Southern Copper Corp (SCCO) 2006 Q2 法說會逐字稿

Welcome to your conference call with your chairperson Mr. Eduardo Gonzalez. I would like to remind everyone that today's conference is being recorded and it's also being recorded for transcription purposes. At this time, your lines will remain in listen only mode until the question and answer session and at that time I will give instructions. During the conference, please state your name before speaking and try to avoid speaking at the same time as someone else. Thank you for using Conferencing Services.

Mr. Gonzalez, I'll turn the call over to you.

Thank you very much. Ladies and gentlemen, welcome to the second quarter results for Southern Copper Corporation. Today, we will be discussing the full results for year-on-year for the second quarter of this year, second quarter of last year. We will also compare quarter to quarter results, that is the first quarter of '06 compared to the second quarter of this year and cumulative results.

We also have with us today Oscar Gonzalez Rocha, Chief Executive Officer and President of Southern Copper Corporation. We have on the call Raul Jacob, Director of Investor Relations and myself, of cours, chief financial officer of Southern Copper Corporation.

Let me begin first by discussing our sales volumes in terms of copper and beginning first with the second quarter of '06. The total amount of copper produced for Southern Copper amounted to 124,300 metric tons and on a year-on-year basis that represents an approximate 26% decline and is, of course, a result of an illegal work stoppage, particularly for a four month period at our LaCaridad mine in Northern Mexico and a little bit over 30 day illegal stoppage at the Cananea mine, and that really represents the 26% reduction on a year-on-year basis.

On a quarter to quarter basis, we also show a 23% decline and that is for the same reasons. We are happy to say at this stage, two important aspects. The case of Cananea mine has been resolved and we believe it has been resolved in a profound and solid way in the sense that we think we can operate with no significant or material labor disruptions going forward. Again, Cananea is already operating and producing cooper at this stage.

In the case of LaCaridad, it is important to know that the union or the people blocking the entrances of the mine have already ceased to do so. They have also removed the striking flags and are, at this stage, negotiating how we could come back into operations in the very near future. So, all in that sense, good news for both LaCaridad and Cananea in our Northern Mexican operations. Hopefully, with all these things we should be pretty much normally running all of our mines by the fourth quarter of this year.

In terms of on a cumulative basis, total copper mine production amounted to 284,000 metric tons and declined by 13.8% from 330,000 metric tons last year and again this is due primarily to both the illegal stoppages at Cananea and LaCaridad.

In terms of copper production sold, we show a slightly different story. In the second quarter of '06, this amounted to 149,000 metric tons and represents a decline of only 12.8% on a year-on-year basis and just about flat on a quarter to quarter basis. The reason for that, obviously, is that we aggressively went out and purchased third party concentrates in order to keep the smelting and refining facilities in Northern Mexico going despite the illegal work stoppages. We were very successful in doing so and this is the reason that sales didn't drop as much copper production.

Clearly, of course, as we continued or started a process of acquiring third party concentrates, although we made a significant margin on these third party concentrate purchases, it was not as attractive as our own mine production and thereby you see a significant cost increase in terms of costs of sales. In the second quarter, that amounted to $526 million, a 26% increase on a year-on-year basis and a 28% increase on a quarter to quarter basis. And again, the reason for that is mainly due to third party purchases of concentrates where we made margins but not as attractive as our own mine production.

Now on a cumulative basis, total copper production sold amounted to 300,000 metric tons. That's a 10% decline from last year, which amounted to 334,000 metric tons. In terms of molybdenum sold, which is our second most important product at Southern Copper, this amounted to 2,300 metric tons in the second quarter of '06 and represented a 28% decline on a year-on-year basis and a 29% decline on a quarter to quarter basis. Also, because of the LaCaridad illegal work stoppage. Caridad, as you know, is one of our three mines that produces a significant amount of molybdenum and also because of lower ore and molybdenum grades at both Cuajone and Toquepala.

On a cumulative basis, total molybdenum sold amounted to 5,600 metric tons and that is down from 7,200 metric tons last year. That is a 22% decline.

In terms of our total sales, we of course, demonstrated a material increase despite the lower sales volumes across the board on the illegal work stoppages. Sales amounted to approximately $1.27 billion, up 34% from last year and up 14% on a quarter to quarter basis and this, of course, is primarily due to higher copper prices that averaged $3.37 in the second quarter. That is a 120% increase from last year and approximately a 50% increase from the first quarter of this year.

Costs of sales, as I mentioned, did not increase as much as the total sales. That is costs of sales only increased by 26% on the second quarter compared to last year, relative to a 34% increase in sales and this, of course, allowed us to obtain a higher operating income which amounted to $649 million in the second quarter, representing a 46% increase on a year-on-year basis and a 3% increase on a quarter to quarter basis. On a cumulative basis, operating income amounted to $1.3 billion. That is a 41% increase from last year.

Operating margins still remain highly attractive. Operating margins based on EBITDA is approximately 51% this quarter compared to 47% in the second quarter of '05 and approximately 49% in the first quarter.

EBITDA amounted to a record $734 million in the second quarter of '06. That represents a 45% increase on a year-on-year basis and amounted to a 7% increase from the last quarter. On a cumulative basis, we have also hit a record amount of EBITDA, amounted to $1.4 billion, representing a 38% increase from last year.

In terms of taxes, we, of course, have shown an increase in taxes this year and that is particularly due, of course, to the fact that we have become considerably more profitable. Total taxes in the second quarter amounted to approximately $208 million, representing a 95% increase on a year-on-year basis and a 4% increase on a quarter to quarter. And on a cumulative basis, taxes have increased to $408 million. That is a 61% increase.

Net income also hit record highs, amounting to approximately $440 million in the second quarter of '06 and equivalent to $2.98 per share and that represents a 41% increase on a year-on-year basis on both an absolute basis and, of course, on a earnings per share basis. It also represents a 4.2% increased on a quarter to quarter basis in terms of earnings per share.

On a cumulative basis, net income has amounted to $860 million for the six months ended June 30 and that represents a 41% increase from last year and on an earnings per share basis, that amounted to $5.85 for the second months ended June 30 and compares to $4.15 last year. Total dividends paid at this stage have amounted to approximately $2.75 for the second quarter of '06. We recently, as you know, announced a $2.00 dividend for this third quarter. The 2.75 paid out in the second quarter compares favorably with the 2.38 paid out last year. That's a 15% increase and a considerable - and remains exactly the same as that paid in the first quarter.

Total investments and capital expenditures amounted to approximately $87 million in the second quarter of '06 and that represents a slight decline on a year-on-year basis. That's a 10% decline and that is due to the fact that we are in the stages of completing the Ilo smelter modernization program where we still have approximately $80 million of additional capital expenditures to spend.

On a cumulative basis, total capital expenditures have amounted to $231 million and that compares to $197 million last year. Again, a 17% rise in capital expenditures. I emphasize again that we have approximately $80 million more to invest in terms of the capital expenditures program in the Ilo smelter, which should be up and running with no problems by the end of this year.

With that in mind ladies and gentlemen, I'd like to also explain that our net sales were reduced by approximately $92 million. That calculation is based on a calculation of our copper production sold. That is, our 149,000 metric tons sold that would have had an average realization price of $3.16. Let me remind you that $3.16 of average realization price is lower than the average market price simply because as copper prices have increased so quickly and we sell most of our copper production on a 30-day moving average, that means that we are trailing the increase in copper prices.

So the calculation, again, is based on a $3.16 average realization, which is what we would have actually realized on those 149,000 metric tons and, of course, the average actual sale or forward sale that we did on those 149,000 metric tons was approximately $2.90. That $0.26 difference or $0.27 difference, on average, multiplied times 149,000 metric tons of copper sold amounts to approximately that $92 million number.

The actual number -- or the market calculation of our cost protection program is well detailed in our 10-Qs and I encourage you to look into those pages in order to see the market calculation, which again, is a different calculation than what we have shown for the $92 million.

We have also placed a total of $400 million in 30-year bonds in the second quarter of this year. The $400 million bond placement was very successful. It was more than 2 times over-subscribed in just a 24-hour announcement and the proceeds of this displacement is intended to be used for the Ilo smelter expansion program and part of the completion of the modernization. These are two separate items. One is the modernization, which is to be completed at the end of this year and a second stage is an expansion which would take us up to approximately 1.8 million metric tons of total concentrate throughput.

Some of the funds will also be invested in the expansion of the SXEW plant in Cananea. That should be completed some time by late '08-09 and that should add an additional 33,000 metric tons of SXEW production while another amount will be used for the initiation of the Tia Maria project.

With that in mind ladies and gentlemen, let me open up the forum up for questions and I thank you again for joining us today. Thank you.

[OPERATOR INSTRUCTIONS] Okay sir, our first question comes from Mr. Daniel Altman. Go ahead, sir.

Hey Eduardo.

Hello Daniel.

I guess, two questions. First of all, I was very intrigued by what you said in the beginning about barricades coming down at Caridad and maybe, you can just give us a little bit more color. Is this a reaction to your plans to shut down the mine? The last news story we saw was that you would find I guess replacement workers or bring back some of the existing workers. Are you more optimistic now that you can actually get the labor that works at Caridad to come back working, I don't know, anytime soon? That's the first question.

Sorry a bit long and then the second question is for Oscar which is - I wonder if you can talk to us a little bit about acquisition opportunities for PCU and specifically Peru Copper CUP or any other opportunities that you see in Peru if that's part of the plans for the company?

Well, absolutely, Daniel. Let me begin by answering your first question and then I'll elaborate a bit on the second question and allow Oscar to add to that. In terms of the LaCaridad strike, yes, part of the reaction is an effect of us shutting it down but really more in depth it's part of what we expected and you will recall that in several occasions we mentioned that the illegal work stoppages at both Cananea, Caridad were related to an inner labor union dispute, an inner union dispute that the federal government would not entirely get involved in solving simply because it was a political year. That is they were weeks away or months away from the elections and did not want to affect those results.

Now, what has changed dramatically, of course, is that the elections have passed. The results are, well I should say pretty much known and the situation is not as heavily politicized today. So the significant changes is that the inner union dispute is being resolved very quickly. For one, for instance, we know from several news agencies and the like that several arrest warrants have been issued against the ex-union leader and I've read in the news as well that they are actually seeking to extradite him from Canada at this stage. So once the head is cut off, so to speak, then the union starts operating in a more normal fashion. So that's the first thing that has occurred.

The second thing is that certain individuals that were disrupting the operations at both Cananea, LaCaridad were arrested and thereby you cut off the, let's say, second level. And the third aspect is that once these sort of ex-leadership positions start to dissipate in terms of what they can do then the union which at all the time, we believe, just wanted to come back to work is starting to happen and in the sense of LaCaridad the people that were blocking the entrances and so on have sort of lost heart and have now removed all of the blocking obstacles and are willing to come back to work.

So, yes, we are confident that La Caridad in the near future can come back. It is very difficult for me to give you a specific timeframe, but we are confident that it's going to be very soon.

In terms of potential acquisitions and the like, I just like to add before Oscar that we generally follow a no-comment strategy rather than -- we can, of course, say our general philosophy and this is consistent from the past that anything that we do whether it's a sale or an acquisition or what have you, is based on maximizing NPV for our shareholders more than anything else and then, we take into consideration corporate governance and so on and so forth.

Having said that, that is the general philosophy as we have stated before. And other than that, we can make no comments. But, Oscar, would you like to add to that?

The only thing is that like anyone know, we were not successful with [Antaya] because [Trata] offered a higher figure than we offered, and in the Toro Mocho, we don't yet, the answer the official answer of Peru Copper and we cannot comment anymore about that.

Just one follow-up on that topic. At the time of the controversy a few weeks back, Peru Copper said that they were looking into legal actions against PCU for manipulating their stock price. I am wondering if there has been any news that you've heard from them or whether you think that was just hot air at that time?

Yes, we don't have any information at all about any legal claim or something that will be about the proposal that we did. Then, again, we cannot comment anymore until they will give some answer about our proposal or definitely, if they are not going to give any answer, we are forgetting the proposal that we did and we are not going to pursue that.

Okay, thanks very much.

You are welcome.

The next question comes from Jamie Nicholson. Go ahead ma'am.

Yes, hi, good morning. Can you provide a breakdown between your production and sales out of Peru and Mexico? And also in your press release, you mentioned that you sold 50% of your production for the second half of the year already. But what is that based on? Do you have a production -- what estimate of production do you have for the remainder of the year?

Certainly, so. Let me first respond to your first question. I mentioned that the total amount of mine production in the second quarter amounted to 124,000 metric tons. 34,300 metric tons were from our Mexican operations and the remaining 89,900 came from Peru. On a cumulative basis, however, that of course has changed. On a cumulative basis, Mexico amounted to 110,000 metric tons out of the total of 284,800 metric tons and Peru to 174,500 metric tons, again, on a cumulative basis. Is that clear?

No, I am not sure those numbers added up. The total metric tons in the second quarter was 224?

No, let me repeat that again. Second quarter was 124,300 and divided up, 34,300 in Mexico, 89,900 in Peru.

Okay.

Cumulative basis was 284,800; 110,000 Mexico, 174.5 Peru.

Okay, great. And then, do you have a target for the year or for the second half that you've based this 50% has already been pre-sold?

Yes. That was based on a calculation that Cananea is working again for the next six months or starting in June, of course, and based on a calculation that La Caridad would not start for another three months. That is, La Caridad would not start until the fourth quarter. If that is the case, a little bit under 50% of our production is sold in forward sales at an average of approximately 3.50.

Okay. And what is your target production for the second half based on those assumptions?

Generally, if we would have had no strikes, the total mine production would be approximately 340,000 metric tons for the six months. Of course, if we assume that La Caridad will not be operating, we can reduce that by approximately 9 to 10%, let's say 10%, which means 300,000 metric tons.

Okay. Thanks and then, you've declared force majeure on some of your contracts. On a practical basis, does this -- I mean what does this imply? Are there monetary penalties with that or does that relieve you from any --?

No, we built our sales contract so that we have a force majeure, let's say, alternative, which means that because of reasons beyond our capability to affect production, et cetera, we can basically cancel a shipment without any penalty. To date, however, I am glad to say that despite of declaring that force majeure, very, very few of our clients did not get the copper because we were very successful, as I mentioned in the call, of obtaining third-party concentrate, processing those and meeting our customer expectations despite the huge issues with the strikes.

Okay. And then, regarding your CapEx, is your budget for this year still like 430, $450 million?

It is still the budget but, as usual, we usually come in a little bit below that. Part of the reason is that, as we have mentioned before, we are conservative in terms of what we ask our Board to approve and the numbers that we use for our equipment purchases and so on, are based at that time on what we believe we can get and we usually improve upon that through negotiations. So, for instance in the Ilo smelter, we will end up spending a significant amount less than what was originally budgeted.

Okay. And then this, your expansion plan, you mentioned in your press release like $600,000. What is the timing? Is that your budget for -- what's your budget for next year, '07?

Oscar, would you like to elaborate on that?

Yes. I think that we will start -- if everything is busy, Tia Maria project, and that we are talking about $150 million investment in a total of two years. And at least we will spend half of that in Tia Maria. We will be closing up the smelter mainly for 2007, still will be remaining 220 to $225 million and replacement of equipment. I think that we will be around $200 million for Peru. And in Mexico, starting the leaching plant in Cananea, maybe we will be on replacement of equipment of a similar amount. Then, we are content that we will be close to $400 million for 2007.

Okay, thanks. So, given your strong cash balance and your recent debt issuance, do you have a target cash and debt level? Are you going to -- I assume you would continue to pay out dividends as you've announced, but what -- can you just give us an idea of what -- if you have any kind of target debt level and cash level that you have?

Well, certainly. We've -- things have changed very quickly and of course it is difficult to keep an exact number regarding our debt levels although, I should say that we feel very strongly in maintaining our investment-grade rating. So, what that means is that we, of course, try to use as much debt as possible in order to ensure an optimal cost of capital for our company. But having said that, we run stress-based copper price scenarios and upside and medium cases and so on, and decide on an optimal capital structure based on that profile for we think we can maintain an investment-grade rating. And as long as we can do that, then we try to use debt.

Now, another issue then is we are not just going to go out and issue debt because we feel like it. You have to have a use for those resources and we haven't issued a little bit more debt at this stage because we have no use for those resources at this stage. As we progress and we start funding projects in the future, this may be a case then, for a little bit of more bond issuances or what have you, or a use of our cash resources.

In terms of dividends, you may recall that we have no specific policy. We follow a general philosophy whereas -- where we like to avoid a negative carry and maintain a minimum cash balance of approximately $200 million. Now, the case is a bit different because we accumulate a bit more cash and we accumulate cash really fast. And of course, we are relatively conservative in nature. But, you can expect that strong dividends will continue if the situation continues as it is and we will follow policies or practices that keep an investment-grade rating for our Company.

Okay, thanks very much, Eduardo.

Thank you.

Our next question comes from [Mr. Vincent Walding], go ahead sir.

Hi, good morning. Could you explain a little bit further the Company's hedging policy, ideally in a way that would help us to understand kind of in the long-term, maybe next year and beyond, what the Company might do with respect to hedging of copper production? Thank you.

Absolutely. The current philosophy is, of course, not to speculate on hedging. All we do is sell copper forward in order to ensure, let's say, a very attractive result. If I give you an example, we have approximately 50% of our production at 3.50 in the second half of the year. If copper prices were to drop to $3 on average for the next six months, we would have $3.25 for our shareholders. On the other hand, if copper prices were to be $4 on average, it would be approximately 3.75, which is still a very nice way to obtain upside for you, but protect the downside.

In terms of heading to '07, we have absolutely nothing hedged at this stage. We do not feel that the forward curves yet reflects where we feel comfortable that we would sell some of our production. But from time to time, we will sell from a lower production forward in order ensure, let's say, an attractive result for the Company as we have done in the past and we have done for the second half of the year. But again, we have done nothing yet for the '07 period due to the fact that we yet believe that there is some room to maneuver.

Okay, thank you.

You are welcome.

The next question comes from Andrea Weinberg. Go ahead ma'am.

Hi, Eduardo. Two quick questions. First, on the cost in the quarter, it seems like there was a cost increase also based on the fact that you have bought copper concentrates in the market. Could you discriminate what the cost increase is related to the purchases of concentrate?

And the second thing would on Tia Maria that Oscar mentioned that you are probably going to start construction already next year. When can we expect production from Tia Maria kicking in into your results?

Let me answer your first question, Andrea. And yes, in the second quarter, we had a total of $60 million in additional costs associated with acquiring third-party concentrates. Of course, we made a slight profit on that, but on average, our cash cost tends to increase considerably due to those third-party concentrate purchases and the reason for that is obvious. Instead of mining copper, let's say, at a cost of $0.30 or $0.40 per pound of copper, whatever that number is, we are buying it from the market, at say, $3.20 and then selling it -- processing that and selling it for say, $3.30, making maybe $0.10 on that and that reduces margin although, we still make a profit. But that is -- the $60 million is the vast majority of the cost increases in the second quarter.

Okay.

In terms of Tia Maria, Oscar, would you like to elaborate?

Yes. We are thinking that by the beginning of 2009, we are going to be able to start producing and will be in the order of 40 to 45,000 tons capital production per year.

And this is for a total cost of $150 million?

That is what we have right now, but we are still waiting to see the feasibility study in order to know exactly in which range it's going to be, but we don't expect to be more than that.

Okay. But just to understand, has this project been already approved by the Board, so you go ahead with the project, or are you still waiting for the details of the feasibility study?

No, we don't have yet the approval of the Board, but we think that as soon as we present the results of the feasibility study, maybe by the first Board Meeting of January 2007, we will get the approval.

Okay, thank you.

Our next question comes from [Laura Contreras]. Go ahead ma'am.

Yes, thank you. My question is over the cost of sales. How do you break down these costs in percentage terms? How much results from PCU operations and how much from third-party purchases?

The total cost and there are some intercompany eliminations here, so bear with me, but the total cost was $526 million for Southern Copper on a consolidated basis. Cost of sales for the Mexican operations amounted to 300 million, 303, and cost of sales for the Peruvian operations amounted to $290 million and again, there is several intercompany eliminations there that will bring that number down. But based on that calculation, that's about the rough breakdown of the cost. And as I mentioned, 60 million was associated with third-party concentric purchases, most of which or all -- almost all of that 60 million was associated with the Mexican operations, but I should say some of that was actually purchased intercompany from Peru. But in any event, that's about the percentage basis of those.

Okay, thank you.

Eduardo, may I add, we also have some additional higher cost related to mine and royalties of about $30 million due to higher prices as well as worker participation that has increased even the better income before taxes that we are having right now.

Good point, Raul, thank you.

Our next question comes from [Chris Christianson]. Go ahead, sir.

Yes, hi. I've got a question about La Caridad smelter operation, what capacity was that smelter running at?

Approximately a little bit over 1 million metric tons of concentrate throughput. And during these days, of course, under strikes and so on, that was reduced to perhaps 700,000 metric tons. Is that about accurate Oscar?

No, I think that we are running the Caridad smelter about 60% of its capacity right now. And that will increase with Cananea working to about 85% -- is the [50%] Caridad will supply in the fourth quarter of this year and we feel that for third quarter, we will be at full capacity with Cananea and Caridad and maybe [inaudible] with completely 1.1 million tons smelting capacity.

Okay. And just another quick one. How much of that going through the smelter was from purchase concentrate versus your concentrate?

Well, in the second quarter, it was obviously a significant amount, as La Caridad was stopped and Cananea was stopped for about a month. So, let's say for -- and we can divide the second quarter up into let's say 45-day periods. The first 45 days, let's say that we were operating the smelter at about 75% of capacity and perhaps as much as 60% was from our own production and the next 45 base, once Cananea entered into a strike as well and we ran out of some of those inventories, perhaps it should have been about -- we are running at about 65% as Oscar mentioned and it must have been half and half from third-party purchases and the rest from maybe inventories.

Okay, thank you.

The next question comes from Mr. Daniel Altman. Go ahead sir.

Hi there, just a couple of follow-up questions. Firstly, on the hedging, can you give us a quarterly breakdown in terms of both volumes and pricing?

Yes, this will be clearly spelled out in our 10-Q which should be filed shortly. But having said that, most of those hedges are in the second quarter right now and the second quarter is at an average of a little bit over 3.40, almost 3.50. And if we take La Caridad out of the equation for the third quarter, it is roughly 70% of our production that is hedged in the second quarter at above 3.40. And then, we have about 10% of our production in the fourth quarter hedged, I believe, at about 3.60.

Okay. So, currently --

And on average, that would give about 3.50 for 50% of our production in the second quarter.

Okay. So, currently, just 10% of the fourth quarter is hedged?

Approximately, yes. And again, I encourage you to look at the 10-Qs that will be filed shortly.

Okay. And assuming that, well, almost independent of your production level, are you planning to hedge more for the fourth quarter?

There is a possibility of we see average prices considerably above what we are seeing today in order to achieve a, let's say, higher average and better realization for our stockholders. But, it will depend on whether copper goes back to $4.

Okay, great. And then, just one other thing. The third-party shipments, did you continue to do that in the third quarter?

We will continue to do some third-party purchases, of course, not to the extent that we did in the second quarter. But, you should keep in mind that as we revamp Cananea and La Caridad hopefully in the near future, we do have to fill up the bottleneck again, we do have to get operations going again, and this is going to take some working capital replenishment. So, we are not going to have, let's say, a perfect second quarter from the operating point of view. But, things should be rather smooth for the fourth quarter.

Okay, great. Thanks again.

You are welcome.

[OPERATOR INSTRUCTIONS]. At this time, Mr. Gonzalez, there are no questions in queue.

Okay, ladies and gentlemen, thank you very much for joining us and hope to see you in the next quarterly conference call or whenever there is relevant news. Thank you very much again, and see you next conference call.