Prices for precious metals continue their climb as investors flee from the dollar and euro to gold and silver’s relative safety. That is helping mining firms such as Compañia de Minas Buenaventura (BVN), Peru’s largest, publicly-traded precious metals miner, which is planning new projects to cash in on the bonanza.
Buenaventura mines gold, silver, copper, lead, and zinc in Peru. It posted profits of $204.2 million in the second quarter 2011, up 83 percent from the same period in 2010, mainly due to an increase in gold and copper sales as well as higher prices.
During the quarter, net sales rose 54 percent to $327.3 million while operating income nearly tripled to $147.8 million. Operating costs rose 20 percent to $144.2 million but administrative expenses fell 33 percent to $19.5 million.
The company obtained an average price of $1,514 per ounce of gold in the quarter, up 25 percent from the same period of 2010. Record gold and silver prices offset lower output of zinc and lead.
A strike at Buenaventura’s Orcopampa gold mine briefly affected production in May, but overall gold production rose 3 percent to 269,778 ounces in the quarter while silver output gained 11 percent to 3.73 million ounces.
The company has a 19 percent stake in the Cerro Verde copper mine, owned by Freeport-McMoRan Copper & Gold Inc (FCX), and a 44 percent stake in the Yanacocha gold mine, owned by Newmont Mining Corp (NEM).
Gold output at Yanacocha, Latin America's largest gold mine, fell 3 percent in the second quarter but Cerro Verde copper production rose 2 percent. Combined, the two mines contributed $129.6 million to Buenaventura’s earnings, up 50 percent from a year earlier.
Rewards vs. risk
Peru's President Ollanta Humala, who took office on July 28, won the second-round runoff in June partly on his promise to impose a mining windfall tax, but the mining industry faces less risk than originally expected, said Carlos De Alba, an analyst at Morgan Stanley.
"We believe the next administration in Peru will pursue a moderate, more market-friendly position than the market is discounting," said De Alba said in a July 20 report. "The stock's risk-reward is attractive." He upgraded the stock to overweight.
The ratification of Peru’s Central Bank president and the nomination of the new minister of energy and mines are “very positive,” Buenaventura CEO Roque Benavides said in an earnings conference call.
But higher taxes could make Peru's mining industry less competitive. “The authorities understand the importance of competitiveness for mining but they insist on additional taxation,” said Benavides.
Meanwhile, Buenaventura is going ahead with new projects. In July, its partner Newmont approved financing for their Conga gold and copper project in Peru, with capital costs estimated at up to $4.8 billion. The project is expected to start production by early 2015.
Buenaventura is also planning to expand internationally.
“One of the alternatives is Chile, one of the few countries with a mining tradition like Peru where there is legal and economic stability,” said Benavides in March.
Buenaventura’s ADR has gained 13 percent in the last 12 months but is still trading about 30 percent below its 52-week high of $57.20 reached last October. BVN reports again on Oct. 28.
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