Southern Copper Corp (SCCO) 2009 Q1 法說會逐字稿

Good morning and welcome to the Southern Copper Corporation first-quarter 2009 results conference call. With us this morning we have Southern Copper Corporation's Mr. Genaro Guerrero, Chief Financial Officer, and Mr. Raul Jacob, Manager of Financial Planning and 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 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, Patricia, and thank you everyone again for joining us for the first-quarter 2009 Southern Copper earnings conference call. Participating in today's conference are Mr. Oscar Gonzalez Rocha, the Company's CEO, and Mr. Genaro Guerrero, Southern Copper's CFO. Mr. Guerrero will now lead the conference.

Thank you. Good morning, everyone, and welcome, again.

Today we will discuss Southern Copper's production, sales, operating costs, financial results and capital spending programs. After that, we will be glad to open the session for questions.

As we all know, the world's economic recession has severely hurt commodity prices with significant reduction in price of copper, molybdenum and zinc. The London Metal Exchange 2009 first-quarter average copper price was $1.56 per pound, 56% lower than the $3.54 per pound average for the same quarter of 2008 and 12% lower than the fourth quarter of 2008.

Major drivers for these low copper prices has been demand contraction in the developed economies and inventory buildout. We believe that demand is growing in certain parts of Asia, particularly in China. Clearly this country has finished the destocking process initiated last year and has come back to the market with a significant demand for copper, particularly for refined copper. We think that China is the first major economy to come back to copper demand growth.

On the supply side, during the last quarter, we had the following factor influencing the supply. More production costs at higher cost mine operations. Refined copper production costs driven mainly by shutdowns in the smelters due to the sulfuric acid stockpiling. As you all know, sulfuric acid is a significant byproduct of the copper smelting process. Reduction of copper scrap production that represents about 12% of total supply. It is estimated that this source of copper has dropped about 40%, helping to balance the copper market.

We think that the worst has passed for the copper market. We expect that soon some other major and emerging economics will show higher demand and see the end of copper demand reduction.

Southern Copper's first-quarter 2009 mine copper production was 120,000 tons, 6% lower than the first quarter of 2008.

It is important to note that including 12,000 tons of Cananea production obtained during the first quarter of 2008, all other Southern Copper Corporation operating units of La Caridad, Toquepala, Cuajone have increased their production by 4% in the first-quarter 2009. La Caridad and Ilo copper production increased by 11% and 10% respectively. Cuajone and Toquepala increased copper production by 1%, and the smelting production was 2% higher than the quarter -- than in this quarter than in the first quarter of 2008. At this point we are looking forward to achieve our 2009 copper-respective production and sales of 470,000 tons.

In terms of molybdenum, prices averaged $8.75 per pound for the first-quarter 2009, 74% lower than the first-quarter 2008 and 40% lower than the fourth-quarter '08. Molybdenum production was 4000 tons in the first-quarter 2009 compared with a 3900 in the comparable 2008 period.

The increase of 3.4% was due to higher ore grade and recovery at La Caridad mine whose production increased by 32% on higher recovery at Cuajone mine where production increased by 11%. The Company is increasing the production and sales plan for 2009 from 17,000 tons to close to 18,000 tons.

Regarding zinc in the first-quarter '09, the London Metal Exchange price averaged $0.53 per pound, 52% lower than the first-quarter 2008 and $0.01 lower than the fourth-quarter 2008. Zinc mine production in the first quarter of '09 increased 9.2% to 27,000 tons compared with the 24,800 tons in the first-quarter 2008. This production increase was the result of higher ore grades and recoveries at our Charcas, Santa Eulalia and Santa Barbara operations. The Company is increasing its 2009 sales plan for zinc from 98,000 tons to 101,000 tons.

Silver COMEX price in the first-quarter '09 averaged $12.63 per ounce, 28% lower than the first-quarter 2008. Silver mine production in the first-quarter 2009 increased 1.8% to 3.1 million ounces compared with the first-quarter 2008. Refined silver production for the first-quarter 2009 was 2.4 million ounces, 1.5% higher than the first-quarter '08 due to the better performance at the La Caridad and Ilo refineries. The Company is increasing its silver sales estimates from 60,000,000 to 70,000,000 ounces of silver in 2009.

Net sales for the first quarter were $622 million compared to $1.5 billion for the first-quarter and $450 million for the fourth-quarter '08. Copper volume sold decreases by 2% when comparing first-quarter '09 with its 2008 equivalent. Molybdenum sales volume maintained its first-quarter 2008 level.

Zinc and silver sales volume increased by 13% and 33% respectively when compared to first-quarter 2008 volumes.

During the first quarter of 2009, we have no material adjustments related to prohibition of price sales.

Total operating costs and expenses for the first-quarter 2009 was $478 million. This figure compares very positively with the $634 million in the first-quarter 2008 or the $581 million of operating costs and expenses in the fourth quarter of 2008. The cost reduction of $103 million between this quarter and the fourth-quarter 2008 includes fuel cost reduction of $8 million, $33 million reduction in power cost tariff, copper purchases from third-party decreases by $4 million, selling and administrative and exploration decreases about $12 million, and other costs and expense reductions, including lower operating and repair material costs and inventory changes.

As a result of dimension sales and operating cost variances, the first-quarter 2009 EBITDA was $225 million or 36% of sales. This figure compares with a $941 million or 63% of sales for the first-quarter 2008.

The Company first-quarter 2009 cash cost per pound of copper produced before by product credits was $1.40 per pound, $0.10 lower than the $1.50 per pound for the same period of 2008 and the fourth quarter of 2008. Southern Copper operating cash costs, including the benefit of byproduct credits, was $0.64 per pound in the first quarter of 2009. This is very competitive cash costs, even under a severe price reduction for all of our byproduct credits.

Net earnings in the first-quarter 2009 were $78.7 million or diluted earnings per share of $0.09 compared with a $565 million or diluted earnings per share of $0.64 in the first quarter of 2009.

In relation to capital projects, as indicated in our press release during the first-quarter 2009, we conducted a careful review of full capital expenditures and made significant cutbacks in our previously budgeted program. We believe this discipline is required to respond to the current scenario of weakness, commodity prices and economic uncertainties.

For 2009 the capital and exploration budget has been further reduced from $450 million to $328 million. Their adjusted budget includes $178 million for the Tia Maria project and Toquepala expansion project, $58 million for all other special projects, $69 million for maintenance and replacement capital expenditures and $23 million for exploration.

Regarding Tia Maria project, the Company has decided to move forward with the project after reducing the total budget from approximately $1.2 billion estimated in 2008 to $949 million, of which $160 million has been spent as of March 31, 2009.

As of the end of March of this year, we have spent $51 million on the Toquepala expansion. We will continue with a feasibility study, as well as the basic and detailed engineering for this project. The environmental impact assessment is also underway, and it is expected to be completed in the fourth quarter of 2009.

Aside from these investments, we have decided to put on hold any additional capital expenditures for this project. We continue with the environmental projects at our mining and metallurgical facilities in Mexico.

At La Caridad metallurgical complex, the gas handling project has been completed. Also, the first stage of the byproduct, an affluent treatment plan project, is currently in operational testing. These two projects are at 100% and 78% of completion respectively and have a combined budget of $9 million for the present year.

The feasibility study for El Arco project was finished during the first-quarter 2009. The study indicates an annual production of 190,000 tons of copper, 105,000 ounces of gold, and 1700 tons of molybdenum with a 35-year life of the mine. The estimated capital cost subject to further review is $1.8 billion. Considering a copper price of $1.50 per pound, the economic evaluation of this project yields an excellent return for the project. The board has given approval to proceed with the environmental impact assessment and the basic engineering study. Given the investment size, we are evaluating several options to develop these projects.

On April 14, 2009, the Mexican Federal Labor Court issued a resolution approving the termination of Cananea's labor relationship with unionized employees and the termination of its collective agreement with its employees and the union.

In addition, the Mexican Federal Labor Corp. determined the damages to the relevant equipment at Cananea mine, encumbered its operations, and as a result, the termination of a -- as a result, the termination of all labor relationships are legally justified.

In respect to the repair of damages suffered by the Cananea mine and plant, the Company will assess the best course of action to take once it counts with the necessary legal and accepted conditions that allowed the Company to restore operations at Cananea.

Regarding dividends, I would like to state again 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 better mine the upper bid quarterly dividend, accordingly on April 23, 2009 the Board of Directors authorized a dividend of $0.045 per share to be paid on June 2, 2009 to shareholders of record as of May 13, 2009.

In addition as part of the 500 million share repurchase program approved by the board in 2008, Southern Copper has purchased 4.9 million shares of its common stock during the first quarter of 2009 at an average price of $14.05 per share. Under the approved program, the Corporation has purchased 34.2 million shares at a total cost of $456 million. With the stock repurchases related to 2008 board approved program, the outstanding shareholders have increased their stock in the Company by 3.9%. Currently the Corporation holds 34.6 million shares in treasury, and there are 850 million shares outstanding.

Thank you very much, ladies and gentlemen, and now we would like to open up the forum for questions. Thank you.

(Operator Instructions). Jamie Nicholson, Credit Suisse.

My question relates to your shop drop and cash in the quarter, mainly it looks like from working capital items. Can you give a little bit more color why there was a big drop in crude workers participation participation on the liabilities side from $205 million down to $82 million and then also why the increase in accounts receivable, if you were seeing any delays in payments from your purchasers? Thank you.

Yes, of course. Well, let start first with the cash position. Well, there are four components that are affecting the cash position at the Company since the last quarter until now. And one was the repurchase of shares that I already mentioned. The other one is the payment of the workers participation in Peru. That was close to $100 million.

Another fact is the payment of dividends correspond to the fourth quarter of 2008. That was another $100 million and also capital investments that we have been paying during the first part of the year.

In respect of Accounts Receivables, well, that has been also decreased as a result of the reduction in prices, and in respect of Accounts Payable, that also is affecting our working capital. That also has been reduced because our cost has been reduced substantially as I mentioned during my presentation.

Okay. Thanks. And then the workers participation came in in Peru, are you expecting additional payments there? If so, what is the timing on that, or is that liability winding down?

Yes, there is a little portion that is still pending for the second quarter, but basically I would say that 90% or more than 90% has been paid during the first quarter.

And then just one more question if I may. Regarding your CapEx plans for El Arco and Tia Maria where you are looking at significant investments there but at the same time reducing your CapEx budget for this year, what kind of timing do you expect for those larger investment plans and where do you see financing coming from that?

Well, in respect of Tia Maria, it is a project that is underway. As far as our capital expenditures for this year, he has already considered an amount that I mentioned. That is -- it is $177 million. And in respect of El Arco, it has a little bit longer term than Tia Maria. In El Arco we are going ahead with basic engineering and with the assessment of environmental, but that is going to take us more time. That is the reason that for this year the investment for El Arco does not represent a substantial amount. But we will continue with it.

So do you think that investment will start increasing beginning in 2010 is kind of like a year away before you start investing more heavily in that?

Yes, well, we can think in start investing additional amounts in 2010. We have not determined exactly the timing in order to start the investment, and as I mentioned, we are exploring several alternatives in order to finance and to develop this project.

Jorge Beristain, Deutsche Bank.

Could you clarify what your current hedges are for the second quarter of 2009? And also for 2009, I did not notice they were expressly detailed in this press release this time?

Yes, of course. We don't have any hedge program established for this year yet. Of course, we are continually following the market, and we are looking for opportunities. We are analyzing in which moment we will trigger a hedge program, especially for copper. But we are still working on that. We don't have any program until now.

Okay. Could you qualify the potential timing and cost of a Cananea restart? It has been in the news quite a bit lately. And the last I have heard it's potentially now five to six months to rebuild the facility at around $50 million. I just wanted to get some quotes on that and if these numbers are embedded in the current CapEx quote that you have outlined for 2009?

Well, at this point of time, we cannot assess or we can not determine the amount that we will extend in order to rehabilitate the mine, and we depend on two facts. One is when the Company is going to regain the control of the operations, and second, as soon we get there, then we will assess how much it will cost. It is very soon to mention an amount of money that this is going to take us, and we cannot speculate in those respects until we get more information.

Okay, and if I could just have one last question. Could you qualify, would there be any impact from the ruling that has been made in the ASARCO fraudulent conveyance suit that a 29% stake in Southern Copper is to be returned back to the ASARCO credit steering committee? Are those shares embargoed? Is that going to have any impact on your ability to continue with open market purchases of the shares? And are you restricted in any way of reducing the free float in Southern Copper below 20%?

And I guess just the flip side of that is, of the share that you said you were holding in treasury right now, will those outright be canceled, or is there some thought of selling those back into the market?

Well, in this respect, first of all, I would like to mention that this issue is at the level of our parent company, Grupo Mexico. At this point Southern Copper is not affected. The management of Southern Copper Corp., with all the information that we already have available, we are not expecting and we don't know about any kind of affectation at the level of Southern Copper Corp.

The same thing as this matter is not in Southern Copper Corp., we don't have any expectation or restrictions in terms of cash. And well, and we will see how this is resolved at the level of Grupo Mexico probably tomorrow in the Grupo Mexico conference call. You are going to receive additional information about this matter.

Okay. And of the treasury held shares of Southern, is the intention to cancel those shares?

The Southern Copper Corp. shares?

Yes, which -- (multiple speakers)

(multiple speakers) maintain their shares in treasury until we decide or until the board decides what to do with the shares that are -- as part of our treasury. But I would say that, that it also is not going to affect any kind of -- I mean it's not going to affect our balance sheet.

(Operator Instructions). At this time there are no questions.

Well, if you don't have any other questions --

[Jorge Dominguez], HSBC.

My questions relate to the cost. I saw a market improvement in the cash costs for the first quarter from the last quarter of '08. Could you give us a little guidance on costs going forward through the year? Could we expect to see them at the current levels, or can we assume that costs might even trend slightly lower from here?

This is Raul Jacob. We think that cash costs should be dropping from both the before byproduct credits of $1.40 that we have averaged for the quarter and also considering the byproduct credits. In both cases we think that in the first one related to costs that have been decreasing through the first quarter and should be going lower through the year as well, and the fact that our byproducts credits should recuperate their prices somehow in the second half of 2009.

And my other question is regarding moly. We all know that with the current lack of demand for steel products moly is suffering. Do you guys have any visibility regarding moly markets, or do you guys still foresee sub $10 for the remainder of the year?

I think that right now we are seeing a very depressed molybdenum market. We believe that it should go back to higher prices that should make our plan to work, and let me remind that we use $10 for molybdenum as an average price for 2009. So we believe that the last part of the year, whenever we see a pickup in the steel demand, that will certainly help the molybdenum demand as well.

Okay. Thank you very much. That's all of my questions.

[Alex Thermault], George Weiss.

Two questions. First of all, you talk about the Chinese being one of the biggest buyers on the market out there. Could you elaborate a little more? You saw this trend in the first quarter. Do you foresee this going throughout the year?

And second of all, you talk about maybe you are saying it was the bottom for the copper market at this point. I mean are we still talking about 400,000 plus tons aluminum [foresemean]. Where do you see that this drawdown inventory will come from, and how do you -- what is the timeframe that you see that happening?

We think -- let me focus on the Chinese demand first. The Chinese demand has been over any expectation due to two facts. The first one was the strategic purchases made by the State Bureau, the State Resources Bureau, and the second one has been the recovery of demand coming from Chinese industries that are copper consuming.

China, as you know, it is short in copper, and usually their DBP growth transforms in 1.5% demand of copper. Even in a conservative scenario, we think that the Chinese demand will be strong for the whole 2009. Not at this level. Probably they will slow down somehow in the rest of the year, but still positive for copper imports to China.

Obviously just one -- I'm sorry, just one (inaudible) there. Obviously part of this strong demand from China has to do with the fact that the scrap market has been -- [developers] credit being a lot lower. Frankly, the price of scrap starts coming off.

I mean if you could tell me on your opinion how much do you think this rise in copper was relative to China by unit and how much do you think was -- I mean buying for the purpose of doing some strategic inventory and how much do you think was actually the scrap market effect?

Well, the scrap market effect is about 0.5 million tons. There are different estimates on what the State Reserve Bureau is doing with the purchases. But clearly if you take 500,000 tons away from the market and add the number between 300,000 and 400,000 tons, which is what this made the purchases of the SRB, you have a significant amount of copper that has been removed from the market.

Regarding the second part of your question, I think that we are seeing a slowdown in the demand reduction from developed economies, and we are seeing one major economy, which is the Chinese one in this case, going out to buy more copper. We think these two trends should accelerate somehow in the rest of 2009, meaning by this that some other major copper consuming economies, emerging economies actually, should come into the market to buy more copper and in the case of developed economies, basically a slowdown or the end of demand reduction from those economies. Those two things are the basis for our belief that the worse is for the copper market has already passed.

Dan Richman, investor.

Going back to Cananea, has the labor union appealed the labor board decision, and why can you not get control of the mine back?

Sorry, the answer is yes. The labor union has appealed the decision regarding the approval of the determination of the labor contracts. It is a union. In addition, individual workers have already filed their own appeals. So these two legal developments explain why is it that we cannot at this juncture determine when is it that we legally can predict the moment where we can regain the control of the mine. We are confident that we will prevail in those legal proceedings. But again, it is still uncertain when that will take place.

Tony Rizzuto, Dahlman Rose.

I am sorry, I did not hear your response to the question about cash cost before the byproduct credits. I was wondering if you could just describe for me how you see that playing out through the remainder of the year?

Yes, it is going to be lower than where it currently is. It is $1.40 for the first quarter. We believe that this $1.40 has not captured all the savings that we have achieved by talks with our suppliers and some reduction in the international markets for fuel and local markets for power. So we believe that these costs should trend lower, and that is only before byproducts credits for the cash costs. Including byproduct credits, we think that we will have better byproduct prices and volumes for the rest of the year that will improve our cash costs overall through 2009.

Alright. Just two follow-ups if I may. First, can you tell us what the power costs are currently that you're paying in Mexico and Peru on a US cents per kilowatt hour basis?

No, I'm sorry, Tony, we don't disclose that information.

Okay. I wonder if you can describe the impact of sulfuric acid? Obviously you have got some SX/EW at La Caridad, and you obviously smelt a lot of your production. So what are the competing impacts of that on your own system?

Well, as you know, the Southern Copper is long in sulfuric acid, and we do have long-term contracts with several customers that somehow has isolated us from the current low prices of sulfuric acid. So even though we are not getting the prices that we obtained in the past in 2007 or 2008, we are still getting better attractive prizes from the Company point of view regarding sulfuric acid sales.

So that is on a contract. Will that begin to diminish as we move forward into this year?

No. We have pretty much all of our production sold at this point.

Okay. Thank you very much.

Jorge Beristain, Deutsche Bank.

Excluding Cananea for 2009, what would your baseline guidance be on copper production or sales for 2009 and also on molybdenum?

Yes, as I mentioned, the copper guide is 470,000 tons of production and sales and for molybdenum 18,000 tons.

And could you just talk a little bit about the grade issue in the first quarter where you seem to be getting slightly more than expected copper recoveries? Is that a one-off, or do you expect this to continue?

We expect this trend to prevail through 2009.

(Operator Instructions).

Well, we do not have any other questions. Thank you very much again for joining us for this first-quarter conference call report. We we hope that all of you join us for the next -- for the second quarter of 2009. Thanks, again.

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