Southern Copper Corp (SCCO) 2008 Q4 法說會逐字稿

Good morning and welcome to the Southern Copper Corporation's fourth quarter 2008 results conference call. With us this morning we have Southern Copper Corporation's Mr. Genaro Guerrero, Chief Financial Officer, and 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 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. All results are expressed in full US GAAP.

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

Thank you very much, Rebecca, and thank you, everyone, again for joining us for the fourth quarter 2008 Southern Copper results conference call. Participating in today's conference, we have Genaro Guerrero, Southern Copper's CFO. Mr. Guerrero will now lead the conference.

Thank you, Raul. Good morning, everyone, and welcome to Southern Copper Corporation fourth quarter '08 and final year 2008 results conference call.

Today I will comment on Southern Copper production sales, operating cost, financial results and capital expenses. After that, we will open the session for questions.

As we all know, the world economic recession has severely impacted commodity prices. Copper has deteriorated sharply. The LME 2008 fourth quarter average copper price was $1.77 per pound, lower by 46% than the $3.26 per pound average for the same quarter of 2007. And 49% lower than the third quarter of 2008. In fact, 2008 ended with an LME copper price of $1.32 per pound.

Major drivers for current copper prices are demand contracting and inventory buildup. We expect both of them to prevail for at least the first half of 2009.

However, we also believe that demand will stop declining and start growing at a certain point close to mid 2009, after China and other major consumers finish their destocking process. The demand recovery will certainly depend on how fast the global economy turns around again to growth.

On the supply side, several copper producers have announced production cuts for approximately 100,000 metric tons in 2009. Additionally, there are still several operating units worldwide that have higher cash cost than current market prices. As the new low price scenario sets in, we expect some additional announcements of mine closures for 2009 that will help to balance the market.

Southern Copper fourth quarter '08 copper production was 125,000 tons, 1% lower than the fourth quarter of 2007, but 6% higher than the third quarter '08.

Regarding our copper smelting and refining production, in the fourth quarter 2008, such production was 29% and 26% higher than in the fourth quarter of 2007, mainly due to 7% higher concentrates production at La Caridad mine, processing of third-party concentrate at La Caridad smelter, and the full capacity production of our Ilo smelter plant after the conclusion of its modernization in August 2008.

Taking advantage of the first major maintenance for this plant, we've made some operational adjustments that will allow the plant to process 1.2 million tons of copper concentrate. That is a 20% increase in the smelting rate.

We expect copper production and sales to be approximately 417,000 tons for the full year of 2009. Please note that in no production guidance, we are not going to consider the Cananea, San Martin and Taxco operations, due to the [currently] labor [shortages] that we have in such operations.

If we were to do that, we should have approximately 15,000 metric tons of provisional copper production per month of operation at full capacity.

Molybdenum prices were $14.60 per pound for the fourth quarter 2008; 54% lower than the fourth quarter 2007. The molybdenum price at the end of 2008 was $9.50 per pound. Molybdenum production was 4,029 tons and 16,390 tons in the fourth quarter '08 and the year '08, respectively, compared with the 4,261 tons and 16,207 tons in the comparable 2007 periods.

The annual increase of 1.1% was due to higher oil grade at La Caridad mine and higher recovery at Cuajone mine, partially offset by lower ore grade at the Toquepala operations. Moly production and sales plan for 2009 are $17,000.

Regarding zinc, in the fourth quarter 2008, price averaged $0.54 per pound, 55% lower than the fourth quarter of 2007. The year-end zinc price was $0.51 per pound. Zinc mine production in the fourth quarter '08 increased 6.7% to 27,706 tons compared with the 25,964 tons in the fourth quarter 2007.

Refined zinc production for the year 2008 was 95,420 tons, 5.1% higher than in the year 2007. The Company expects to sell 98,000 tons of zinc during 2009.

In respect of silver, silver prices in the fourth quarter 2008 averaged $10.15 per ounce, 29% lower than the fourth quarter 2007. The 2008 year-end price of silver was $11.27 per ounce. Silver mine production in the fourth quarter 2008 increased 2% to 3.1 million ounces compared with the 3 million in the fourth quarter of 2007.

Refined silver production for the year '08 was 10.8 million ounces, 8% higher than the year 2007 due to the recovery of full capacity at the San Luis Potosi refinery. The Company expects to sell 16 million ounces of silver in 2009.

Southern Copper's sulfuric acid production during the fourth quarter 2008 was 473,000 tons, 22% more than the fourth quarter 2007 due to the better smelting performance of the Ilo and La Caridad smelters. For the full year 2008, the Company produced 6% more sulfuric acid than in 2007.

Please note that [18%] of the total production is consumed by our Southern Copper's corporation [FXEW] and leaching processes. Our current sulfuric acid production guidance for 2009 is 1,500 tons.

As I already mentioned, during the last quarter, we had a dramatically drop in metal prices. That has severely affected our fourth quarter 2008 results. Following generally accepted accounting principles and the terms and conditions on our sales contracts, Southern Copper Corporation has a portion of its sales provisionally priced using the forward prices in the case of copper and the last available quote for molybdenum concentrate. These provisional price sales are finally adjusted using the average price in subsequent periods.

During the fourth quarter, we recorded a negative provisionally priced adjustment of $409 million for such (technical difficulty) sales. This figure compares to a negative provisional price adjustment of $67 million recorded in the fourth quarter 2007.

The estimated adjustment on open sales is recorded under net sales, and the provisional price net of volumes sold for copper and molybdenum are disclosed in our 10-Ks and 10-Qs.

Net sales for the fourth quarter were $450 million, compared to the $1,295 million for the fourth quarter 2007. Fourth quarter 2008 sales without the already mentioned price adjustment were $859 million. This figure compares to $1,361 million for the fourth quarter 2007.

Copper volumes sold increased by 4.4% when comparing fourth quarter '08 with its 2007 equivalent. Molybdenum volumes sold increased by 1.3% for the full year 2008.

Additionally, during the fourth quarter 2008, we held 30,000 tons of copper derivative contracts with average prices of $3.40 per pound of copper. In the fourth quarter 2008, we have gains reported in net sales of $74 million and $137 million gain for the full year 2008 for such derivatives.

Total operating cost for fourth quarter '08 was $581 million. This figure compares with a cost of $663 million in the fourth quarter 2007 or $764 million in the third quarter of 2008.

The cost reduction from the third quarter to the fourth quarter 2008 of $183 million is explained by the following variances -- full cost decrease of $6 million; $30 million in power cost reduction, mainly due to lower tariff at the Peruvian operations; third-party copper purchases decreased by $48 million as a result of lower metal prices; and other cost reductions of $96 million, including workers' profit-sharing and mining royalties.

The fourth quarter 2008 EBITDA was negative $49 million. This figure compares with $712 million for the fourth quarter 2007. EBITDA without price adjustments was $327 million for the fourth quarter of 2008, equivalent to 38% of sales. This figures compares with an EBITDA of $773 million or 57% of net sales for the same period of 2007.

The Company's fourth quarter 2008 cash cost per pound of copper produced before byproduct credit was $1.50 per pound, $0.06 lower than the $1.56 per pound for the same period of 2007 and $0.52 lower than the $2.02 per pound in the third quarter of 2008. The Company operating cash cost including the benefit of byproduct credits was $1.17 per pound in the fourth quarter of 2008.

Byproduct credits were affected by the adjustments necessary to write down provisionally priced molybdenum sales. The impact of this writedown reduced the byproduct credits by approximately $0.61 per pound. Excluding the effect on this adjustment, the Company estimates that the operating cash cost in the fourth quarter 2008 would have been $0.56 per pound.

Net earnings in the year 2008 totaled $1,407 million or diluted earnings per share of $1.60, compared with the $2,260 million or diluted earnings per share of $2.51 in the year 2007.

Net loss in the fourth quarter 2008 totaled $125 million or diluted loss per share of $0.14, compared to the net earnings of $311 million or diluted earnings per share of $0.85 in the fourth quarter 2007. Not considering the fact of sale adjustments, fourth quarter '08 net earnings would have been $130 million. The equivalent 2007 figure would have been $353 million.

All of our capital projects have been suspended temporarily or are under close review. The Company believes this is a responsible action to take, considering the current economic downturn, and also it is prudent at this time to preserve cash in response to low metal prices and current cost of capital equipment.

As a consequence, the Company has decided to reduce its expected 2009 budget from over $1 billion to $450 million, including explorations, which represents the minimum investment the Company will maintain in 2009 to be ready to move forward when circumstances improve. Southern Copper Corporation will continue with the environmental projects at its mining and metallurgical facilities. And will move to our completion of some smaller project with [assured] payback and with returns.

In respect of Tia Maria project, Southern Copper has expended $118 million through December 2008, and currently is evaluating whether to put this project on hold or to slow down the spending in light of the current market conditions.

As of December 31st, 2008, we have spent $38 million for the Toquepala expansion. We are continuing with the feasibility study as well as the basic and detailed [engineering]. The environmental impact assessment is also underway and is expected to be completed in the fourth quarter of 2009. The Company has decided to put on hold any new additional capital expenditures regarding this project.

For the Cuajone expansion project, we have signed a feasibility study contract, and will only continue at this point with the engineering and the environmental impact assessment.

Regarding maintenance and replacement capital, the Company is budgeting $81 million for this concept for the year 2009. By taking the mentioned actions, the Company believes it will be able to take advantage of more reasonable capital equipment cost in the future, aligned with the currency of [expenses].

About Cananea's strike, in December 2008 the Mexican Federal Labor Court ruled in favor of the Company and declared the Cananea strike illegal. The union appealed this decision and on January 7, the judge of the Fifth District on labor matters annuled the decision favorable to the Company. The Company has filed a request to review this judge's decision, and will maintain the correspondent legal process to review such a decision and continue pursuing that positive resolution of the work stoppage.

Regarding dividends, I would like to remind that 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 get (technical difficulty) [the upper bid] quarterly dividend. Accordingly on January 29, 2009, the Board of Directors authorized a dividend of $0.117 per share to be paid on March 30th, 2009 to shareholders of record as of March 11, 2009.

In addition, as part of the 500 million share repurchase program approved by the Board in 2008, Southern Copper has purchased 29.6 million shares of its common stock at an average price of [$13.52] per share. With these repurchases, the outstanding shareholders have increased their stake in the Company by around 3.5%.

Ladies and gentlemen, thank you very much for joining us and we would like to open the floor for questions. Thank you.

(Operator Instructions). Jorge Beristain from Deutsche Bank.

I just wanted to make sure I heard the correct copper guidance correctly. You did state that you would be missing some 15,000 tons I believe per month and then you named various mines. Could you just recap that? And in summary I just need to know what is your baseline guidance for 2009 for copper production and also for molybdenum?

Sure. The 15,000 metric tons of additional copper production per month is basically Cananea production at full capacity. Then again we are not considering that production. And our guidance for 2009 is 470,000 tons for the full year.

Sorry. (multiple speakers) did I hear that correctly? It's 417?

It's 470.

Oh. 470. Okay. Thank you. And for molybdenum?

For molybdenum, it is 1-7 -- 17,000 tons.

Okay. And could you talk a little bit about unit costs? Obviously the calculation of the unit cost was affected in the fourth quarter by all the provisional pricing netbacks. But roughly speaking, based on what you quoted being the fourth quarter net cash cost of about $0.56, where would you see net unit cost going, holding molybdenum prices constant and knowing what you know about your predicted production for 2009?

How much more do you think you can get that unit cost down on a percentage or a cents per pound basis in '09?

Well, Jorge, for 2009 we are expected to get a cash cost of around $0.60 per pound. This is considering -- or we are calculating that, considering an EBITDA of $1.2 billion for the year, you have seen a copper price of $1.75. And this is -- and that is very close to the [$0.568] or $0.57 per pound that we got in the fourth quarter 2008, if we exclude the adjustment that we recorded during that quarter for adjustment in prices.

And what molybdenum prices are you baking into that assumption?

$10 per -- $10 per pound.

I would like to add that the fourth quarter has usually a little bit more production for Southern Copper than the first three quarters of the year. So the $0.60 -- it is a conservative position that the Company has taken. Even though we are seeing some cost reductions developing in the first quarter, we are not considering them in the $0.60 cash cost indicated by Genaro.

And sorry. What was your full year '08 cash cost on average? Cents per pound?

Before byproduct credit, it was --

No. Including everything. Net.

I'm going to say both of them. Before byproduct credits, was $1.71. After byproduct credit, $0.34.

Carlos de Alba from Morgan Stanley.

I just wanted to know how much tons of concentrate did you buy in the fourth quarter?

During the fourth quarter you said?

Yes.

About 110,000 tons of copper concentrate. That has about 30,000 tons of copper.

110,000 tons, okay.

That was concentrate with about 30,000 tons of copper.

Great. Those were my questions. All the others have been answered already. Thank you.

Alonso Aramburu from Santander.

I was wondering if you could clarify, roughly, what portion of your sales remain as provisional for future prices in this quarter? My second question would be if you still have any hedges for 2009?

Can you repeat your first question please?

Yes, sorry. What percentage of your sales remain as provisional on future prices?

For the next quarter?

Yes. By (multiple speakers).

It's around $174 million. It's our future sales that are still open.

Are those mostly copper sales or both copper and moly?

Both. Copper and moly.

Okay. And do you have any hedges left in '09?

No, we don't have any hedge for 2009. We are in the process and analyzing to see if we are going to get in a 2009 program.

Great. Thank you.

Jamie Nicholson from Credit Suisse.

Yes, actually, if I could ask a clarification on just that last question -- you said $174 million of your sales in '09 are provisional. Can you -- is that what you're expecting? I mean, could you just elaborate on what that means in terms of your expectation for offset on revenues? And is that in the fourth quarter or throughout multiple periods in '09?

This $174 million is what is [spending], and is the open position that we have for the next quarter.

In first quarter '09, that's what you -- that amount you expect to have offsetting your revenues?

That is what is going to take price during -- in the future, in the [subsequenting] periods. And of course this is, as I mentioned, is considering the copper core price. The copper forward core price and the last price of molybdenum that we know.

And of course if these prices go up or go down, then this number is going to change and it's going to -- and it depends on the date or the periods when the sales are taking prices.

Okay. So it's based on the current copper futures curve and it's mostly just for the first quarter. Is that right?

Well, it's not exactly the first quarter because -- sales that are open, and the sales can take price during January or can take price during February or in the subsequent months. But more or less, it's a quarter.

Okay. Thanks so much. And then my other question relates to Cananea. I know there's a lot of uncertainty regarding the labor issues and opening that, but you have -- what is the cost structure of Cananea? And is there a certain minimum copper price outlook before you would consider opening that from an economic perspective?

Can you just clarify what the cost structure is of Cananea, or your expected cost structure of that mine is? Thank you.

Thank you. Raul, do you have some numbers that we can share in this respect?

Yes. Cananea has a cash cost of about $0.77 per pound. In this case, the Company will move forward as soon as we can with opening up the operation and always as long as we have the appropriate conditions to operate. And we are looking for -- to get to that point.

Also, I would like to comment a little bit on the open sales question that you did. We always have an open sales adjustment both quarters, but usually they go unnoticed because of -- because we move in a certain band of prices. Problems or significant adjustments arise when we have a change in trend which was what happened in the fourth quarter of 2008.

Okay. Great. Thanks so much for the clarification. Thank you.

Jack Franke from Duquesne Capital.

Just on the '09 guidance, what zinc and silver price is in the guidance as well?

Yes. The zinc price that we take was $0.60 per pound.

Okay.

And the silver -- excuse me?

Thank you. And what's the silver?

Silver, $10 per ounce.

Okay. Just so I'm clear, you guys are using $10 moly and $1.75 copper?

That's correct.

Okay. Thank you very much.

[Daniel Morey] from [Calper] Securities.

I was wondering if you can tell me what range of copper prices would you be reconsidering assuming the Toquepala expansion project and the Tia Maria project? And about the Cananea strike, I know it's real hard, but I was wondering if you have a date in mind about when will the mine will be fully operational again?

Raul, do you want to take the first part of the question?

I couldn't copy it well. Could you repeat it, please?

Yes. Sure. At what range of copper prices would you be reconsidering resuming the Toquepala expansion project?

Okay. There are two things here. One is the uncertainty of this current market environment where -- that has made our Board after a discussion and a review to hold on the moving forward with the project as we were doing.

And the second issue is regarding the capital cost of equipment that we are seeing. And we think that we will see much lower prices for major capital equipment in the future. And we think that the proper thing to do is not to stick to a budget that was approved in 2008, with much higher equipment cost and obviously steel and some other materials, petroleum -- but to look for a couple -- I'm sorry, equipment cost that is looking to current prices.

So we think that that is going to take a process of spending all the backlog equipment that maybe has been built at a much higher input cost. And that's another reason for this adjustment in our capital expenditures.

Regarding copper prices, the projects were evaluated at copper prices quite similar to the ones that we have right now. But we think that, given the current volatility and uncertainty in the market, we believe that it's a wise thing to wait for a while before we move forward with them.

Okay, and the (inaudible) Cananea strike, do you have a (multiple speakers) -- mine will be fully operational again?

Yes, well, it is very difficult to determine or to make expectations in terms of the date that this is going to be resolved. Even though the strike has been declared illegal, the union maintains its stoppage.

Then the situation is complex, and due to the strike, doesn't have any substantive labor causes or issues, but seeking for personal interest, obviously, of the leaders. Then they, I can tell you that the labor authorities continue making the necessary actions to achieve a solution. And we are positive that such solution will come in the near future.

But again it's very hard to determine a particular date.

Okay. Thanks a lot.

Victoria Santaella from Santander.

Good morning. I have two questions that are much more market-related. If you can give us a feeling of how sales volumes are behaving for the month of January and February? Are you seeing delays on orders? Are you seeing a significant collapse? Are things better than fourth quarter? If you can give some color in terms of demand.

And the second one is, if you are reducing significantly your CapEx, does that mean that you are looking more actively into acquisitions or you just want to preserve your cash? Is there any change that we should expect some dividends? If you can give us some ideas in terms of what's the mindset of the Company?

Well, yes, in terms of the sales and the volume of sales, I would like to tell you that we are not seeing any problem in order to allocate all of our production volume. And, probably, Raul in the [tensile] market, you can share with Victoria some of the expectations that we have in this respect. And I will take again the second part of the questions in respect of CapEx and acquisitions.

Okay. Victoria, regarding -- I believe that you asked about the moly specifically. Is that right?

No, copper mainly, and if you also have some color on moly that's fine but I just wanted to see how that demand is going on January and February.

On copper, what we are seeing is a severe adjustment process of inventories. And I mean by this not only the warehouses inventories that are increasing, but not that much actually.

But private, the private (inaudible) inventories that the companies -- that the copper industrial consumers have. Those are being reduced and well, you can work out the numbers. But usually if you reduce 10%, your inventory in a company of certain material what will happen is that for a while, your purchases will reduce much more than 10%. So that means creating a sensation or a sense of a much lower demand decline that what we are seeing.

Also we believe that demand, it's not responding yet to the stimulus packages that have been put in place in the US and China. Being the Chinese one is the most important for our industry in terms of their relationship with basic metals consumption and, specifically, copper.

We don't see at this time any problem that is (inaudible) indicated with our copper sales at all. Actually with none of our metals.

But in terms of demand, we are seeing some declining demand for the first half of 2009. We believe that a certain point after midyear, we should see a recovery in demand, basically driven by China.

On moly, the molybdenum market, as you know moly is used for steel production and for special alloys and steel. And on that, obviously demand has decreased more than what we have seen for copper. And this is affecting, somehow, some molybdenum producers. Some of them were operating at much higher costs than what we are. And they had to shut down their operations.

For us, we have molybdenum at a very low cost so we don't plan to reduce our production. And we're moving forward to sell 100% of our molybdenum production in 2009.

One question, one clarification -- do you have to offer a deeper discount than some of your competitors in order to place all of your production, or you don't have -- it's more like market rates what you are giving right now?

Well, actually I'd like to report that our metal has a premium over the market price of refined copper, and we think that due to the quality of our product, we are pushing some other producers in terms of taking our metal [instead] of them. So (multiple speakers).

Thank you so much.

So we are not seeing -- we are not seeing any problem with that.

Well, in respect of the CapEx, Victoria, the CapEx is, as I mentioned, is going to be reviewed. And we think that at this point in time it's a responsible action that the Company is taking.

Of course, we think that it is prudent to preserve cash in these kind of circumstances. And we are looking to review, to adjust the capital cost for equipment in all of the projects that we have in the pipeline.

And that is the first or the main driver. But of course we are open as always for opportunities in the market in terms of acquisitions.

And any possibility of changing dividend policies?

No, I would say that the dividend policy as we always mention is reviewed in each Board of Directors' meeting, and is going to continue doing the same.

Thank you so much.

Jorge Beristain, Deutsche Bank.

Sorry. I think my question was answered. It was about dividends, but maybe we could just also talk about CapEx. If in fact we do see copper, say, hover around $1.50, roughly I think your Company's EBITDA would be in the sort of $700 million to $800 million range.

Given your commitment to CapEx taxes and a higher debt load, would you essentially just be paying the excess cash -- excess free cash flow as dividends? Or could you see potentially deficit spending -- in other words, paying dividends with an increase in further borrowings in order to sustain some kind of a minimum dividend?

I am afraid that the answer would be more or less the same. If the copper is increased to $1.50 -- that is what I understood is in your question is -- well, then the excess cash is going to be analyzed and depends on the projects that we have in the pipeline, the decision is going to be taken at the Board of Directors' meeting.

Then, well, it's -- would be more or less the same answer to your question.

Thank you.

Carlos de Alba from Morgan Stanley.

Couple of follow-up questions. [Insa] lost money in the third quarter and presumably lost money again in the fourth quarter. And we have not seen any recovery in zinc prices nor on silver.

Is there any possibility that you consider closing -- temporarily closing that operation down? That's my first question. My second question has to do with -- Minera Mexico bought some or sold forward some US dollars in order to secure the requirements of Mexican pesos. What's the rationale behind that transaction, if I may ask? Thank you.

Sure. In respect of the Insa or zinc operations, we are not planning to close or to shut down any operation in that respect. We are expecting to reduce costs, and we have entered in a very hard and important program in order to reduce cost, and not just only in the zinc area, but in all of our operations. And we believe that even the low prices or even the level of prices that we are seeing currently in zinc, our operations are going to be able to continue operating with profit.

The second part of your question was the -- ?

The FX, the -- .

Oh, the FX derivatives. Yes, those second derivatives was protecting the FX -- well, the Mexican peso, dollar exchange rate. And we have recorded in the fourth quarter around $53 million. This is a provision -- it's a unrealized number. And we have recorded that as a realized and unrealized net loss.

And those derivatives, well, the rationale for those derivatives was to protect the appreciation of the pesos against the dollar. And those derivatives go through, more or less, the middle of 2009.

Genaro, let me verify something. Carlos, regarding your prior question on concentrate volumes that the Company's [tons] -- I was wrong, it was 50,000 metric tons of concentrate. So my apologies for the mistake.

So 50,000 of concentrate that is equivalent to [30,000] tons of copper contained?

It has 26% of copper. So it's about 13,000 tons of copper (multiple speakers).

Okay. Thank you.

There are no more questions in the queue at this time.

Thank you very much. And we hope that you will join us in the next conference call for the first quarter 2009 results. Thank you, everyone.

This does conclude today's conference call. You may now disconnect. Thank you.