Southern Copper Corp (SCCO) 2007 Q1 法說會逐字稿

Good morning. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Copper first quarter results conference call.

(OPERATOR INSTRUCTIONS)

At this time, I would like to turn the conference over to Eduardo Gonzales, Chief Executive Officer. Please go ahead, sir.

Thank you very much, Janice, and thank you everyone, again, for joining us for the first quarter 2006 results for Southern Copper Corporation. Gentlemen and ladies, I think the first order of the day, of course, as I'm sure it's on everyone's mind, is the situation regarding the strikes in Peru.

I'd like to describe the situation to you in the following way. Unfortunately, there is two aspects to these work stoppages, illegal work stoppages, in Peru. One is an idiosyncratic situation and one is more of a systematic situation. In terms of the idiosyncratic situation, or particular to Southern Copper, on the 28th, that is, on Saturday, our workers at the Ilo smelter went on an illegal work stoppage, arguing for higher wages. They were joined today by the Cuajone and Toquepala unions, who argue also increases in salaries. But they also argue something that is more systematic and political in nature, and we cannot really resolve that situation on our own.

This is regarding no limit to the worker's profit sharing for all of the industry in Peru, and that is being asked for from the government. They are also requesting free affiliation to pension funds, again, something that we have no control over, and some other minor items.

In any event, it is important also to emphasize that as of right now, Ilo is operating normally. That is, the smelter, foundry and refinery are operating normally despite the fact that there are some picket fences. About 20 to 30% of the workforce is moving in and out of the smelter and, again, we are working under normal circumstances and expect to continue that way for a short time period.

In the case of Toquepala and Cuajone, both mines are operating normal. We have taken the proper precautions so that the impact of these illegal work stoppages are not material to the company. We have a participation of unionized members of about 60% in Toquepala and somewhat less in Cuajone. The remainder, of course, have decided to walk out.

We expect the authorities on a federal level to declare the strike illegal in a short period of time, maximum a couple of weeks, by which time we hope everyone returns to work and disruptions are minimized at that time. I emphasize again that all of our operations continue to work under normal circumstances or at normal capacities due to the precautions that we have taken.

With that in mind, ladies and gentlemen, let me move on to the quarterly results. The quarterly results reflect a quarter where we have lower copper prices than we had during the fourth quarter last year, and, again, all of our figures today will be based on the first quarter of '07 compared to the fourth quarter of '06, that is, quarter-to-quarter, and also comparing the first quarter of '07 to the first quarter of '06, that is, year-on-year.

Now, in terms of copper mine production, this amounted to 171,600 metric tons during the first quarter of '07 and represents a 4.4% decline on a quarter-to-quarter basis, due primarily to a drop in the ore grades of the Toquepala mine, slightly mitigated by an increase in our grades at our Cananea mine.

On a combined basis, ore grades on a quarter-to-quarter basis dropped by 2% and thereby explains the 4% decline, again on a quarter-to-quarter basis. On a year-on-year basis, we demonstrated almost a 7% increase in that copper mine production, and that is due to exactly the opposite. We have increasing ore grades compared to the first quarter of last year and thus higher mine production.

Total copper sold during the first quarter amounted to 151,000 metric tons. This was about 9% lower than the fourth quarter of last year, that is, on a quarter-to-quarter basis. And this is due primarily to certain disruptions that we experienced in the startup of the Ilo smelter and refinery, where we accumulated some significant concentrates. Ironically, this accumulation gives us certain advantages right now, as we have a certain amount of inventories at the Ilo smelter and are able to use this during the work stoppage in order to continue operations.

On a year-on-year basis, total production sold increased by almost 10%, and this is also a result of destocking. Total molybdenum sold during the first quarter of '07 amounted to 3,300 metric tons, representing an 8% decline on a quarter-to-quarter basis, also due to slightly lower ore grades, particularly at the Toquepala mine, and a 9% increase from last year, that is on a year-on-year basis, and this is also due to increases in ore grades at all of our mines regarding molybdenum, but also increased recoveries at the La Caridad mine in Mexico.

Copper prices amounted to a total of $2.70 for the first quarter of '07, representing a 15% decline on a quarter-to-quarter basis, but a 20% increase on a year-on-year basis. Zinc was an 18% decline, but a 54% increase on a year-on-year basis, and molybdenum represented a slight 3% gain on a quarter-to-quarter basis, but a 16% gain on a year-on-year basis.

When we combine the higher relative production on a year-on-year basis with the higher metals prices, we demonstrated a pretty good quarter. Total sales amounted to $1.1 billion, that is, 21% higher on a year-on-year basis, but -- excuse me, $1.3 billion, and that represents a 21% increase on a year-on-year basis, and a 17% decline on a quarter-to-quarter basis, due primarily to the lower copper prices.

Total cost of sales amounted to $473 million, a 15% increase year-on-year, but a 21% decline quarter-to-quarter. Here I'd like to emphasize that we've seen a flattening of these pressures and expect that there will no longer be significant up pressures in terms of costs, but the copper prices are significantly stronger, leading into the second quarter, and expect results to be very strong during the second quarter and going forward.

As a result of the relatively lower cost of sales and increased sales all in all, operating income amounted to a total of $787 million, up 24% from last year and down 17% quarter-on-quarter, due to the lower copper prices. Total EBITDA for the quarter amounted to $878 million, up 28% from last year and down 14% on a quarter-to-quarter basis.

Total net income for the quarter amounted to $563 million, up 33% from a year ago and down 11% from last quarter, that is, the fourth quarter of last year. That translates into a net income of earnings per share of $1.91 for the first quarter of '07, also of course a 33% increase on a year-on-year basis and an 11% decline on a quarter-to-quarter basis.

Total capital expenditures for the quarter amounted to $105 million. That is down 26% year-on-year and down 27% quarter-on-quarter, primarily due to the completion of the Ilo smelter modernization program and expect, again, the Ilo smelter to be operating normally towards the end of this quarter, that is, the second quarter.

Capital expenditures in the expansions of the Cananea SX/EW plant number three is underway and expect that plant to be operating sometime in 2009. We are also aggressively working on pre-feasibility studies or completing feasibility studies and basic engineering studies on several projects. That includes Tia Maria. It includes Los Chancas in Peru. It includes [el Larco] in Mexico. It includes two projects at the Cananea mine. One is a concentrator expansion and another one is a molybdenum plant construction.

With this in mind, ladies and gentlemen, thank you very much for joining us and we'd like to open up the forum for questions.

(OPERATOR INSTRUCTIONS)

Your first question is from Carlos de Alba of Morgan Stanley.

Yes, good morning, Eduardo, gentlemen. How are you?

Very good, thank you.

The first question is regarding the hedging program that you put in place in the first quarter. What was the rationale behind it?

Well, we will be very cautious in terms of hedging going forward. Of course, what we'd ultimately like to achieve is some sort of protection on the downside without limiting the upside for our shareholders and if you look at the small amount of collars that we have placed during the first quarter of this year, they do exactly that.

These are collars that guarantee a floor of $3.18 per pound of copper and a ceiling of approximately $4.04 per pound of copper. I emphasize this is only based on 6% of our production and would like to achieve more placements in this nature, but, again, we will be very cautious. We will not limit the upside, but we'll try to protect ourselves on the downside.

Good, thanks. And just a follow-up, or not a follow-up, but a follow-up question regarding the Asarco situation. Recently Asarco LLC filed a lawsuit against AMC, or Grupo Mexico, in which it argues that the transaction took place when Grupo Mexico bought PCU from Asarco was done following conveyance. What is the risk in case this lawsuit comes or is proved to be correct or the arguments to be correct in the courtroom? What are the risks to PCU?

That's a good question, Carlos, and let me emphasize again that we believe that there is no indirect or direct impact in Southern Copper's integrity regarding this lawsuit that is an issue between Grupo Mexico AMC, parent companies, of course, of Southern Copper, and their subsidiary, Asarco. I would much rather that you ask the same question to Grupo Mexico on their conference call on Wednesday regarding what possibilities they see that that may or may not impact Grupo Mexico.

But, again, from the Southern Copper point of view, there is no reasonable scenario where this may affect the integrity or ongoing operations of Southern Copper.

Thank you, Eduardo.

You're welcome.

Your next question is from [Avan Budbi] of International.

Avan Budbi, your line is open.

Hello, good morning. I've got two questions. Basically, one is on the provisional pricing and another is on the cost of sales. My first question is regarding this provision pricing. There was a provisionally priced contract on 31st December. I just wanted to know what was the impact on this quarter's revenue due to those provisional pricing contracts?

And my second question is on the cost of sales. I would like to know, out of this total cost of sales, how much is due to the purchase of external copper concentrates. Thank you.

In terms of your first question, we have a lower average copper price during the first quarter of '07 than we did during the fourth quarter of last year, so the provisionally priced contracts are actually negative. They impact negatively on the results. I believe the number for Southern Copper was somewhere around MXN45 million negative, but, [Raul], if you're listening, could you clarify if you have better information regarding the provisionally priced contracts?

Yes, thank you very much, Eduardo. Basically, we have for this adjustment we use the forward curve. In this case, we are doing itwith an average price for the option sales of $3.11. That was a different price than what we had at the end of '06 and right now we are having and adjusting the range for 83 million pounds of copper -- we don't have the detail on the impact of this on the current sales other than using this forward curve at $3.10.

And for your second question, could you repeat what that was?

Yes, it was regarding the cost of sales, like in some of the previous quarters last year, in the quarter still flowed higher because of the external party third-party purchases of copper concentrates. So I just wanted to know how much of this total cost of sales, how much is due to purchase of external third-party copper concentrates.

Okay, the number for the first quarter of '07 is approximately $48 million of cost in terms of concentrates purchased from third parties. This is in the first quarter of '07, and this compares to $34.6 million in the first quarter of '06. On cash cost or a per-pound basis, that's about $0.13 per pound of copper.

And if you don't mind, can I just ask one more question? Just like to know the effective tax rate in this particular quarter has been just 29%, compared to 32% in each of the previous quarters last year. So is there any particular thing, or we should assume 32% going forward?

We do have a slightly lower tax rate leading up to 2007 rather than that of '06. The effect here is twofold. Number one, in Mexico, the tax rate dropped from 29% to 28%, but also the relative weights in terms of what Mexico contributes to Southern Copper is different. The prior quarters, due to the disruptions in Mexico, Southern Copper's Peruvian operations were contributing about 60%, or over 60%, of the income.

This year, it is approximately or almost exactly 50/50, in fact, a little bit more skewed toward Mexico now, which is about 54% in the first quarter, contributed by Mexico and the difference, of course, by Peru. And, again, Mexico also taxed at a lower tax rate. So you should expect the all-in tax rate to drop somewhere around the 31% range or 30% range going forward.

Okay, thanks a lot.

The next question is from Victoria Santaella of Santander.

Hi, good morning, Eduardo. I have a brief question regarding your expectations in terms of the uses of all the cash that the company is accumulating. Are you guys going to pay down debt, increase CapEx? Can you give us an idea what is management planning to do with that?

And the second question is if you can give us an idea of how has been global demand for especially copper and moly lately?

Yes, in terms of our accumulation of cash, we are actually paying all of the excess cash, or everything that has been accumulated from the fourth quarter to the first quarter, which was approximately $450 million of net cash accumulation, we almost paid that entire amount in dividend, which amounted to $430-some odd million.

So in essence we are paying all of our excess cash in terms of dividends and trying to avoid negative carries. Nevertheless, we still have approximately $1.3 billion net in terms of cash at the end of the first quarter, minus, of course, the dividends. Some of that cash is being kept for certain capital expenditures that we hope to approve and fund going forward in the next forward months and quarters and the remainder is what we consider to be a relatively sound base in terms of minimum cash.

Of course, this will vary, because we have to pay taxes and so on and so forth and the number you see is not necessarily the free cash flow that we have accumulated, but, in any event, the main idea here is to avoid the negative carries, to keep only the amount of cash that we deem necessary for capital expenditures and operating purposes and pay the rest in dividends.

Thank you, and a brief comment on demand, global demand for copper and moly?

Well, as we all know, we've seen a pretty significant increase in terms of copper prices, up to $3.60 or so and back down to about $3.50, and molybdenum has also somewhat increased, although molybdenum has been far from its high levels two years ago, or almost two years ago, and is rather stable, staying at about the $27 range and sometimes going down to $22 and back up to $25 and so on and so forth.

But, in general, I'm sure you're all aware of the Chinese factor here. Consumption in China increased during the first quarter substantially and that led to significant drawdowns in terms of inventories, but also there is a significant amount of hedge fund activity that drives these metals prices up and down and a lot of volatility in the medium and short term.

However, I also would like to emphasize, and this is the same thing we said in the fourth quarter conference call, that we expect copper prices to remain very strong. It is difficult to give you a precise number in that sense, but we expect and continue to believe that there will be very strong copper prices going forward, and thereby allowing Southern Copper to continue to deliver very strong value to our shareholders, vis-à-vis dividends and share price increases.

Thank you very much.

Thank you.

Your next question is from Rafael Urquía of Citigroup.

Yes, good morning. My name is Gabriel Gonzalez. I work with Rafael Urquía and I was wondering if you would be able to provide us with a little bit more color with regards to the length of the strike, that is to say how long you expect this is going to be a lingering problem, especially in light of the fact that the outsourcing issue seems to be something that simply can't be settled and doesn't want to go away, whether perhaps these strikes will be resolved quickly but we could see further problems going down the road, again, because of the problem with outsourcing.

Good question, and we honestly feel that the strike should not last too long, given the very, very high probability, and the government has already indicated the nature of these strikes, which are illegal. As soon as they are declared illegal, it is usually the case that workers return within 48 hours to work. So the key here is to have the government move to declare these strikes illegal. We expect that will happen, at the longest, within the next two weeks.

And if that is the case, we expect disruptions to be relatively small. Of course, this is all I can give you at this stage, but we are confident that things will be resolved accordingly and workers will return within that timeframe, and perhaps even sooner.

Thank you.

You're welcome.

Your next question is from [Andres Cua] of GBM.

Yes, good morning. I was wondering if you can give us a little bit more color in terms of your improvement in EBITDA margin. Clearly, pricing has something to do with it, but is there a little bit more to it?

Yes, there's a couple of effects. Number one, of course, the higher metals prices, but I emphasize that we had higher byproduct credits compared to the first quarter of last year across the board. All prices were higher, but also all productions were higher, and this reduced the amount of third-party purchases in terms of concentrates. And you will recall that when we purchase from third parties, we buy these at a higher cost than it is to produce our own concentrates.

So this switch in mix also helped the margins going up to the first quarter of '07. And, finally, I'd like to say that cost pressures have somewhat flattened. Of course, there is an increase from the first quarter of last year, but they have flattened and in fact come down slightly from the fourth quarter of last year. So these are the three effects -- again, higher prices, higher provisionally priced contracts, cost controls and a reduction in third-party purchases.

Okay, great, thanks.

Our next question is from Alonso Arambaru from Santander.

Yes, good morning. I was wondering if you can give us a little more color? You mentioned that you don't expect more pressures on the cost side for the rest of the year. I was just wondering if you could just give a little more color on that.

It's of course very difficult to give you a prediction of where costs are going to go, but, again, our feeling is that these cost pressures have somewhat flattened out. We do not expect any significant cost pressures going forward, but we do expect copper prices to remain relatively strong, so margins ought to remain very strong going into the next few quarters.

What were your cash costs this quarter?

The total, or the net cash cost, was $0.047 per pound of copper, approximately.

And excluding byproducts?

But before byproduct credits, $1.27.

Thanks, I guess one last question, a follow-up on the strike. I understand that the Ilo smelter workers started a strike on Saturday. Is that because they have different demands than the rest of the mining workers, or not?

Well, these are different unions, and one of the unions is that the dates in terms of where they can negotiate contracts be tied to all across the unions, and this is one of the particularities that some of the unions are asking for. Also, the Ilo smelter wanted perhaps to make some sort of point regarding that they were asking for wage increases, which is something rather typical in this market situation. And they wanted to strike right before everyone else did to make some sort of a point that would make them unique.

But the basic and the fundamentals of all of these strikes are the same.

Okay, thank you.

You're welcome.

There are no further questions.

Okay, ladies and gentlemen, well, thank you very much for joining us again in the first quarter results for Southern Copper. We hope to see you in the Grupo Mexico conference call 48 hours from now. Thank you very much.

This concludes today's conference. You may now disconnect.