Southern Copper Corp (SCCO) 2007 Q2 法說會逐字稿

Good morning and welcome to Southern Copper Corporation's Second Quarter 2007 results conference call. With us this morning, we have Southern Copper Corporation Mr. Jose Chirinos, Chief Financial Officer; Mr. Raul Jacob, Head of Investor Relations, who will discuss the results of the Company for the second quarter and answer any questions that you might have.

The information discussed on today's call may include forward-looking statements regarding the Company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially and the Company cautions to not place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Our results are expressed in fully U.S. GAAP.

Now, I will pass the call to Mr. Raul Jacob.

Thank you very much, Brittany, and thank you everyone again for joining us for the second quarter 2007 results for Southern Copper Corporation. Today, we have with us Mr. Oscar Gonzalez Rocha, who is our Chief Executive Officer; and Jose Chirinos, who is our Chief Financial Officer. I leave you with Jose Chirinos, who is going to do the first segment of this conference call.

Thank you very much, Raul, and thank you everyone again for joining us for the second quarter 2007 results for Southern Copper Corporation. Copper prices production and sales. The LME average copper price was $3.47 per pound in the second quarter of 2007, 6.1% higher than $3.27 per pound average in the second quarter of 2006, and also higher than the copper price for the first quarter of 2007, when it was $2.59 per pound.

During the second quarter of 2007, copper production was 351 million pounds; 28.1% higher than the 273.9 million pounds of production in the second quarter of 2006, lower than the 378 million pounds of copper produced in the first quarter of 2007. When compared with the three first months of 2007, copper production decreased due to lower production from the Toquepala mine in Peru, as a result of lower ore grade and lower mineral milling from the Cananea mine due to a major repair in the tailing disposal system.

Smelters and refinery copper production was lower by 16.3% and 2.4% respectively when we compare to the second quarter of 2006. This variance results from the ramping up of the modernized Ilo smelter in Peru. We are pleased to report that the nominal and design capacity for the Isasmelt furnace, the most important component of this facility, was reached in less than 45 days. Compared with other smelting furnaces using this technology, the start-up of the Ilo smelter has been achieved in the shortest time. Also, the sulfur capture during the second quarter was 97.6%, higher than the 92% required by the Peruvian regulations. We expect this project to be at full capacity during the third quarter of 2007.

Copper sales were 356.2 million pounds, 80.2% higher than the 329.2 million pounds sold in the second quarter of 2006. As you may have noticed, there is no direct correlation between the production increase of 28.1% and the sales increase of 8.2% when comparing 2007 figures with 2006 ones. The difference is due to the replacement of third-party copper sold in 2006 by SCC Copper. Since third-party copper is much more expensive than our own production, this equates to a higher return on sales. We will revisit this in a few minutes when we discuss costs.

Molybdenum prices, production and sales. Molybdenum prices were $30.41 per pound, 26% higher than the 2006 second quarter average price of $24.22 per pound and 18% higher than the first quarter of 2007 average of $25.81 per pound. Molybdenum production increased from 5.1 million pounds in the second quarter of 2006 to 8.6 million in the first quarter, a positive variance of 69%. The higher production resulted from improvement in the recovery of La Caridad production, which added 3.5 million pounds of additional molybdenum production, explain this increase.

When compared with the first quarter of 2007, second quarter 2007 was -- had 6% higher production. Due to the better production, sales volume of molybdenum increased from 5.2 million pounds to 9.1 million pounds, a positive variance of 75%, helping significantly to the profitability of our operations.

With respect to zinc prices, production and sales, zinc prices during the second quarter of 2007 averaged $1.66 per pound, higher by 11% when we compare to the second quarter of 2006 price of $1.49 per pound. The average price of the first quarter of 2007 was $1.57 per pound. Mined zinc production was 73.6 million pounds in the second quarter of 2007, 5% higher than the 70.1 million pounds produced in the second quarter of 2006. Second quarter zinc production was also higher than the 71.3 million pounds produced in the first quarter of 2007. The increase in production between the second quarters of 2007 and 2006 resulted from higher production at the San Martin mine, where an illegal stoppage in the second quarter of 2006 reduced production, and from better ore grades and recoveries in our other sub operations.

It should be pointed out that our refined zinc production increased to 42.3 million pounds. This figure compares with 2006 second quarter production of 12.3 million pounds. The 244% production increase of refined zinc results from the recovery of operations at SCC's zinc electrolytic refinery located in San Luis Potosi in Mexico. As you know, this facility resumed operations in October of 2006 after an electrical fire seriously affected it at the beginning of the year. Zinc sales included -- including concentrates and refined materials were 70.1 million pounds in the second quarter of 2007; higher by 16% than the 60.5 million pounds sold in the same period of 2006 and 7% higher than 65.6 million pounds of zinc sold in the first quarter of 2007.

Net sales. Due to the higher prices and volume increases, our sales were $1.8 billion in the second quarter of 2007. This figure compares very favorably with a total sales for the second quarter of 2006 of $1.3 billion, an increase of 43%. For the first quarter of 2007, sales were $1.4 billion.

Cost of sales. Cost of sales amounted to $562 million in the second quarter, an increase of 7.8% from the $522 million in the second quarter of 2006. The increase in cost of sales in the second quarter of 2007, as compared to the second quarter of 2006 is principally due to $57.5 million of higher production costs as a result of the higher strike-free production in our Mexican operations, offset by a reduction of 113.2 million in purchases of copper concentrate on the open market made in 2006 due to the strike activities. Other factors, increase in cost of sales include an increasing workers participation of $27.5 million, a loss in translation difference of $17.2 million due to the appreciation of the Mexican peso against the U.S. dollar, a consumption of inventory of $32.1 million and $11.3 million of higher sales expenses mainly due to the sales of excess copper concentrate in our Peruvian operation due to the Ilo smelter ramping up.

The company cash costs known in our industry as [CIG1] was negative $0.295 per pound in the second quarter of this year. This figure compares with a positive cash cost of $0.405 per pound for the same period of 2006. Excluding the effect of the byproduct revenue, cash cost was $1.32 per pound lower than the $1.50 per pound of the third quarter of 2006. For the first quarter of 2007, cash cost averaged more than [$0.047] per pound.

Operating income and EBITDA. As our sales increased by 43% and our operating costs and expenses only by 8.5%, the Company's operating income amounted to $1.145 billion in the quarter, which compares very favorably with last year's second quarter operating income of $649 million, and the $787 million obtained in the first quarter of 2007. EBITDA for the second quarter was $1.2 billion, a Company record and 61% higher than last year's second quarter EBITDA of $735 million and also higher than the 86 -- $61 million obtained in the first quarter. The EBITDA margin is 65% of sales, higher than 58% of sales registered in 2006.

With respect to net income, second quarter 2007 net income increased to $726 million from $439.3 million in the second quarter of 2006, an increase of 65% and amounted to [$2.465] per fully diluted share compared to $1.49 per fully diluted share for the second quarter of 2006.

Derivative activities. I would like to comment briefly on the scope of some of our derivative activities in the periods we are reviewing. As you know, we have recorded significant losses from copper derivative activities in 2006 periods. In the second quarter of 2006, we recorded a sales reduction of about $258 million due to losses on copper derivatives. In the second quarter of 2007, we are pleased to note that a gain of $3.3 million was recorded in sales due to copper derivative activities. As of June 30, 2007, we have in place copper collar contracts running from July to December for 146.2 million pounds with minimum and maximum LME prices of $3.20 per pound, and $4.07 per pound -- to be clear, $4.07 per pound.

Additionally, we have in place copper swap contracts for 7.9 million pounds of third quarter copper sales at an average COMEX price of $3.71 per pound. We expect that these contracts will ensure a positive return for our shareholders. Additionally, I would like to add there is certain investment we hold -- that contain embedded derivatives. We began making this investment in 2006 and they are reported under marketable securities on our balance sheet. At June 30, 2007, this investment has a face value of $340 million and a net value of $276.2 million after deducting evaluation account recorded in current liabilities.

Investments were made to enhance the return on our cash balance. Unfortunately, we have suffered some losses both realized, and unrealized on this investment. In the second quarter of 2007 and the first six months of 2007, we have recorded losses of $50.8 million and $81.6 million respectively.

The respective capital expenditures -- capital expenditures including exploration expense amounted to $90.8 million during the second quarter of 2007, a slight decrease compared to the second quarter of 2006, due principally to the completion of the Ilo smelter modernization in January 2007. Additionally, the Company's crushing and conveying project at the Toquepala unit is in full production. The primary crusher and associated overland conveying system are fully operational. Construction of the operating ramp had placed 51.6 millions tons of material and was completed in the second quarter of 2007.

We plan to construct a new SX/EW plant at the Cananea mine with an annual copper production capacity of 33,000 metric tons. Proposals for an engineering, procurement and construction management contract have been received and are being analyzed. In conjunction with this project, we are developing a crushing and conveying system project with a 15 million metric tons per year capacity.

Regarding the expansion projects at the Cananea mine, the concentrator expansion is under a technical and economic evaluation. The expanded concentrator would add 33,000 tons of copper content per year and would begin production in the year 2009. In parallel, due to improving molybdenum grades, the Company also plans to build a molybdenum plant to produce concentrates with approximately 4,000 tons of molybdenum content per year. We have completed the basic engineering and we are analyzing alternatives of the detailed engineering.

Regarding the Company's exploration activities, a pre-feasibility study at Los Chancas, a copper-molybdenum property in the southern Peru is in process and we expect it to be completed in this quarter. Additionally, a feasibility study for Tia Maria, a copper oxide deposit in the region of Arequipa, Peru is in process. This study should also be completed this quarter.

In addition to these Peruvian properties, we are planning to develop our Mexican properties at El Arco in Baja California and Angangueo in Michoacan. We expect to go forward with the development of these Mexican properties as well the expansion of the operating properties once we believe that the necessary financial and governmental requisites have been obtained.

With respect to the payment of dividend declared, it is the Company policy to review at each Board meeting the capital investment plan, cash resources and expected future cash flow generation from operations in order to determine the appropriate quarterly dividend. Accordingly, the Company declared a quarterly dividend of $1.60 per common share to be paid on August 31, 2007 to common shareholders of record at the close of business on August 14, 2007.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jorge Beristain.

Hi, Mr. Chirinos, it's Jorge Beristain with Deutsche Bank here. I just had a question about the cash -- sorry, the cash cost of production which seemed to be rising, and I understand that a part of the quarter-on-quarter increase, roughly $0.10 per pound, was due to increased profit sharing with workers. I was wondering if you could share with us a kind of sensitivity at current copper prices that we are seeing now in the third quarter if you expect that level of profit sharing to increase quarter-on-quarter going into the third quarter?

Jorge, thank you very much. With respect to this, that was something extraordinary between the first and second quarter. This increase, it's something that's happened in Cananea that Mr. [Oscar Gonzalez Rocha] kind of explained that that's -- or Mr. Gonzalez, and there are as you noted we are containing and controlling the costs. There are some things -- exceptional of course, in this respect. But the current costs are well controlled. With respect to the increase of the worker participation, it's due to the higher results -- economic results, so this is the basis is the profit between -- excuse me, profits before taxes and that is increasing due to the prices and production and so on. That's why it is increasing.

Yes. But, sorry, could you give us a sense if this is going to increase again in the third quarter versus the second quarter?

If this is going to increase, if the profit before taxes increases, the prices are in the same level and the costs are also controlled, or that we have better prices, that's going to increase consequently.

Okay. Thank you.

Your next question comes from Felipe Hirai.

Hi, good morning everyone, I have two questions. The first one is regarding the derivatives that you are using. You mentioned that you booked a loss of $50 million on investments and looking at your income statement, I see a loss of $55 million in -- booked on the line of losses on derivatives instruments. Could you explain me again what happened there, because you also mentioned that you had a gain of $3.3 million in derivatives? So, this would be my first question.

And my second question is regarding your other expansion projects. If you have any first -- if you any -- could you give us any guidance on the total cost of the expansion project in the Cananea, the one that you mentioned, the 33,000 tons, and also about the -- Tia Maria or Los Chancas and El Arco as well? Thank you.

Okay, thank you, Felipe. Of course, we have many, many questions in one question. I would like to ask Raul to answer with respect to the last part of the question.

Regarding the CapEx for our Cananea, Los Chancas and Tia Maria for the total package of expansions that we are considering, what we call the first generation has currently cost in the range of $400 million of total CapEx. I should point out that we are currently doing a pre-feasibility study in Tia Maria and there is reasonable chance for an upgrade of the pilot production which is right now 43,000 metric tons of copper per year and that number may increase. If the number increased of course, we will see an increase in CapEx related to the Tia Maria project, but so far, the Cananea expansions in SX/EW as well as the concentrator and molybdenum plants, the Tia Maria project have a total CapEx of $400 million.

Raul, could you -- do you have the -- what's the CapEx only for Tia Maria and what's the CapEx for all -- the Cananea project?

At this point, I think that we will be --

Raul, if you want I can explain about Tia Maria, Tia Maria as you mentioned is going to be maybe increased. We are, with Bechtel, with the feasibility study. But, right now, we have a possible production of 90,000 tons of copper content from oxides and the cost will be around $700 million. But, in this $700 million, we are preparing some of the costs for the sulfur exploitation that will be later because we are finding more results in these deposits and we can go for floatation after the leaching operation. That is for Tia Maria. I don't know if that answers your question and Raul, you can continue with the rest.

Sure, thank you.

In the case of Los Chancas, we have a budget that is about to change because we are finishing the pre-feasibility study of Los Chancas in the third quarter, so I think that we better wait for the news from our consultants on this matter. In the case of the derivatives, Jose Chirinos will explain what the Company has recorded and what's the current position on that.

Okay, with respect to the $3.3 million gain, it is recorded and shown in the net sales line, because it corresponds to the copper sales. And with respect to all, there are -- you were asking some detail, in our next 10-Q report, we will show in detail what's going on as we did in the previous quarter.

Okay, thank you.

That answered your questions, Felipe? Okay.

Your next question comes from the line of [Donald McLaughlin].

Yes, good morning. I have a couple of questions. I am interested in your outlook for the copper market for the coming quarters, pricing, demand, what are you seeing out there, and then what's the risk of additional capacity disrupting whatever market dynamics? And then, also, I am curious about the situation of this -- of the Asarco litigation, if there is any risk of a ruling that would hurt or reverse the corporate restructuring?

Donald, on the market, what we see is basically a market that is extremely tight. As you know, copper inventories are less than a week right now and it has been in that extremely low level for quite a while. At the first half of 2007, it is clear that the Chinese market has restocked their inventories of copper. We have found evidence that that has stopped already and we believe that for the second half of the year, the market should be relatively balanced, but responding to a very strong economic growth in the world. As you know, the GDP growth for the world economy, it's between 3% and 3.5% according to different estimates and that gives you support for having, in general, basic materials with strong demand and in the case of copper, since supply is not responding as it was expected, we are having certainly a very tight market. I hope that it clarifies your concern.

Yes, it does. Thanks. And what about the Asarco?

Donald, sorry about the Asarco question, but we cannot answer that (inaudible) of this conference.

Okay, understood.

Your next question comes from the Victoria Santaella.

Hi, Mr. Chirinos, good morning and congratulations on the great results. I have two brief questions. Number one, if you can give us some idea on the grades of Toquepala mine going forward, are we going to continue seeing declines there? And number two, if you can elaborate a little bit on the decline on the smelting -- on the smelted copper during the second quarter and should we -- what should we be looking for next year in that line as well?

Okay, thank you very much, Victoria. I would like to ask Mr. Oscar Gonzalez to answer your questions.

Yes, about the grades in the Toquepala mine, within that, we are going to improve a little bit for next year. Right now, we are in the order of 0.7, 0.73, and I think that we are going to increase to 0.75 for next year. That is about grades. And I didn't recall the second part of your question.

My second part of the question is the perspective on the declining production of your smelted copper?

That -- like was mentioned in the discussion of Mr. Chirinos, it's because of the ramping up of the smelter. But, right now, we expect that in the third quarter, we will be at the normal capacity and that is smelting in the order of 3,400 tons of concentrate. Right now, we are in the last three weeks of July. In 3,000, that is a little more than 85%, then we expect that we will comply with that and we will not have any more problems in the future.

Thank you. And one last question, if you can comment in general, are you experiencing any bottlenecks with equipment that you might want to acquire in the market in order to continue with your CapEx plan? Is there any changes in your long-term growth planning given the tight markets and as I mentioned before, the scarcity in some cases of tooling, machinery and so on in the mining industry.

No, we don't expect any problem at all, and of course in the new production floor, our expansions in Toquepala, Cuajone and the new projects in Tia Maria, Los Chancas or in Cananea, we will let as soon as we have a result from our feasibility study and start doing the connection with the fabricators in order to have everything that we will need on time.

Thank you very much.

Your next question comes from the line of [Vedant Duvet].

Hi, basically I have got two questions. The first question is about the volumes of mined copper. As I see, there's a decline in the mined copper production compared to the first quarter of 2007. I just wanted to know why is there a decline in the mined copper production? In the first quarter, the production was around 378 million pounds and the second quarter, it's approximately around 351 million pounds. I am just interested to know why there is a decline in production, and in the light of the recent labor problems, is there any revised guidance on copper production?

And my second question is about [dig] cost. As I said, there has been a decline in the mined copper production, but the cost of production has actually gone up. In the first quarter, the cost of production was approximately $466 million. In the second quarter, it's $552 million. So, there has been a decline in production, the costs have actually gone down -- gone up, so I just wanted to know why there is an increase in cost, and do you have any guidance for this full year on cost? Thank you.

Felipe, Mr. Oscar Gonzalez will comment on your question.

Okay. The high cost that we have in the second quarter mainly was because of the expenses that we have in the Cananea mine, because of rupture of a pipeline, water pipeline, to feed our concentrator and we need to replace it completely including something, there's problems in the same concentrator and that cost and the cost of energy that is high in Peru and in Mexico is doing this extra cost and we hope that the energy cost is going to continue, but we hope that the extra cost that we need to spend for this changing of the pipeline will reduce the cost from the second quarter and the third quarter. And the other part of your question was what, Felipe?

I wanted to know, do you have any guidance for the cost for the full year -- for the full year. And my first question was, why there has been a decline in the copper production compared to first quarter.

That is the same reason that our concentrator in Cananea for the full month of June, we don't have that production at full capacity, was 40% of the capacity, and some reduction in the milling of Toquepala that is what this that was less production in the second quarter. But, we hope that for the third quarter, because the pipeline in Cananea is already fixed in the middle of July, will be better in the third quarter and the same in Toquepala because we are going to increase our production because of the grade and because of the equipment that we are using closer to the mine, the crushing equipment.

Do you have any guidance on the full year production numbers and the cost numbers?

I think that our copper production will be very close to the 170,000 tons like we have in the first quarter of 2007, and the cost I hope that we will be able to come back to some of our figures of last year of $0.65 that we had in the year 2006. But, remember that this year because of the oil prices and the energy are getting higher and is difficult that are coming back now. But, we hope that with the extra production, we will reduce the cash cost or the operating cash cost.

Thank you, thank you very much.

Your next question comes from the line of Yuri Maslov.

Yes, hello. Actually, I have got two questions, if I may. One is on the moly production, because it seems that your moly production is quite strong. So, I was wondering if you had any guidance on moly production for full year '07, is it going to be like 12,000 tons like in '06? But, it seems to be it's going to be higher than that. And related question to that is, if you start producing additional 4,000 tons of moly from 2009, what's going to be the combined output then, is it going to be 18,000 or 19,000 tons, or if you could give some clarity around that? So, that was my first question.

And the second question is about your feasibility studies that you mentioned today on Los Chancas and El Arco because if I remember correctly, they are part of the third generation. Very few are doing feasibility studies now. Does that imply that you are going to bring potentially production earlier than initially expected? Thanks.

Yes, about the moly production, the reason was the Caridad grade was 0.037 that is higher than last quarter's and is going to continue high in the mine of Mexicana de Cobre. And in Toquepala, the grade was at the same time 0.038. But, in Caujone, it was at the normal 0.024. We think that our production for this year is going to be very close to the last year production. Remember that we mentioned that in Peru operations, we will have a shortage of 8% in the production of moly because of the grades, and in Mexico, is a increase. Then within that, we are going to be very close to the figure of last year. And after Cananea, we will have this moly plant ready. Definitely, we are going to go in the figures that you mentioned in the order of 16,000 tons of moly.

About the -- about the El Arco, I think that like was mentioned, really -- we believe that the -- when we will have ready the financial and the government requisites have been obtained, and mainly because we don't have any infrastructure in that area, and we are studying that again and making a feasibility -- a revision of our feasibility story that we did a long time with some engineering firms, we will decide if we will continue with that. But, it's one of our intents to have that project in operation as soon as we can.

Okay, thanks.

Your next question comes from the line of Felipe Hirai.

Hi, good morning again. So, I have just one final question regarding your growth strategy because in the last quarter you were mentioning the potential on new acquisitions that you could have. How has that changed in the past few months due to the current level of consolidation in the market or are you still pursuing new acquisitions?

Okay, Felipe, thank you. Our strategy is to, at present to develop the projects that we have mentioned and probably, as it was explained before, to increase the capacity of our present facilities.

Okay. But, do you still consider new acquisitions or not?

No, not right now. We are not, with this kind of investment that we are thinking for our own operation, we don't think that we are in the position right now unless it's something that is very attractive, but we don't think so.

Okay, thank you.

Your next question comes from the line of Oscar Cabrera.

Good morning gentlemen. I just have a couple of follow-ups on the questions that you already obtained. I apologize if you heard this, I just joined the conference late, you have accomplished (technical difficulty) some of your expansion projects (technical difficulty)

We can't copy you right, Oscar.

Can you hear me?

Oscar, no, no, we are not hearing you very well, being cut in your transmission.

Okay. Now look, I will call you back later on, thank you very much.

Thank you for your time.

Your next question comes from the line of Jorge Beristain.

Hi, just a follow-up on the CapEx. I just didn't quite catch what you were saying of your generation one projects, which I understand it's Cananea, Los Chancas and then you also have mentioned Tia Maria thrown in there. And I think you quoted the total being $400 million for the CapEx for those three projects. Could you just clarify what the growth CapEx is for your generation one projects?

Yes. I am sorry if I mislead you on that, Jorge. But, the first generation of projects comprised of four projects. They are the following. The SX/EW plant at Cananea that will add 33,000 metric tons of copper production per year, the expansion of the Cananea concentrator that will add 33,000 -- another 33,000 metric tons of additional copper production per year, the molybdenum plant in Cananea that will produce 4,000 metric tons of molybdenum per year, and Tia Maria that at this point has an official estimate of 43,000 metric tons per year. Those four projects have an estimate cost of $400 million.

Now, was explained in Tia Maria, we are doing the feasibility study and there are several options that may increase the CapEx that we are currently having in our estimate. That's where we are. In the case of Los Chancas, Los Chancas is not a project of our first generation package, it's a project of the third generation, it's a greenfield project as you know, and we are doing the pre-feasibility study on that project. Even though we have forecasts for CapEx on Los Chancas, we are currently about to receive in the third quarter our pre-feasibility study on this matter and would like to maintain the CapEx number still unadjusted for Los Chancas.

Okay, I understand. Thank you.

Jorge, the thing -- this is Oscar Gonzalez, the thing is that we are in process of the feasibility study and we don't have the real feel right now, but I will mention in Tia Maria, is a possibility that it will be a double of production of 90,000 tons instead of 43,000 and that of course is going to cost more. But, we are not going to have the results until the end of the third quarter of this year. Bechtel in Santiago, Chile is doing these studies for us and it is still development, some analysis, and when we will be ready, we will let you know about this.

Okay, thank you.

And there are no further questions at this time.

Thank you very much, ladies and gentlemen for joining us this morning and thank you very much again. Bye-bye.

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