Southern Copper Corp (SCCO) 2007 Q4 法說會逐字稿

Good morning and welcome to the Southern Copper Corporation's fourth-quarter 2007 results conference call. With us this morning, we have Southern Copper Corporation, Mr. Genaro Guerrero, Chief Financial Officer and Mr. Raul Jacob, Head of Investor Relations, who will discuss the results of the Company for the fourth 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 risk 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 statement whether as a result of new information, future events or otherwise. All results are expressed in full US GAAP. Now I will pass it on to Mr. Raul Jacob.

Thank you very much, Andrew and thank you, everyone, again for joining us for the fourth-quarter 2007 Southern Copper earnings conference call. As you know, the Southern Copper Board recently appointed Mr. Genaro Guerrero as Chief Financial Officer of the Company. Before I leave you with him, let me give you some background information on Mr. Guerrero.

Genaro Guerrero is an industrial engineer that joined what today is Minera Mexico in 1983. During his long career with our Corporation, he has served in several positions in the finance area of Grupo Mexico and Southern Copper. Among them, Minera Mexico's Treasurer and CFO of ASARCO. Before being appointed as new CFO of SCC, he held a financial role in Southern Peru Limited, a subsidiary of Southern Copper.

Mr. Oscar Gonzalez Rocha, our CEO, will also participate in today's conference call. I leave you with Genaro Guerrero.

Thank you, Raul and well, good morning, everyone. I am very glad to participate for the first time in this conference call and the agenda that we are going to try to cover today is including prices, production and sales volumes. Then we are going to review some of our financial results, capital expenditures and then after that, we are going to open our session for questions.

Before we go into the details on the fourth quarter of 2007 and the year of 2007, I would like to mention that Southern announced today this morning a share purchase program authorizing the Company to repurchase up to $3 million of Corporation's common stock. The share purchase will take place from time to time based on the market conditions and some other factors that have to be analyzed in its opportunity.

The repurchase program has no expiration date and may be modified or discontinued at any time. Any shares acquired will be available for general corporate purposes. The Company intends to finance the share repurchase program through available cash.

Now after that, let's focus now on the fourth quarter '07 and the last year's performance. But before that, I would like to say that even though the last quarter results have been affected by the illegally striking Cananea, their earnings for the year of 2007 has represented a record high for Southern Copper Corporation. This has been a consequence of very good average metal prices, especially in two of our main products that are copper and molybdenum and also we have got a very nice increase on molybdenum production and of course, in the sales of that metal.

But let us start first with copper prices. The LME fourth quarter of 2007 average copper price was $3.26 per pound. That represents 2% higher than the same quarter of 2006. The average price for the full year of 2007 was $3.23 per pound, 6% higher than the $3.05 per pound in 2006.

The 2007 copper market was characterized by a strong demand and a weak supply response. The US House in downturn impacted global demand by about 1% and at the same time, the emerging economy's growth on the world copper demand, of course led by China, increased by 5% in 2007.

For 2008, we think that the strong demand of emerging economies will overcome any weakness of volatility coming from the developed economies. On the supply side, new projects and expansions that would contribute with more copper will be somehow offset by lower production from existing operations, as well as delays on capital goods deliveries, technical and labor problems at the operations.

The full-year 2007 copper production was 1,306 million pounds, only 2% lower than 2006. The fourth-quarter mined copper production was 278 million pounds. This production was 30% below the 396 million pounds of copper produced during the fourth quarter of 2006. The reduction of 180 million pounds in production quarter to quarter was mainly as a consequence of Cananea's illegal stoppage and a lower ore grade at Toquepala mine in Peru.

Since I have now mentioned the illegal stoppage at Cananea, let me update on where we are in the situation of this facility. On January 11, as probably you know, the Mexican Labor Ministry through its Federal Arbitration and Reconciliation Council declared the strike illegal and asked the workers to be back at their jobs within 24 hours. The return to regular production will be gradual due to the rehabilitation of the installations. At this time, one of our SX/EW plants in Cananea is back to work and we are expecting the second one to be producing in the next following weeks.

Considering our expected ramping up of operations, Cananea copper production will be around 300 million pounds in 2008. That represents 38% higher than the 217 million pounds produced during 2007.

Now in respect to the 2008 copper production plan, Southern Copper Corporation is expecting to produce 1.4 billion pounds of copper. The smelter and refining operations in terms of copper production, the Peruvian Ilo smelter has reached full capacity during the fourth quarter after its modernization. During this smelter modernization and environmentally-driven project -- I'm sorry -- I am very enthusiastic to report to the market that the average sulfur capture of the smelter was 95% in 2007, higher than the 92% required by Peruvian environmental regulations.

The smelting and refining production was lower by 32% and 37% respectively for the fourth quarter 2007 compared to the fourth quarter 2006. The production plan for 2008 is 1.2 billion pounds for the smelter production and around 1.2 billion pounds for refined copper production. This is including the SX/EW production.

Now, let's talk about copper sales for the fourth quarter 2007, 293 million pounds were sold, 28% lower than the 404 million pounds sold in the fourth quarter of 2006.

Shifting to the molybdenum, the molybdenum prices were $32.10 per pound for the full quarter of 2007, 28% higher than the same quarter in 2006. For the full year, the average price was $29.9 per pound, 23% higher than 2006. For the full year, molybdenum production increased 37% from 26 million pounds to 36 million pounds. During fourth quarter '07, molybdenum production increased 15%, growing from 8.2 million pounds to 9.4 million pounds. These production increases were the result of higher ore grades in the Toquepala, Cuajone and Caridad mines.

Due to such a production increase, fourth-quarter molybdenum sales volume increased from 8.7 million to 9.7 million pounds, 11% positive variants and a 40% positive variance for the full year compared with 2006. The better molybdenum prices combined with the production increases contributed significantly to Southern Copper Corporation's profitability in the fourth quarter and in 2007. Southern is expecting to produce 33 million pounds of molybdenum for 2008 year.

Well, that has been a relation of prices, production and sales volumes and now I would like to comment on some of our financial results. The sales for the year of 2007 increased to a record of $6.1 billion from $5.5 billion. This is basically the result of higher average copper and molybdenum and silver prices and higher molybdenum volumes as we have mentioned.

Net sales in the fourth quarter of 2007 decreased $355 million when compared to the fourth quarter '06. The decrease in net sales was the result of lower volumes sold of copper, zinc and silver. The lower volumes sales were partially offset by higher molybdenum and silver prices and higher molybdenum sales volume.

Copper prices, protection swaps during the year have been included in net sales. These swaps were favorable for around $8 million during the quarter, during the last quarter and for the full year, $11 million.

Now talking about costs, total operating costs for the fourth quarter '07 were $664 million compared to $682 million in the same period of 2006. Cost of sales at the Mexican unit decreased by $71 million due to the strike. Workers participation and mining royalties also decreased the cost by $23 million during the period.

But on the other hand, $37 million of higher cost was recorded from our Peruvian operations due to higher labor, higher fuel and power costs. An increasing third-party concentrate purchase explained the remaining difference of the $48 million reduction in Southern Copper Corporation's cost of sales.

Now going a little bit down in the P&L, our administrative expenses increased $9 million. This is basically due as a result of adjustments in the retirement plan for Mexico and the appreciation of the Peru currency in respect to the dollar and some increase in consulting fees. The depreciation, $11 million more, due to the capitalization of the Ilo smelter modernization project and higher amortization of leach material costs. In relation with exploration, $10 million higher after including the cost of Tia Maria feasibility studies and Los Chancas pre-feasibility study, both of them finished during the last quarter of the year.

Now talking about EBITDA, for the full year 2007, EBITDA increased by $448 million, $3,765 million, equivalent of 62% of sales, compared to an EBITDA of $360 million in 2006. Year-over-year, net sales decreased by 22% and operating costs and expenses by 3%, yielding an operating income reduction of 35%.

The Company's operating income amounted to $630 million in the quarter, which compares unfavorably with last year's fourth-quarter operating income of $968 million. EBITDA for the fourth quarter was $712 million, 30% lower than last year's fourth-quarter EBITDA of $1,020 million. The EBITDA margin was 55% of sales, lower than the 62% of sales registered in 2006.

Now, the net income for the year of 2007 was $2.2 billion, 9% higher than the $2 billion achieved in 2006. Fourth-quarter 2007 net income decreased $311 million from $655 million year-over-year, a 52% reduction. Earnings per share amounted to $1.06 per fully diluted shares compared to $2.23 per fully diluted shares for the fourth quarter of 2006.

During the fourth quarter, a non-cash charge to income tax of $90 million was recorded to recognize the effect on taxes of Minera Mexico's dividends paid to Southern Copper Corporation during 2007.

Now, our capital expenditures. The capital expenditures, including exploration expense, amounted $82 million during the fourth quarter of 2007. Our year-over-year decrease when compared to the $131 million expended in the fourth quarter of 2006. The difference comes from the completion of the Ilo smelter modernization and that happened in January 2007.

The Company has an investment program that will increase total copper production in about 270,000 tons by 2011. The 39% increase in production will be achieved at a capital cost of $2,108 million dollars.

As has been informed to the market, the program is focusing on a group of projects based in Peru and let me inform you on new developments regarding these projects. The first one is the Tia Maria project. This project is located in the Arequipa region. The total resource is 638 million tons of mineral with an average copper ore grade of 0.39%. When finished, this project at the end of 2010 will produce 120,000 tons of copper per year for the next 19 years. The Company is currently beating the dry and wet areas of the project and the 2008 budget for the project is $65 million.

On the expansion for the Toquepala and Cuajone mines, as well as the Ilo metallurgical facilities, the Company has started the process for contracting feasibility and environmental impact studies. The results of these studies are expected to be ready at the end of 2008. The total budget of these studies for the year of 2008 is around $36 million.

For 2008, the Company capital expenditure [saturized] amount is $530 million. Out of those, $100 million will go to the Peruvian expansions that we already mentioned and around $150 million will be for maintenance capital in Peru and Mexico and the remaining will be used for several projects that will improve, of course, our Southern Copper Corporation's productivity.

Now talking about payment of dividends, the policy of the Company is to review through each of the Board meetings the capital investment plan, cash resources and expected future cash flow generation from operations in order to determine the appropriate quarterly dividend. Then accordingly, the Company declared a quarterly dividend of $1.40 per common shares to be paid on February 29, 2008 to common shareholders of record at the close of business on February 12, 2008.

Well, that is basically what I have to report through this conference call and then I would like to open the forum for questions. Thank you very much for your attention.

(OPERATOR INSTRUCTIONS). Oscar Cabrera.

Good morning, everybody. A couple questions, please. On the first one, can you tell us what your expectations for zinc and silver production are for 2008, as well as lead?

Oscar, how are you doing? This is Genaro and well, in respect of zinc, our guidance for 2008 zinc production is 300 million pounds of production for the year.

For silver, it should be around the same that we have been producing in 2007 depending on when the Company solves the problem for the IMMSA units that are on strike. That number will go up, obviously. Lead will maintain our current production trend.

This is where the question was going. There have been reports that perhaps a couple of the mines in Mexico will be closed. Do you foresee any closures on your mines on the zinc/lead side?

Yes, this 300 million pounds of zinc already are including the decision on the closing or the stop of operations in Taxco. The Company has decided to stop that mine. The Company is going to continue exploring the mine and continue having it, but at this time, the decision is to stop operations.

Thank you, Genaro. And then secondly, on your CapEx expenditures, you have a budget of $2.1 billion over the next five years. $530 million in 2008. How do you foresee the expenditures happening in 2009? Is that going to be a $1.5 billion year in terms of expenditures because how can you get Tia Maria to operate in 2010 if you don't have that kind of expenditure --?

I understand your question, Oscar and yes, there is a very intensive capital expenditure program for the following four years. This year, as we mentioned, we are going to spend the $530 million. That is including, of course, maintenance and other projects. And for 2009, we are expecting to spend $950 million in projects, plus maintenance. For 2010, we are expecting to invest $965 million, plus maintenance. And for 2011, at the end of our projects, this number is going to decrease to $127 million, plus maintenance of the year. The maintenance of the year is usually around $150 million.

And then just a follow-up on that if I can. What do you think then your dividend policy will -- do you foresee that changing in 2009 and 2010 by your capital expenditures?

No, I don't think so. We are continuing, as I have mentioned, reviewing with the Board of Directors in respect of our cash availability and so what is going to be the dividend declared.

All right. Thanks very much. Genaro, nice to hear you. Looking forward to catching up at some point and I'll let the next guy ask questions.

Thank you very much, Oscar.

Jordi Dominguez.

Good morning, gentlemen. My first question comes on the lines of the income tax. We saw the income tax rate rise by a couple points 2006 versus 2007. Is it because of differentials in Peruvian tax versus Mexican tax?

Yes, Jordi. Well, I suppose -- your question is to if we can --

Revert.

Revert it?

I mean not revert it, but go back to the percentages of tax paid that you had in 2006 or should we expect 34%, 35% levels in 2008 going forward?

Yes, of course. Of course, we can go back to those levels of income taxes or income tax rates.

Okay. So what level should we expect in 2008 and going forward? 31%, 32% or closer to 35%?

Okay, well, let me -- I am going to use your question in order to explain a little bit what happened with this income tax amount that we recorded in the fourth quarter. This, of course, is a charge to income tax. It is a non-cash item and was recorded to recognize the effects on taxes for Minera Mexico dividends paid to Southern Copper, its parent company.

More specifically, this tax deferred recognition on the P&L derives from the difference between the effective tax rate in Mexico and the effective tax rate in the US. Applied the difference over the portion of the dividends paid from the Mexican subsidiary, that is Minera Mexico, to its parent company or to its parent -- to the US parent that is Southern Copper Corporation. Again, this recognition is a non-cash charge and corresponds to the portion of dividends paid by Minera Mexico during 2007. This actually is a catch-up for the whole year.

For the future, well, I would say that that is going to depend on the calculation of the effective tax rate in Mexico versus the effective tax rate in the US and of course, that will be affected by several tax credits and our tax plan for the following years.

Okay. Thank you for the explanation. One last question if I may ask. You mentioned the mining production level for 2008 that you guys expect. Do you guys expect a recovery of the smelting and refining production for 2008 as well to 2006 levels?

Yes, we are expecting to recover that and we are expecting to improve it a little bit.

Could you give a little color on the levels? Should we expect 1.3 billion pounds for smelting and refining more or less along those lines?

Yes, I mentioned 1.2 billion pounds for smelting and refining for 2008.

Okay. Sounds good. Thank you so much for your time, guys.

[Ed Dubay].

Hi, this is Ed from Nomura. I just have a question on the cost front. I would like to know what was the cash cost per pound in the fourth quarter 2007 and for the full year 2007 and how do we expect this cash cost going forward in 2008? Thank you.

Okay, the Company cash cost per pound produced in the fourth quarter -- this is before subtracting by product revenues -- was $1.57 per pound. This is higher, $0.47, than the $1.10 per pound for the fourth quarter of 2006. This increase is mainly due to the copper production reduction that represents around $0.44. Cash cost inflation explains the remaining difference. We got a little bit higher costs. Including the effect by product revenues, the Company cash cost was negative $0.27 per pound in the fourth quarter of 2007. This figure compares with a negative cash cost of $0.28 per pound for the same period of 2006.

Now, for the full year of 2007, cash costs before by products, credits was $1.36 per pound. This compared to the $1.28 per pound for 2006, an $0.08 increase year-to-year. The Company estimation for the full cash cost for the year of 2008 is around $1.33 per pound.

Thank you very much.

Harry Mateer.

Hi, this is [Stephanie Leesha] speaking for Harry Mateer. I had a quick question regarding -- I know you outlined the CapEx distribution based on the $2.1 billion growth investment. I was curious though, is there any possibility that you guys could come to market to finance some of that and/or would you just continue to manage your dividend?

No, I think there is a very strong possibility to go to the market and try to get finance for those projects.

And do you have any kind of timing with doing that and can you, by any chance, give the CapEx distribution again? I think I missed it earlier.

Okay.

Thank you.

And do you mean for the next four years?

Yes.

Okay. In 2008, and I am going to talk first about the projects. For 2008, we have $100 million. For 2009, $950 million. 2010, $965 million and 2011, $127 million.

Perfect. Thank you.

[Jorge Rodriguez].

Good morning. My question is regarding the ore grades at Toquepala. Do you have the actual figure of the decline in ore grades and is this something that may linger on for the coming quarters?

Well, let me check. Is Mr. Gonzalez Rocha, are you on the line? Yes, probably we miss him. Then I will pass this question to Raul Jacob who has some information in relation with that. Go ahead, Raul, please.

Thank you, Genaro. In 2006, the Company declared new reserves for the Toquepala mine as a consequence of this review in the reserve base of this operation. We also adjust the long-term ore grade of the Toquepala operation. That year, in 2007, the average ore grade for Toquepala was 0.74% for copper. For the year 2008, our current production plan indicates that we will have an ore grade of 0.62% for the Toquepala mine. So that will affect our production of copper and concentrate coming from this operation, but at the same time, we will have some more copper coming from Cuajone that will improve or basically set off somehow the loss in production at Toquepala.

Okay, thank you.

Rodrigo Heredia.

Good morning, everyone. I have two questions. The first one is what is your copper and molybdenum sales forecast for 2008? And the second one is is what do you think about this recent change in the union position here in Mexico?

Okay, Rodrigo. Let's try to cover first your first question. In terms of sales of copper, well, we can consider that our sales are going to be -- our production for -- the production estimate that I gave you for 2008. That was 300 -- hold on -- that was 1.4 billion pounds of copper and for molybdenum, 33 million pounds of molybdenum. Can you repeat your second question, please?

What do you think about this recent change in the union position here in Mexico regarding the meeting that was yesterday between the union and the governmental agency here?

Rodrigo, about this question, let me pass the question to our council in Southern Copper Corporation. This is Mr. Armando Ortega who is going to take care of your question.

Yes, good morning. I think we are simply hearing and reading what the union declared yesterday. We are not sure whether the union has a different position or not. Unfortunately, that union is untrustworthy and I think we wait and see. I don't think, at this juncture, we have any more elements to have an opinion, an educated opinion, as to where these gentlemen are leading or not.

Okay.

Okay. Thank you, Armando. Okay, if we don't have any other questions, thank you very much for your attention and for joining us in this conference call. Is there any other questions?

Dan Richman.

Yes, I noticed on your December 31 balance sheet a new category of current assets called investments with a balance of almost $118 million. Could you tell us what this is and perhaps it is related to my next question? I noticed under other noncurrent other liabilities, they increased $58.9 million in the fourth quarter. Could you tell me what the major elements of this increase in other liabilities is and which balance sheet or expense accounts got charged for the debit?

Okay, Dan. In relation with the first question, this has been separated from the cash and marketable securities because this is a series of investments in different papers with different maturities that are not cash and marketable and that is the reason we have separated that from the total, is $117 million.

Thank you. And the increase in other noncurrent liabilities of $58 million?

Well, in that respect, I don't have the breakdown at this moment in front of me and at the top of my head. I know that there are -- those are reclassifications, but, well, if you are interested on the detail of that, we can provide you the breakdown, well, later on during the day.

Thank you. That was in my e-mail to you yesterday.

Yes, we know, Dan and we have your e-mail and then we will prepare a report and we will send that to you.

Thank you.

Well, thank you very much. If we don't have any other questions, we appreciate a lot your assistance to this conference call and well, we will -- I hope that we can here you and that you can join us again for the next conference call. Thank you very much.