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Morningstar | Buenaventura’s 1Q Struggles at Owned Mines Buoyed by Stakes in Yanacocha and Cerro Verde

In the first quarter of 2019, Buenaventura’s EBITDA from direct operations fell 75% year on year to $25 million, due to lower prices and production declines at three of its mines. More favorable results at its partially owned operations helped offset the weak performance of its direct operations, as adjusted EBITDA, including associates, fell just 11% to $155 million. Profitability will continue to be driven by its ownership stakes in Yanacocha and Cerro Verde, while other mines fail to contribute at the same level.

We’ve made minimal changes to our forecasts for Buenaventura, with the exception being reduced silver production at Uchucchacua because of a labor strike in January that has since ended as well as heavy rain throughout the quarter. However, since the impact looks to be fleeting, our longer-term forecast for Uchucchacua is intact.

We’ve slightly raised our fair value estimate to $13.50 per ADR from $13 due to the time value of money impact on our model. Buenaventura’s no-moat rating is unchanged. We view shares as slightly overvalued at this time

After last raising the interest rate in December 2018, the Fed has paused its increases, leaving the federal-funds target rate at a range of 2.25% to 2.50%. Amid signs of a slowing economy, including slowing consumer spending and business investment, the Federal Open Market Committee, or FOMC, now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest-rate options not only imply no chance of a rate hike but more than 50% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate-hike path has reduced the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.