Southern Copper Corp (SCCO) 2008 Q1 法說會逐字稿

Good morning and welcome to the Southern Copper Corporation's first-quarter 2008 results conference call. With us this morning we have Southern Copper Corporation Mr. Genaro Guerrero, Financial Chief Officer, and Mr. Raul Jacob, Head of Investor Relations, who will discuss the results of the Company for the first 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 do 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 U.S. GAAP.

Now I will pass the call onto Mr. Genaro Guerrero.

Thank you very much, Lisa. This is Raul Jacob, and thank you everyone today for joining us for the first-quarter 2008 Southern Copper earnings conference call. Participating in today's conference, we have Mr. Genaro Guerrero and myself. Mr. Guerrero will now lead the conference. Genaro?

Thank you. Good morning, everyone. Our agenda for today is we are going to try to cover prices, production, sales volume and then we are going to talk a little bit about our [new] reserves. We are going to discuss our financial results, the labor situation in the company, the capital expenditures, dividends and then we will be very glad to open a session of questions.

Then let's start with copper. We have continued enjoying a positive trend on copper prices. The London Metal Exchange first-quarter of 2008 average copper price was $3.54 per pound, jumped 32% from an average of $2.69 per pound for the same quarter of 2007, 9% higher than the fourth quarter of 2007.

The first-quarter copper market was characterized by a strong demand and a [weekly] supply response. Even though we have seen a weak U.S. market, the demand growth from emerging economies led by China and India maintained the copper demand at a strong pace.

On the supply side the forecast for 2008 indicates a copper deficit due to the labor unrest and power shortages in Chile. As long as we have extremely low inventories of copper in the market, we can expect these events to positively affect the short-term copper prices.

Southern Copper first-quarter 2008 copper production was 282 million pounds. Lower 25% than the first quarter of 2007 but 2% higher than the fourth quarter '07. The reduction of 96 million copper pounds in production quarter to quarter was mainly the result of the following. La Caridad mine production decreases by 14%, or around 10 million pounds due to a plant temporary decline in ore grade. This we expect higher ore grades for second half of the year. About -- talk about our copper production decreases in first-quarter '08 by 11% or around 11 million pounds when combined with the first quarter of 2007 in accordance with our planned production ore grades.

At Cananea, we continue -- we have this stoppage that had decreased the production comparing first quarter '08 with first quarter '07 by 77 million pounds. This production decrease has been partially offset by an increasing Cuajone production of 6% which have improved grade and recovery in the first quarter of 2008.

Regarding our smelting and refining copper production, I'm pleased to report that as a result of the Peruvian Ilo smelter operation at full capacity, production has increased by 70% when comparing first quarter '08 with first quarter '07 and 19% when comparing to the fourth quarter '07. For refining, production has increased 3% and 20% for the same periods.

Now talking about molybdenum, the molybdenum prices were $33.01 per pound for the first quarter '08, 28% higher than the first quarter '07 and 3% higher when compared to the fourth quarter '07. Comparing the first quarter '08 with the same period of 2007, molybdenum production increased from 8.1 million pounds to 8.7 million pounds, a 7% increase resulting from higher recoveries at our mine. The better molybdenum prices combined with the production increases contributed significantly to Southern Copper Corporation's profitability in the first quarter of 2008.

Talking about zinc, the zinc price in the first quarter 2008 averaged $1.10 per pound, 30% lower than the first quarter 2007. Mine zinc production decreases from 71 million pounds in the first quarter '07 to 55 million pounds in the first quarter '08. This 23% decrease in production is the result of the strikes in the San Martin and Tasco mines.

Solvents refined zinc production improved 19% in quarter-over-quarter as it was reported to the market before. San Luis Potosi zinc refinery resumed operations in October 2006 after an electrical fire that affect its capacity at the beginning of 2006.

Now going to the financial results. In relation to net sales, for the first quarter net sales were $1.5 billion, $140 million more than the same quarter 2007. This represents an increase of 10% over first quarter 2007. The improvement is the result of higher metal prices and higher sales volume of molybdenum.

During first-quarter 2008, the Company entered into copper derivative contracts to protect 395.6 million pounds for the period March/December 2008. These copper derivative contracts cover approximately 30% of our planned 2008 production and we are mainly zero cost [collars] with average flow prices of $3.40, and average ceiling prices of $4.23.

Talking about our [new] reserves. As were disclosed in our 10-K annual report, we want to note to the market that the Company has increased the ore reserves. We use for purpose of internal mine that we use for purposes of internal mine and operating plans. In prior years, Southern Copper has used some metal price assumption $0.90 per pound of copper and $5 per pound of molybdenum for calculation of ore reserves quantities.

Based on the latest economic and market developments, the Company changed its long-term price assumption to $1.20 per pound for copper and $9 per pound of molybdenum. As a result, the Company recalculated its ore reserves and mine plans. The new sulfide ore reserves as of December 31, 2007, were [7090.3] million tons with an average copper grade of .549% and the new leachable reserves were 4988 million tons with an average copper grade of .212%. These reserves represent an increasing copper content of 28.7% when compared with our ore reserves as of December 31, 2006.

Now let's talk about cost. Our operating cost and expenses for the first quarter 2008 was $634 million. This figure compares with a cost of $571 million in the first quarter 2007 or $663 million in the fourth quarter of 2007.

Cost of sales in the first quarter '08 increased by $54 million when compared to the same period of 2007. The main variances are the following, $20 million of higher fuel, power and labor costs partially offset by lower costs due to the Cananea stoppage; $23 million exchange rate losses from currency appreciation in both Mexico and Peru; and higher mining royalties in Peru for around $5 million.

Now our depreciation, amortization and depletion was $8 million higher due to the capitalization of the Ilo smelter modernization project and higher amortization of leach material costs.

Our cash cost, the Company cash cost per pound of copper produced in the first quarter '08 before subtracting by product revenues was $1.51 per pound, $0.28 higher than the $1.23 per pound for the same period of 2007 and $0.06 lower than the $1.57 per pound in the fourth quarter of 2007. Including the benefits of the -- by products, the Company cash cost was made at $0.15 per pound in the first quarter of 2008. This figure compares with a positive cash cost of $0.05 per pound for the same period of 2007.

Talking about operating income and EBITDA, for the first quarter of 2008, EBITDA increased by $84 million to $945 million equivalent of 63% of sales, compared to an EBITDA of $861 million, also 63% of net sales for the same period of 2007. Net sales increased by 10% and operating cost and expenses by 11% yielding an operating income increase of 10%. The Company's operating income amounted to $865 million in the quarter which compares favorably with last year's first-quarter operating income of $787 million and with full-quarter '07 operating income of $631 million.

The net income for the first quarter '08 was $565 million, 2% higher than the $552 million achieved in the same period of 2007. Earnings per share amounted to $1.92 per fully diluted share compared to $1.87 per fully diluted share for the first quarter of 2007.

Now about our labor situation. In the first quarter of 2008, as we informed you in the last conference call, Cananea has started ramping up its operations reaching at the end of the first quarter approximately 48% of its total capacity. But on April 10, the mine entered in a labor stoppage that [obstructed] production again. After assessing the situation, the Board of Directors of Mexicana Cananea has decided to offer all employees a severance payment in accordance with bargain agreement and applicable law. This is offered in order to award the employees with a significant severance payment that will allow them to choose the labor alternative that is the best for each of them. The company is committed to resume operations once labor stability is reached to produce with efficiency and competitiveness.

Now our capital expenditures, including exploration expenses amounted $58 million during the first quarter, a decrease of $33 million when compared to the $91 million expended in the first quarter '07. The decrease is largely related to the completion of the Ilo smelter modernization in January 2007.

The Company has an investment program that will increase total corporate production by 270,000 tons by 2011. This 39% increase in production capacity will be achieved at a capital cost of $2.1 billion.

As previously announced, that program is focusing on a group of projects in Peru and allow me to give you an update on these projects. The most significant one is Tia Maria project located in the Ariquipa region of Peru, which is approximately 100 kilometers north of our Ilo facilities. We are expecting completion date in the fourth quarter of 2010. This project will produce 120,000 tons of SX/EW copper [capital] per year for around 18 years.

As part of the $934 million total capital budget for this project during the first quarter of this year, the Company have committed $388 million in equipment and engineering recruitment and construction management contracts. The main equipment at (inaudible) is 20 [hold] trucks, 240 tons capacity, to six cubic [jaw] shovels, the auxiliary equipment for those, primary, secondary and tertiary crushers, 8.6 kilometers or over land conveyors, and the spreaders and reclaim system.

Now regarding the expansions for the Toquepala and Cuajone mines, the Company has signed agreements for major mine equipment and have contracted technical and environmental studies which are expected to conclude by November 2009. In parallel we will continue with an engineering and procurement process.

Also subject to the satisfactory resolution of social issues and the acquisition of the necessary governmental permits and subject to approval of our Board of Directors, Southern Copper Corporation plans to invest approximately $1.2 billion in the Los Chancas project. This project is a copper molybdenum property in the southern part of Peru. This is in addition to the $2.1 billion previously announced for our offer for our other Peruvian projects. We expect this project will increase our (inaudible) copper production by 80,000 tons by the year 2013.

Now about our payment of dividends. 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 $1.70 per common share to be paid on June 3, 2008 to common shareholders of record at the close of business on May 14, 2008.

Well with this, I will include my comments and discussions and thank you very much for joining us and we will like to open up the floor for questions. Thank you.

(OPERATOR INSTRUCTIONS) [Carlos de Alba].

Good morning, Raul. Just two questions. Could you update us on your guidance for copper production and moly production in 2008? That would be the first question. And the second question is how feasible it is under the current Mexican laws to shut down an operation that is on strike that has been ruled as legal by the Mexican court system? Thank you. (technical difficulty)

Ladies and gentlemen, we are having technical difficulties. Ladies and gentlemen, we will be back with you in just one moment please.

Lisa?

Yes, sir.

We lost the connection.

It looks like you had lost your connection. Just a moment. I will have Mr. de Alba ask his question again for you, okay?

Yes please.

Thank you. Mr. De Alba, are you there? We are going to go ahead and move on to the next person. Oscar Cabrera.

Good morning, everybody. I'll leave the same question for Carlos to ask. But can you please remind us what the breakdown in the Mexican production is in terms of SX/EW and concentrate production in Cananea and Caridad? And I will follow up with a question after that, please.

The breakdown?

For 2008, our plan for Cananea was to produce in total 135,000 tons. We didn't budget any production for the beginning of the year meaning by this the first quarter, as I said, our plan was 135,000 tons for the whole operation. On that about 40,000 a little bit more, 45,000 SX/EW production and the rest is the mine production for '08, Oscar.

Okay. It is this nameplate capacity or is this what you -- I understand there was a ramp up procedure and all that. But what is your nameplate capacity over there?

It's 180,000 tons per year.

Okay. The follow-up on that is you have a (inaudible) tag versus about call it contain 220,000 tons of copper concentrate. Do you expect to buy third-party concentrate? Are you running the smelter at reduced capacity? What are your plans for the smelter in Caridad, please?

That would be if the market permit us in a good terms by corporate concentrates in order to try to fulfill our smelting. In Caridad, we will do that. It depends on the market conditions but we are able to do that.

Okay, rephrasing that question, what kind of capacity utilization do you have right now at the Caridad smelter?

It is about 50% of capacity at this point, Oscar.

Right. Are you concerned at all that you need to declare force majeure in any of the upcoming months if the Cananea situation continues?

No, for 2008 we had considered this situation and we have not commit a long-term contract with our customers. Then we would also need to declare any force majeure as we declared during 2007 when we just got the (inaudible) stoppage in Cananea.

One more if I may and then I leave the floor for the next person. When you went through the same process in Caridad, it took you a little bit over two months after an agreement had been -- you had come to an agreement with the labor unions. How do you foresee the negotiations with the labor union and the process to restart the Cananea mine?

That is very difficult to define at this point of time, Oscar. While this announcement was made last Thursday, the problem I would say that the problem here is different than the Caridad. The situation is different, the times are different and we will speculate if we determine any time for the resolution for this labor situation. It is very difficult to define at this moment.

Okay, great. Thank you very much for the answers.

No problem, thank you.

Jorge Beristain.

Good morning, gentlemen. It's Jorge Beristain with Deutsche Bank. I just had two questions. One is regarding your latest potential project that you are saying is still pending Board approval but the Los Chancas project at $1.2 billion, that would employ roughly $6.80 per cash cost or CapEx cost per pound of new copper production and that is roughly double what you're currently quoting us on the current $1.2 billion package of CapEx. Are you taking a significantly different long-term view on the long-term price of copper that would justify that or is this project expected to have much lower operating expenses than the current generation of expansion? That is my first question.

Jorge, this is Raul Jacob. I think that in this case, the project has certain characteristics that considering the concentrate production plus an SX/EW facility after a few years of operating the concentrator, we arrived to the $1.2 billion cost that we indicated for CapEx. Certainly the Company have been looking to the market, the corporate market and the molybdenum market and we what we are seeing is that there is support from two years ago -- there is higher support for our longer copper price for higher and longer copper price in the coming years. That has been taken into consideration while doing the pre-feasibility study on Los Chancas that we finished last year.

We are currently doing the feasibility study on this project and some other studies as well. And we think that figures for CapEx will change as we move on into the initial development of this project.

Okay, my second question and actually it's a follow up to one of the questions made earlier. What is the full-year volume guidance now for Southern in light of the fact that Cananea does not seem to be restarting and what is the current in the second quarter the projected output for Cananea?

Well, I will say, Jorge, that the guidance is still the same but of course, we should subtract Cananea but as it's uncertain how long Cananea is going to be out of operations. It is difficult to figure out a guidance right now. Cananea, we can say that Cananea should be produce 15,000 metric tons a month then depends on when resume operations in Cananea that would be our guidance.

Okay, thank you.

(OPERATOR INSTRUCTIONS) [Christopher Buck].

I'm just wondering if you can give us some more information on your capital structure and whether there is any plans to issue any debt or any other plans in terms of capital structures? Thank you.

At this point, we have about $1.5 billion in totaled debt. In terms of net debt, the Company has pretty much zero as net debt. As you obviously can conclude, this is an underutilized balance sheet and we think that for the development of the 2.1 billion program, some other investments may arise and being added to that, we will consider a use of debt that will certainly improve our long-term capital structure.

Great, thank you.

[Jordi Dominguez].

Good morning. My question relates to the hedging provisions you've put in place for copper production. I would like to know if there is a plan to put similar provisions in place for 2009 and what level of production if any would you target? Thank you.

We don't think that this is going to go to 2009. I would -- we think that this would be resolved this year.

So you don't plan to put any hedging for copper in place for next year at the current moment?

At the current moment, no.

I believe that we misunderstood part of your question, Jordi. Let me mention that the Company is approaching hedge activity on a short-term basis. We usually don't have any hedge positions for next year other than what we may have at the end of the fourth quarter by the mid fourth quarter regarding the initial part of the next year. So I guess that that answers your concern.

For 2008, will you stay at the current hedging levels or will you try to increase them or you are satisfied at the current positions?

I don't know, this is continually analyzed and would be dependant on the market. We are now we are seeing that the prices has very strong support and then we are seeing a deficit, a little bit of deficit for this year in terms of copper. Then it's a matter to wait a little bit and see how the market is performing. Also there is a lot of volatility. Then we will continuously analyze and follow the market in order to determine if we can increase a little bit our coverage.

Thank you.

Alonso Aramburu.

Good morning. A couple of questions. First, if you could remind us what was your official guidance for copper production at the beginning of the year? And second, what is your expectation for molybdenum production this year?

Our guidance at the beginning of the year was 635 million pounds of copper.

Thousand.

635,000 tons, sorry, 635,000 tons of copper. And molybdenum is around 15,000 tons.

Great. And I guess one final question. Do you have an expiration date on the offer you've made to the workers at Cananea?

No, we don't have any expiration date for that.

Okay, great. Thanks.

Alex Hacking.

This is Alex Hacking from Citigroup. I'm going to reask Carlos's question. Can you give us an update on the legal situation at Cananea and also give us an idea of what the timeline looks like in terms of getting future legal decisions?

Well more or less, the legal situation is the following. We got our -- Cananea got a rule from the judge and we have not been -- the judge or the court have not been informed the company about the strike. But then we are waiting for that. But even that, the workers are making this stoppage and now the operations has been shut down. That is more or less the situation. We are waiting for the authorities in order to be informed about the official legal situation for the strike in Cananea.

Just to clarify, the last ruling was that the strike is legal? Correct?

That is -- excuse me -- what was the question?

That the last ruling from the court is that the strike is legal.

Well that is exactly the point that we have not received official notification about that.

Okay, thank you.

Yuri Maslov.

Hello, a couple of questions on production guidance. Could you please first of all confirm again what was the production out of Cananea this year so far?

Well during the first quarter, Cananea produced around 12,000 tons of copper.

What about subsequent months?

Subsequent for the rest of the year, well that would depend on when the labor situation is resolved.

I understand. What about April?

Representative: April, well, 3063 tons of copper.

Okay. And if we exclude Cananea out of your guidance, how much production do you expect to generate this year in the remaining four mines and how much production will you have next year as well excluding Cananea?

Well, we figure out the number here and it's around 520,000 metric tons for the year, for 2008.

Okay, and the same will be for 2009, i.e., if you assume Cananea does not come into production over the next two years, that would be the level of production?

Yuri, I don't we have that forecast. We want to start operations in Cananea as soon as we can. We are offering these as a solution for our workers, the severance payment that the Company has announced. It's a solution for certainly creating very difficult situation to the workers of the Company and their families. We actually want to keep operating on Cananea but obviously if there is this kind of labor situation, we can't. So our current forecast is that we should finish this problem through 2009, '08, I'm sorry, and operate in 2009 at full capacity in Cananea.

And with a severance package, is it possible for you to disclose roughly the value of this package? Or the impact your severance package is going to have on labor costs?

It's approximately, it's $60 million. Of course, this -- the Company is working in order to figure out this amount but we have this approximation because this needs to be calculated in -- and depends on the situation on each of the quarters.

And at the moment while this strike goes on, you don't pay any salaries or bonuses to these people? Is that correct?

No, that is correct.

Okay. If an individual takes this package, then you take him off the payroll effectively?

Yes.

Okay and the final question about molybdenum production again, the guidance going forward, is it going to be around 15,000 or 16,000 tons or how would you describe it?

It is 15,000 tons.

In 2009 as well?

At this point we don't know how much is going to be in 2009. The driver of our mining plants, it's the copper production and molybdenum comes as a byproduct. However, if you see our last year's production, we have been very comfortably over 14,000 or even 16,000 tons per year.

I'm sorry just a final follow-up. If Cananea is taken out of the equation again, how would that affect molybdenum production?

Cananea doesn't produce any molybdenum.

Okay, well thank you very much for your answers.

No problem.

Rodrigo Heredia.

Good morning, everybody. I think I missed the question probably. Where are you planning to close in the Cananea mine?

Let me ask Mr. Armando Ortega with us today to answer your question.

He is the general counsel of the company.

Rodrigo, first clarification, it's not a Company that is closing Cananea. Stoppage isn't closing before have come from workers and from the union in particular. Based upon these circumstance is that we are going through the root of the severance payment that has been explained by my colleagues. So there is the first clarification.

Is that clear, Rodrigo?

Well my question -- I'm going to the fact that where are you going to stop producing in Cananea?

Why?

Excuse me, can you repeat -- I couldn't catch your question clearly.

Okay I wanted to know when are you stopping to producing Cananea?

Well, Cananea is not producing at this moment.

Okay, okay.

The mine stopped producing in April 11th after it was shut down by the national union.

Okay, thank you.

Jorge Beristain.

Quickly two follow-ups. What is the number of workers at Cananea that would be involved in this potential settlement package?

It is 1300 workers.

Okay, so you are talking about a potential payoff package of roughly $46,000 per head?

Yes.

Okay. The other question was just the actual molybdenum production that you generated this quarter based on your full -ear guidance would seem to imply that the coming quarters would be a bit lower probably 3600 a quarter or 3.6 -- sorry 3600 tons per quarter. Is that a correct assumption or are you now purposefully mining high grade moly copper specifically?

No, not really, Jorge. What happens is that molybdenum camps in our mineral asset trace and it is hard to define exactly how much molybdenum are you going to get given a specific mining plan. During the first quarter, we see our internal plan, we were over our plan in the Peruvian and Mexican operations basically in the three mines that have a molybdenum plant. We are maintaining our guidance but actually, we should increase a little bit maybe for 16,000 tons if we consider what happened in the first quarter. In this case, we want to be conservative regarding our molybdenum production because of what I explained at the beginning of this comment.

Okay, thank you.

(OPERATOR INSTRUCTIONS) [Daniel Altman].

Good morning. It's Daniel Altman from (inaudible). Just a question on your CapEx budget. I see you have some pretty substantial projects and obviously the first quarter was a very low number in terms of outlays. I wonder if you have guidance for 2008 and 2009 in terms of what you think your CapEx outlays could be?

Yes, Daniel, how are you. As we indicated during the first quarter, we have to spend not a match in CapEx but we have made several commitments for the Tia Maria and the other Toquepala and Cuajone expansions. In total as we mentioned, about $400 million has been committed and that money will be spent -- start spending at the end of this year and in 2009. For this year, our current guidance is our budget for the year which is $530 million for 2008. For 2009, our guidance is $1.1 billion of CapEx.

Okay. Do you still -- given the first quarter number -- do you think those are still realistic estimates for CapEx?

Yes, we do.

Okay, great. Thanks a lot.

Sir, at this time your queue is empty. There are no more questions.

Okay, well thank you very much for joining us. Thank you everyone. Have a good day.

Ladies and gentlemen, at this time, your conference has concluded. You may now disconnect.