanced portfolio of base and precious metals the current cost structure had limited flexibility to withstand additional setbacks.

Thus, these financial drawbacks, combined with weakening metals prices and increase inflationary pressures and chain disruptions, pose challenging issues for the company.

Finally, the political situation in Peru is unstable , with the new leftist President in trouble.

Despite only a year in office, Peru's president faces several criminal investigations, including for influence peddling and leading a criminal network.

Thus, I continue recommending a small-sized core investment and accumulating on any weaknesses. The future Fed decision to hike interest rate by another 75 points or even higher will not help the mining sector.

One winning strategy that I often recommend in the gold sector in my marketplace, "The Gold and Oil Corner," is trading about 50% LIFO of your whole BVN position and holding a core long-term position for a much higher target. It is the centerpiece of my marketplace which will protect you from unwelcome "surprises" recurring regularly.

3 - Stock performance

BVN has slightly outperformed the VanEck Vectors Gold Miners ETF ( GDX ) and is down 14% on a one-year basis.

CEO Leandro Garcia said in the conference call:

...second quarter 2022 EBITDA from direct operations was negative $19.1 million compared to $68.5 million reported in the second quarter of 2021. Second quarter 2022 operating cash flow reached $72.7 million compared to $101.7 million in second quarter of last year. Second quarter 2022 net loss was $39.9 million compared to $37.5 million net income for the same period in 2021.

Compania de Minas Buenaventura ADS - Financial Snapshot 2Q22 - The Raw Numbers

Data Source: Company release

Gold Production And Balance Sheet Details

1 - Revenues were $150.11 million in 2Q22

2Q22 revenues were $150.11 million, down from $240.86 million in the same quarter a year ago and down 35.6% sequentially, as shown in the chart above. The steep decrease in revenue was due to lower lead, zinc, and silver sales.

Net loss (attributable to equity holders of the parent) was $39.90 million compared to an income of $37.54 million last year. The cash position is now $326.32 million, up from $255.23 million in 2Q21.

Buenaventura’s share in associated companies was $56.1 million in 2Q22, which remained unchanged compared to 2Q21.

On April 29, 2022, Cerro Verde paid a total dividend of $150 million. Buenaventura received $29.4 million relative to its stake in Cerro Verde.

2 - The Free cash flow was a loss of $42.30 million in 2Q22

Trailing 12-month free cash flow was a loss of $410.69 million, with a free cash flow of $42.30 million for the second quarter of 2022.

3 - Compania de Minas Buenaventura debt situation

The company shows a cash position of $326.32 million and a total bank loan plus financial obligations, including a current of $742.41 million at the end of 2Q22. The net debt is now $416 million with a net debt to EBITDA ratio of 2.2x with an average maturity of 3.8 years.

Moody's Investors Service downgraded Compania de Minas Buenaventura S.A.A.'s (Buenaventura) corporate family rating and senior unsecured ratings to B2 from B1.

The rating action incorporates the company's revised production estimates that reflect the effects of extended suspension of operations in Uchucchacua, lower than expected production in El Brocal following the landslide in March, and higher costs across its operating units.

4 - C onsolidated Gold production. Details - Total production was 41,324 Au Oz and 1,918,152 Ag Oz in 2Q22.

The company operates seven mines in Peru: Tambomayo, Orcopampa, Uchucchacua (suspended, see below status), Julcani, El Brocal (61.43%), La Zanja, and Coimolache.

Note: Gold production includes 100% of Buenaventura's operating units, 100% of Tambomayo, 100% of La Zanja, 100% of El Brocal, and 40.095% of Coimolache.

4.1 - Charts detailed by metals and price realized in the first quarter of 2022

4.1.1 - C onsolidated Gold Production (Au Oz)

Note: BVN operates 100% of five mining units, including Uchucchacua, Orcopampa, Julcani, Tambomayo, La Zanja in Peru, and San Gabriel, a mining unit under the development stage. It also owns interests in Colquijirca, Cerro Verde, El Brocal, Coimolache, Yumpaq, San Gregorio mines, and Trapiche, a mining unit at the development stage.

Consolidated Gold production was 41,324 Au Oz in 2Q22 compared to 35,906 Au Oz in 2Q21.

Equity gold production was 39,605 Au Oz, up from 34,241 Au Oz in 2Q21. Also, equity gold production, including assoc., was 47,596 Au Oz compared to 46,241 Au Oz in 2Q21.

4.1.2 - Silver Production consolidated (Ag Oz).

Note: Silver production was 1,918,152 Ag Oz during the second quarter of 2022. Silver direct operations production was 1,607,230 Ag Oz.

Note: Silver production decreased by 51% yearly, and lead production fell by 41% yearly.

4.1.3 - Base Metals consolidated. (Metric Tonne = 2,204.6 pounds)

Note: Zinc production decreased by 46% year on year, primarily due to the suspension of Uchucchacua’s operations and a change in the mine sequencing at El Brocal, which experienced a landslide in the open pit during the last days of March. The company’s 2Q22 copper production has remained stable, year on year.

COO Juan Carlos Ortiz talking about copper production, said at the conference:

In the case of copper, we have two components working together and this impacted us during this quarter. Number one was the inflation, mainly diesel contractors, we need to renegotiate the cost of the services from the contractors that operate in the underground mine where we fit all the copper to the processing plant. And the second impact that we have is that we are ramping up the production in the underground mine. So we are investing more meters of development underground.

4.1.4 - Price realized for Gold and Silver

The gold production was sold at $1,815 per ounce, and the silver production was sold at $27.06 per ounce in 2Q22.

4.1.5 - Attributable All-in Sustaining costs or AISC

4.1.6 Guidance 2022 revised after the landslide at El Brocal in March 2022

Buenaventura has updated its 2022 production guidance ranges, and the revisions mainly were upwards, except for the El Brocal operations and the extended suspension of operations in Uchucchacua.

Technical Analysis (Short Term) and commentary

Note: The chart is adjusted for the dividend.

BVN forms an ascending wedge pattern with resistance at $6.55 and support at $6. I recommend accumulating between $6 and $5.45 and selling about 50% between $6.45 and 6.70 with potential higher resistance at $7.90.

The overall strategy that I usually promote in my marketplace is to keep a core long-term position and use about 50% to trade LIFO while waiting for a higher final price target to sell your core position at or above $9.

Trading short-term LIFO lets you keep your oldest shares in the game while allowing you to trade the waves and accumulate significant gains without jeopardizing your investment.

Thus, I recommend buying BVN between $6 and $5.45 with potential lower support at $5.20.

The gold segment is now struggling with the Fed expected to hike interest rates by at least 75 points on September 21-22. Hence, I believe the gold miners will experience wild swings that could be used as an opportunity.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States generally to accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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