EUR 850.00 For Business Accounts Only

Morningstar | Buenaventura Continues to See Its Equity Investments Drive Most of Its Profitability

Compania de Minas Buenaventura's direct operations currently account for roughly half of EBITDA, but equity investments will account for a larger share in the future. Key equity investments include a 45.95% ownership in Yanacocha, operated by Newmont, and a 19.58% stake in Cerro Verde, operated by Freeport-McMoRan.Historically, Yanacocha has been a major gold producer, but production has been declining and reserves depleting. The Quecher Main expansion is planned to open in 2019, extending the mine's life through 2027, albeit at lower production. More important, the project will keep the mine open as studies on the potential sulfides project continue. Cerro Verde produces around 500,000-550,000 tons of copper per year, following the successful ramp-up of an expanded plant.Investors must consider Buenaventura's lack of diversification. First, Yanacocha and Cerro Verde account for roughly 40% of EBITDA, concentrating profit in just two mines. Second, Buenaventura faces material geopolitical risks, as 100% of its direct operations and equity investments are in Peru. However, the company has significant experience working with the Peruvian government, which has helped mitigate some of this risk.Our long-term nominal gold price forecast is $1,300 per ounce in 2020. Investment demand will weaken as the Federal Reserve raises interest rates, weighing on near-term gold prices. However, Chinese and Indian jewelry demand should eventually fill the gap left by investment demand. Strong preferences for gold in these countries drive high income elasticity, and rising incomes should result in robust jewelry demand growth over the next few years. Strong demand will lead to a production shortfall, requiring a higher incentive price to encourage additional mine production. However, cost deflation caps the potential upside from an otherwise strong demand story. Depreciation in producer currencies, lower oil prices, and general mine cost deflation stemming from the end of the Chinese-driven commodity boom have helped drive cost reductions, lowering the marginal cost of production.