Southern Copper Corp (SCCO) 2006 Q4 法說會逐字稿

Good morning, my name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Copper Conference Call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Gonzalez, you may begin your conference.

Thank you very much, Angie, and thank you very much ladies and gentlemen for joining us this morning. We have with us today, Oscar Gonzalez Rocha, who is the President and Chief Executive Officer of Southern Copper. We also have with us Raul Jacob, who is the Director and Head of Investor Relations for Southern Copper. And myself, as Chief Financial Officer of Southern Copper.

Well, let me keep my comments as brief as possible, and comment on some of the highlights for 2006. As most of you know, we had a record quarter this fourth quarter of 2006 and also a record year for the 12 months ended on December 31st of 2006. In many cases, the year was a difficult year for us.

We, as you know, went through several disruptions towards the middle of the year, especially in the illegal work stoppages at both the La Caridad and Cananea mines. Both of these operations being stopped caused us approximately 90,000 metric tons of our own mine production. But, despite these significant disruptions, we were able to recover, by the middle of the third quarter of last year, and fully recover or mostly fully recover by the fourth quarter of '06.

With that in mind, ladies and gentlemen, let me go and -- into the numbers and discuss particularly our mine production during the fourth quarter. All numbers that I mention here today will be based on a quarter-on-quarter basis, year-on-year basis and then I will of course touch upon 12-month numbers accumulated for 2006 compared to 2005. Total copper production for the fourth quarter of 2006 amounted to an almost normalized 179,600 metric tons. That is a 27% increase quarter-on-quarter, and of course that is primarily due to the normalization of operations at both the Cananea and La Caridad units in our Mexican division.

Both Cuajone and Toquepala operated slightly above expectations during the fourth quarter and in fact throughout the year. On a year-on-year basis, total mine production was a little bit lower than last year by about 1%, but again, almost normalized to the 180,000 run rate that we hit in the fourth quarter of 2005. On a cumulative basis, total mine production amounted to 605,000 metric tons and was 12% lower than the 690,000 metric tons registered during 2005. Total production sold during the fourth quarter amounted to 183,000 metric tons. That's a 27% increase quarter-on-quarter and a 6% decline on a year-on-year basis due to a slight accumulation of inventories.

On a cumulative basis, that is on a 12-month basis, total copper sold amounted to 629,000 metric tons and represents a 10% decline. The reason mine -- total production sold is not as low as mine production is due to third-party purchases that we acquired during the end of the second quarter and beginning of the third quarter in order to replace that production that was not produced by both Cananea and La Caridad, albeit at a much higher cost than producing our own production.

Copper prices during the fourth quarter amounted to approximately $3.20, registering an approximate 10% decline quarter-on-quarter and a 57% increase year-on-year. Despite the lower copper prices during the fourth quarter, on a quarter-to-quarter basis, we were able to deliver a record level of EBITDA due to the recovery of both La Caridad and Cananea. EBITDA during the fourth quarter, for instance, amounted to $1.019 billion and represents a 16% increase on quarter-on-quarter basis, again despite a 10% decline in copper prices quarter-on-quarter. On a year-to-year basis, total EBITDA increased by 50% and that is primarily due to the increase in metals prices, as most of you know.

On an annualized basis, total EBITDA amounted to a record $3.3 billion, that is 41.6% higher than the $2.34 billion generated during the full year of 2005. Total cost of sales came relatively under control during the fourth quarter of this year. That is mainly due again to the fact that we stopped acquiring so much copper concentrates from some third parties and started depending on our own internal production, which is of course of significantly lower cost.

We did experience significant other cost pressures during the year, particularly we can refer to electricity, we can refer to reagents, steel ball, tires, et cetera. But, none of these aspects caused any disruptions during the year and we do not expect these prices to continue their increase during 2007.

Let me touch upon also total taxes paid during the fourth quarter amounted to $300 million, and that is of course a significant increase quarter-on-quarter of 10% and an increase of 63% year-on-year. And on an annualized basis, total taxes amounted to $980 million, that is a 66% increase. These taxes are quite in line with our approximate 32% marginal tax rate and are of course a result of a profitable company and certainly due to the increases in metal prices, and so on.

Total net income for the quarter amounted to $630 million. That is a 21% increase quarter-on-quarter and a 50% increase year-on-year. On a fully annualized basis, total net income amounted to a little bit over $2 billion, and represented a 44% increase from the $1.4 billion generated during 2005.

Earnings per share during the fourth quarter amounted to a record $2.15, up 21% quarter-on-quarter and up 50.7% on a year-on-year basis. For the full year ended on 31 December 2006, total earnings per share amounted to $6.85, up 44% from the $4.75 generated during 2005. Total dividends paid during the fourth quarter amounted to $1.70, that is also a record level, and represents an increase of 23% on a quarter-on-quarter basis, 19% year-on-year. For the full year ended 31 December, total dividends paid amounted to $5.13 out of a total earnings per share of $6.85, and that compares to a total dividend of $2.90 per share for 2005 compared to total earnings per share of $4.75.

Total capital expenditures for the fourth quarter amounted to $145 million, that is almost in line with last quarter's and on a year-on-year basis, represented a decline due to the completion of the Ilo smelter modernization program primarily. On an annualized basis, total capital expenditures amounted to $520 million, a slight decline from the $600 million that were spent in 2005, again mainly due to the completion of the Ilo smelter modernization program.

With this in mind, ladies and gentlemen, I would like to open up the forum up for questions and thank you very much for joining us today.

[OPERATOR INSTRUCTIONS] Your first question comes from Raphael Biderman.

Good morning, Eduardo. Congratulations for the results. Eduardo, I have two questions. One is regarding, on the press release, you mentioned that you still have some impact of the concentrates you acquired on the previous quarter. This had some impact on the cost of goods sold, and I would like to know the size of it, if I understood correctly.

And also, if you could comment a little in terms of the outlook of copper prices, basically my doubts is regarding how are you guys seeing demand in the United States, it's already rebounding, demand in Asia, restocking process, and also in particularly, the new capacities which are expected for this year, they are not -- if they are coming on-stream as expected? And the big -- and there are some big increases in inventories in the LME. Like last Friday, there was an increase, an inflow of 7,000 tons and if you guys have an idea where is this coming from? If this could be producers or the Chinese -- if the Chinese government could be trying to manipulate the market again because I suspect producers wouldn't want to scare the market putting so much tonnage on the LME? This is more or less my doubts, Eduardo.

Well, thank you very much for both of your questions and let me try and tackle the first question. In terms of third-party production acquired, most of that copper concentrates was acquired during the second quarter. The total amount for the year acquired from third parties amounted to approximately $180 million. I don't know exactly how much of that is relevant in the fourth quarter, but it is safe to assume that a significant amount of production that was acquired from third parties during the third quarter was sold during the fourth quarter rather than our own copper production, so that did affect the cost of goods sold during the fourth quarter, but mainly during the third.

Again, I cannot venture and tell you the exact number, but yes, the fourth quarter was affected still by third-party purchases. On the other hand, both Cananea and La Caridad, mostly Cananea, reached almost 100% production during the fourth quarter, but Caridad is still struggling at about 93% as we speak today and as people are being retrained and so on, and we expect to reach capacity in the next few weeks or months.

In 2007, we do not expect the material third-party purchases, although we will continue to do this from time to time given the fact that we like to manage our smelters and refineries at close or 100% of capacity. On a relative basis, total mine production should reach the run rate that we reached in 2005, a little higher. In other words, during 2007, for your information, we should be producing approximately 200 million pounds of additional copper production compared to 2006, which was about 90,000 metric tons. So, that means that we should be reaching about 700,000 metric tons and thereby decline our third-party purchases materially.

Now, your second question regarding copper prices, we have taken a statistic that is based on several dozen analysts, including CRU, the banks and so on. It appears that the average for 2006 -- I am sorry, for 2007, is estimated by this average at about $2.80. At this stage, we believe that China in the short-term has switched their consumption machine, so to speak, into internal consumption rather than importing. They have demonstrated a 19% decline in imports into China, but we have also seen a very, very dramatic drop in Chinese inventories of well over 50% in the last few weeks, which means that in a few months it is likely that China will not have inventories to consume from its own inventories and thereby switch back to importing from other parties or from outside of China.

We believe that the fundamentals continue to be very strong. As we see the average of analysts or take particular sources, credible sources that -- I would not like to mention which sources these are, but they are credible sources -- we can see that in 2007, we will be on a balance and we will still hit a decline or let's say an imbalance in 2008 where production may outstrip a little bit -- by a little bit the consumption.

Now, when we look at the statistics of the projects that are in line to consume or to produce in the next 24 months, we find it difficult to believe that some of these projects will come in on time or that some of these projects will come in at all during that time period. And I -- again here, I would not like to mention any particular names, but it seems to us that it will be difficult for the supply-demand situation or for the demand situation to considerably outstrip supply or for supply to considerably outstrip demand. So, we think that we will generally be in balance, and fundamentals look very strong going into 2007 and certainly thereafter. And I don't know when you asked your question about new capacities whether you referred to these capacities that I just mentioned or our own capacities.

No, no, these capacities you just mentioned, yes.

Okay. Well, thank you.

Okay.

Your next question comes from [Andre Salar].

Yes, good morning. Congrats again on the results. Could you just also give us an outlook for the -- for molybdenum prices please?

Molybdenum prices we believe will slightly recover, although we have budgeted a very conservative price as we generally do. But, we think that it will recover from today's prices within the next few weeks and months. To which levels, it's hard to say, but we estimate it should be in the mid-20s.

Okay, great. Thanks.

And your next question comes from Jorge Beristain.

Hi, good morning, Eduardo. Jorge Beristain from Deutsche Bank. I just wanted to follow up again on that question regarding how much concentrate or what was the value of third-party concentrates embedded in the cost of goods sold in the fourth quarter, because as far as I understand, that's pretty critical metric just to throw a number out for every $100 million difference, it would seem to impact your cost of goods sold per pound of cash cost production by about $0.25? So, I just wanted to understand, when you said that the bulk of that 180, did it fall in the third quarter or in the fourth quarter?

The bulk fell in the third quarter, although again -- I'd say about 30% fell during the fourth quarter. But yes, it does impact the fourth quarter results. Now, there is also something important to mention here that, as copper prices dropped, you also know that there are provisionally priced contracts, which impacted fourth quarter results. And I did Jorge see your numbers estimates for the fourth quarter, we should have been actually quite inline with those numbers, if it wouldn't have been for the provisionally priced contracts.

Yes. That was going to be my second question, was -- could you give us what you believe was your average realized price of copper per pound in the fourth quarter?

I believe it was about $3.20, $3.21, but the provisionally priced contracts cost us approximately $75 million to $80 million on copper alone.

Okay. So, sorry, while the quote that you are giving is basically the market price, so you have not stripped out this $80 million impact?

No. The realization price is usually above the average metals price, but in any event the -- what the provisionally priced contracts refer to is those contracts that were still open on December 31st on a 30-day basis.

Okay. So, sorry, just to clarify, the $3.21, that's your average realized price including provisional pricing or excluding provisional?

Including.

Okay. I'm sorry, my last question was just on the volume guidance, it does seem that there has been a little bit of a creep up. I understand your company was operating at about 650,000 ton annualized rate. Obviously, what we saw in the fourth quarter would put you much closer to the 700,000 ton that you now said is -- could be the new guidance. Is this a change in your public stance on your guidance or was there something anomalous in the fourth quarter that perhaps you had better ore or could you just discuss why you are now seeing a 700,000 ton production rate?

Well, it's simply, if you look at the run rate in 2005, we had already produced about 690,000 metric tons of copper production, our own mine production. So, it's really back to normal is what it is and maybe a little higher ore grade here and a little lower here, but in general, we believe that the run rate capacity of the company is approximately 700,000 metric tons of our own mine production, of course, absent any disruptions that we had during 2006.

Okay, thanks very much.

You are welcome.

Your next question comes from [Carlos De Alba].

Yes, Good morning, Eduardo. Two questions, first one is, could you give us an estimate of the sales you generate from the Ilo smelter modernization project that has just been completed? And question number two is, any guidance in terms of CapEx and if you have any hedges in 2007? Thank you.

Yes, about the smelter in Ilo, we are tomorrow or Wednesday starting the operation of the new furnace and we are shutting down the reverberatory furnaces, one tomorrow and one Wednesday, in order that the 1st of February that is the compromise that we have with the Peruvian Government, we are not going to have any gases through the start. That is what we have scheduled and we are a little late. But, we think that we are going to accomplish anyway the [pama] in the last phase of the agreement.

And is there any savings estimates coming out of --?

Yes, [inaudible - multiple speakers] concentrates because definitely the consumption is not going to be like running the capacity, full capacity of the plant, but is only meanwhile the new furnace will reach the full production. We, with the training that we give in Australia and in Arizona to our people, we think that we are going to reach that maybe in two months of 100 capacity of the furnace. And then, during February and maybe part of March, we are going to sell some concentrates. We already sold some in January, but at the same time, we are growing later on mainly to buy some concentrate when the furnace will have a full capacity in the last part of the year.

And the savings, definitely, we are going to have savings. We already have the savings of the [casting wheel] that is running since February in the order of about $0.02 and within that we are going to be in about $0.10 for this full year in the [estimate] that is about $0.03 less than what we had in the last months.

Thanks.

You are welcome.

What about CapEx, Eduardo, any guidance for 2007?

Yes. Our total budget amounts to approximately $500 million. Most of it is in replacement of equipment and -- and so on. But, we have budgeted the construction of the SXEW plant in Cananea, which should bring about 33,000 metric tons. And as we move through the year, we will of course announce whether we bring about any new projects approved by the Board and we will add the capital expenditures at that time. Importantly however, we think that the Company will still be able to generate a very significant free cash flow. Thereby, we think we can continue to match with a combination of strong dividends, while still continuing to develop our own project pipeline, which is of relatively low capital expenditures, but still deliver value to our shareholders.

So, just to confirm, the 500 million budget number includes the SXEW plant at Cananea?

Yes, it does.

Okay.

That we are going to spend.

Thank you.

You are welcome.

Your next question comes from Hongyu Cai.

Yes, hi, good morning. This is Hongyu Cai from Goldman Sachs. My question is actually a follow up on Carlos' question. Did you sell any copper production in a forward contract or in another word, do you hedge anything in 2007? And secondly, in terms of provisional price adjustment, do you have all your copper sales sold in the provisional price term or is just a certain percentage of your total volume that is sold in the provisional term?

Sure. We have no forward sales right now, no swaps in place for 2007. Now, the way provisionally priced contracts work is we sell our copper on a 30-day moving average, more or less, sometimes on a 60 day, but on average it's about 30, maybe 35 day moving average. Now, those contracts that have not been priced at the end of a particular quarter or period, and that's usually above 30, 35, maybe 40 days average are the provisional pricing of the -- of December 31st towards the difference of the average of the last quarter and that gives you the provisionally priced amount which in this case, when copper prices decline is a negative number; when copper prices increase is a positive number. That number amounted to approximately $80 million during the fourth quarter of negative price contracts.

Thank you. So, to follow up basically, that amount that is unpriced is just -- because you price on a 30-day average basis?

Correct.

So, pretty much, one-third of your fourth quarter production is open?

Relatively speaking, yes.

Okay. Thank you very much.

You are welcome.

Your next question comes from Daniel Altman.

Hi. It's Daniel from Bear. Just a couple of questions, Eduardo. Firstly, on working capital for the fourth quarter, can you talk about, looks like you had a pretty big surplus, can you talk about how you got there in the quarter, if that was a one-off or whether that was something actively managed?

Secondly, if you could provide a base cost, kind of a mining cost for copper in the fourth quarter before byproduct credits? And thirdly, I know Oscar was quoted in the media predicting a $3 copper price for this year. I wonder if you could talk about whether that's, let's say an official company forecast and maybe how you guys got to the $3? Thanks.

Well, let me begin backwards. Mr. Oscar Gonzalez Rocha did mention that our expectation is roughly about $3. I believe that reflects our own estimate rather than the company's estimate. I should say however that I am more in line with Oscar than the average of the market. I believe that copper prices will recover and will average higher than the $2.80, which is the company's official number, and it is an official number due to the fact that that is the average that we have come up with when we consider all of the analysts and CRU and so and so forth. I don't know if that answers that question.

Yes, that's fine.

In terms of the net change in working capital, you mentioned a surplus and the surplus is mainly due to a decline in third-party purchases. And as we of course take that out of our balance sheet, you will see a decline from those metals that were acquired at much higher costs than our own production. That's the main event in that respect. And your second question was, Daniel?

And the other question is, if you strip out all the byproduct credits, what do you see is your base cost now for copper mining?

If you give me one second, I can tell you.

Take your time.

Eduardo, let me comment on the working capital variance. This is Raul Jacob. We have -- if you compare the fourth quarter with the fifth -- I'm sorry, the fourth quarter of this year with the one of the 2005, we have a variance due to the higher workers participation and income tax to be paid in the first quarter of 2007. That adds to what you just mentioned and make this significant variance that we're showing in our press release.

So, that would be deferred taxes to the first quarter?

It's -- we have to make a provision for the total income tax and profit sharing that we have and that has to be paid on the first quarter -- at the end of the first quarter or at the beginning of the second quarter of next year. So, as you know, Dan, the number of profit sharing has increased significantly in 2006 due to the higher copper prices that the company has had. So, that's one of the things that are making that significant difference that you have seen in working capital.

Okay.

Thank you, Raul. And to answer your question about cash cost without byproduct credits, the total number was $0.82 for 2006 compared to $0.80 for '05 per pound, of course.

Okay. I seem to get a much higher number. Just -- maybe you could just share the zinc and molybdenum byproduct credit for the quarter if you could?

Yes, I believe the zinc number was about -- well, the molybdenum number was about $0.25 -- little higher, was about $0.35 and zinc was about $0.18. Now, this does not include third-party purchases, by the way, of the $0.82. You would have to add about $0.25 additional for the third-party purchases, which would be about $1.

Okay. Okay, thanks very much.

Thank you.

And you have a follow-up question from Raphael Biderman.

Eduardo, when you mentioned that you expect the market to be in balance this year, are you already considering these projects that will not come on-stream or you are considering that some of these capacity expansions will come on-stream?

And also another question, Eduardo, is if I wanted to adjust your EBITDA for non-recurring events, would it be correct to add to the EBITDA the 75 million of provisional price contracts -- the losses you have had in provisional price contracts, plus some losses like 30% of the 180 million from the concentrates acquisition?

Well, I would like to rephrase both of those. These are not losses. We didn't lose 140 million from third-party purchases. What it is is it's more expensive to acquire from third parties than it is to acquire from our own mine. Usually, of course, we pay market prices for third-party purchases minus a TCRC -- a treatment and refining charge and that where we make the profit in the foundries and refineries. In the provisionally priced contracts, this is just a number that is a non-cash number that is netted out of sales because it is what again is provisionally priced and is not a final number yet, and that could vary upwards or downwards, and it is really that simple.

In terms of the future projects, when I said balance, I said that in a sense by reading what we see from the average of analysts and several other sources. Again, our personal belief, this is not the company's outlook, by the way, is that there will continue to be a deficit of supply during -- this year and many of the projects that we see, that are supposed to come online in the next 12 months or 24 months, we do not see it happening. And in some of these cases, we know for a fact that it's quite an exaggeration to think that they will.

So, again, we see fundamentals very strong. We do not see supply outstripping demand during the near future, and we see China coming back into the consumption fray of things in the next few months and we look forward to strong copper prices going forward.

Eduardo, I mean, in terms of the adjusted EBITDA, I mean not -- I mean, what would be the normal run rate of EBITDA if it wasn't for non-recurring events? I mean, I understand that this -- the acquisition of concentrate was a cash outflow that actually happened. But I believe this is not sustainable for the foreseeable future. I mean, if I want to adjust to see what is the sustainable level for EBITDA, I would have to strip off --?

I see your point. Let me mention the following. Obviously, I cannot give you exact numbers or forward-looking statements to the extent that these things are -- will cause liability for the company. In any event, however, we did mention during the conference call that we expect more or less during 2007 to produce an additional 200 million pounds of our own mine production. That is -- as you know, our own mine production is considerably less expensive than buying from third parties.

If you run through those numbers, that -- it means that -- and if you run through the numbers of how much the illegal work stoppages cost us in both Cananea and La Caridad, it is safe to assume that we will be posting very strong numbers going forward on a quarterly basis, and we have a very good advantage when we compare to 2006, due to the fact that we will have that additional 90,000 metric tons of our own mine production, a huge advantage. How -- what exactly that turns up to be, I cannot say, but again, it is an advantage and we should be delivering very strong quarters going forward this year in 2007.

Okay. Thank you, Eduardo.

You are welcome.

And your next question comes from Jamie Nicholson.

Hi, I'm just wondering if you could provide the cash cost breakdown for the Peruvian operations and for Minera Mexico? In other words, how does the $0.82 look when you just look at Peru and just Minera Mexico? And then, secondly, if you could give us the year-end debt and cash position of Minera Mexico please?

Absolutely. The year-end cash position of Minera Mexico is approximately $500 million. In terms of cash cost, they are very similar, I should say however that the Mexican operations do count on byproduct credits from zinc, whereas the Peruvian operations have no zinc, but have a lot more molybdenum. So, on average, we are about the same.

Okay. And the debt position at Minera Mexico at the end of the year?

The debt position, we had a total amount of Yankee bonds of $350 million for '08 and $125 million -- I'm sorry, $150 million of '08s, excuse me, and $125 million of [20]. And that's all the debt that Minera Mexico currently has outstanding.

Okay, thank you very much.

You are welcome.

And your next question comes from Carlos De Alba.

Yes, just a follow-up in terms of the income statement. If I see at the fourth quarter results, SG&A came down about 20% from what you guys presented in the third quarter and depreciation increased about 12% again quarter-over-quarter. I just want to understand if we should consider the fourth quarter results on an annualized basis as the current run rate for '07?

In terms of depreciation, you should expect that as the relative run rate. In terms of administrative costs, we do expect savings during 2007. We expect a total number in absolute terms of a reduction of approximately $5 million in administrative costs when we compare to the full year of 2006. Much of these administrative costs were strong during 2006 due to of course Sarbanes-Oxley, the implementation of new systems and information systems and so on, and we do not expect these to be reoccurring.

Excellent, thanks. And just another question, if I may, I saw -- and that you guys have booked now a $280 million -- sorry, only $280,000 of marketable securities. Is tehre any rational of why doing this versus having in cash or --?

Yes, these are investments that are locked in over 90 days. And when we lock those in, we have to register these as marketable securities rather than cash.

Okay, but it's only 90 days. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] There are no further questions at this time.

Okay, ladies and gentlemen, thank you very much for joining us today and we hope to see you again in the first quarter conference call in about three months. Thank you very much.

This concludes today's Southern Copper conference call. You may now disconnect.