Southern Copper Corp (SCCO) 2009 Q2 法說會逐字稿

Good morning and welcome to Southern Copper Corporation's second-quarter 2009 results conference call. With us this morning we have Southern Copper Corporation 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 second quarter and answer any questions that you might have.

The information discussed on today's call may include forward-looking statements regarding the Company's results and prospects, which are subject to 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 to 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 the call on to Mr. Raul Jacob.

Thank you very much, Marlene, and thank you, everyone, again for joining us for the second-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.

Good morning, everyone, and welcome to our conference. Today I will discuss Southern Copper's production, sales, operating costs, financial results, and capital expenditure program. After that we will open the session for questions.

During the second quarter 2009 we have seen a partial recovery in the prices of copper, molybdenum, zinc, and silver. We chart the most important commodities produced by Southern Copper. The LME 2009 second quarter average copper price was $2.12 per pound, 45% lower than the $3.83 per pound average for the same quarter of 2008, but 36% higher than the prior quarter.

A major driver for the better copper prices in the second quarter '09 has been the significant demand recovery of China. We think that this process will be reinforced with more positive news regarding economic growth from China as well as other emerging economies. As you know, economic growth in these economies results in higher metal demand.

We believe that there are initial signals of end of the recession for the US and European economies. An encouraging sign regarding to the copper market is the availability of metal inventories when compared to copper consumption. Currently there are about eight days of consumption covered by copper inventories at the major LME and COMEX warehouses of London, Shanghai, and the USA. This figure was 32 days, four times higher in the 2001/2002 lower price cycle.

We believe that when demand recovers supply will underperform, and it did in recent years, giving support to prices over $2 in fourth quarter '09 and 2010. Southern Copper's second-quarter '09 mined copper production was 119,000 tons, 2% higher than the second quarter of 2008.

It is important to note that Southern Copper operating units have increased their production in the second quarter of 2009. La Caridad and IMMSA copper production increased by 9% and 5%, respectively. The Peruvian operations of Caujone and Toquepala increased copper production by 3% as melting production was 2% higher this quarter than in the second quarter 2008.

It is worth mentioning that during the second quarter 2009 the Ilo smelter copper concentrate throughput was 298,000 tons, the highest smelted production obtained in a quarter. This was achieved because in June 2009 the concentrate throughput reached a monthly record of 114,375 tons. At this point we are changing our guidance for 2009 to 490,000 tons of copper sold in 2009.

Molybdenum prices averaged $9.10 per pound for the second quarter 2009, 72% lower than the second quarter 2008 and 4% higher than the first quarter 2009. Molybdenum production was 4,400 tons in the second quarter '09 compared with the 3,900 tons in the comparable 2008 period. The increase of 13% was due to higher ore grade and recovery at Caridad mine, whose production increased by 44%, and higher recovery at Caujone mine were production increased by 8%.

The Company maintains its production and sales guidance of 18,000 tons for 2009.

Regarding zinc, second quarter '09 the price averaged $0.67 per pound, 30% lower than the second quarter 2008 but 26% higher than the first quarter 2009. Zinc mine production remained stable in the second quarter '09. Refined zinc production increased by 6% to 25,900 tons compared with the 24,500 tons in the second quarter 2008. The refined production increase was the result of the improved performance of the San Luis Potosi zinc refinery.

The Company is increasing its 2009 estimated sales for zinc to 105,000 tons. Silver COMEX prices in the second quarter 2009 averaged $13.75 per ounce, 20% lower than the second quarter '08 but 9% higher than the first quarter '09. Silver mine production in the second quarter '09 increased 9% to 3.4 million ounces compared with the second quarter 2008.

Refined silver production for the second quarter '09 was 3.5 million ounces, 33% higher than in the second quarter 2008 due to the better performance of the La Caridad and IMMSA refineries. The Company is maintaining its guidance for silver sales of 17 million ounces for this year.

Net sales for the second quarter were $825 million compared to the $1.462 billion for the second quarter 2008 and $622 million for the first quarter 2009. Copper sales volume increased by 7% when compared second quarter '09 with its 2008 equivalent. Molybdenum sales volume increased by 13% compared to its second-quarter '08 level and by 10% when compared to the first quarter 2009.

Silver and zinc volumes sold increased by 26% and 2%, respectively, when compared to second-quarter 2008 volumes. During the second quarter of 2009 we have had no material related to provisional priced sales. No material adjustments related to provisional priced sales.

Total operating costs and expenses for the second quarter 2009 was $521 million. This figure compares favorably with the $669 million in the second quarter 2008. The cost reduction of $148 million between this quarter and the second quarter 2008 includes fuel cost reduction of $11 million, $44 million reduction in electric power cost carried, lower labor costs of $7 million, worker participation decreased by $58 million, mining royalties decreased by $7 million, selling, administrative, and exploration cost decreases by $13 million. And depreciation as well as other costs and expenses reduction explain the remaining difference.

As a result of the mentioned sales and operating cost variances the second-quarter 2009 EBITDA was $380 million or 46% of sales. This figure compares with the $225 million in the first quarter in '09. The Company's second-quarter '09 cash cost per pound of copper produced before by-product credits was $1.50 per pound, $0.35 lower than the $1.85 per pound for the same period of 2008.

Southern Copper operating cash cost including the benefit of by-product credits was $0.51 per pound in the second quarter of 2009, $0.13 lower than the $0.64 registered at the first quarter 2009, a 20% reduction. The very competitive cash costs achieved during the second quarter 2009 is the result of higher by-product credits, higher volumes of by-products sold due to operational efficiencies explained $0.04 of those $0.13 cost reduction, and better metal prices account for the remaining $0.09.

The net earnings in the second quarter 2009 were $175 million or diluted earnings per share of $0.21 compared with the $548 million or diluted earnings per share of $0.62 in the second quarter 2008. Southern Copper's capital expending programs have continued in the second quarter 2009. The Company is currently using internal funds for capital expenditure and carefully monitoring the use of resources to preserve cash.

The Tia Maria project, which includes the Tia Maria and the La Tapada deposits in the Peruvian region of Arequipa, is expected to produce 120,000 times of SX/EW copper cathodes per year. The approved budget for the project is $934 million through June 30, 2009; $187.2 million has been spent on this project.

The basic engineering work has been completed. Current work on the project includes the development of the detailed engineering, the commencement of fabrication of the main equipment, and the environmental impact assessment which was completed in June 2009 and presented to the Peruvian authorities for approval.

As of June 30, 2009, the Company has spent $72.8 million on me Toquepala concentrated expansion. Detailed engineering works are scheduled to start in the third quarter for this year, and the environmental impact study is currently being conducted and is expected to be completed in the fourth quarter of 2009.

Other capital project is the by-product treatment plant at La Caridad metallurgical complex. This project is at 85% completion and it has been expend $13.4 million. The first stage of the project is in operation and the total completion of this facility is planned for September 2009.

The lime plant at Agua Prieta, which is 100 km north of La Caridad, has been fully modernized to comply with environmental regulations and to meet the lime requirements of the Mexican operations. The new furnace will reduce the consumption of natural gas to a third of its current level and cost will be reduced by 45%. The operation is scheduled to start off in August 2009 with a total investment of $20.8 million.

El Arco project, a world-class copper deposit in the north part of Baja California peninsula with estimated resources of over 1.3 billion tons of mineral. This project is expected to produce 190,000 tons of copper and 105,000 ounces of gold annually. Based on the approval of the Board of Directors the Company has contracted the basic engineering and is proceeding with the environmental study and land acquisition for this project.

In respect of Cananea strike, on April 14, 2009, the Mexican Federal Labor Court issued a resolution based on a force majeure approving the termination of Cananea's labor relationships with individuals and unionized employees, as well as the termination of its collective bargaining agreement with its employees and with the National Mining and Metal Workers Union. This ruling has been challenged before federal tribunals and it is expected that it will be resolved during the month of August.

The Company, the state of Sonora, and the Mexican federal government are working together to restore the necessary legal and safety conditions to resume operations at Cananea.

Regarding dividends, I would like to state again that it is the Company's 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, on July 15, 2009, our Board of Directors authorized a dividend of $0.10 per share, approximately 50% of earnings per share. This dividend will be paid on September 2, 2009, to shareholders of record as of August 6, 2009.

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

(Operator Instructions) Jorge Beristain, Deutsche.

Good morning, gentlemen. It's Jorge Beristain from Deutsche Bank. Just had a question related to your molybdenum output. We have seen quite a nice rally in moly prices lately and I just wanted to understand -- in speaking with other producers they have said that they have the ability to flex up their operations and get a little bit more moly out in the second half. And I was wondering if you would also see a supply response from your company to the improvement in moly prices.

Hello, Jorge. Good morning. This Raul Jacob. We are not increasing our molybdenum production. We are holding to the guidance that we have made. In general terms, we never reduce our plans when the low prices came in. We are seeing a better market for molybdenum for the coming months, but basically we are sticking to our initial plans. As you know, our goal is to produce 18,000 tons of molybdenum for 2009.

Okay. And then you do comment on this in your press release, but we are still in a waiting pattern then to see the response of the appeal to the Mexican Labor Panel regarding the Cananea strike. Is there any further color you could give us when the expected date of a ruling is there in August?

Well, Jorge, good morning. I will pass this to our council, Armando Ortega, probably he -- well, I am sure that he can elaborate a little bit more in respect of Cananea and in respect of these legal procedures.

Yes, good morning. As has been stated, this decision by this Mexican Federal labor court has been challenged both by individual workers and by the union as an entity before different federal tribunals. When we put in our press release the August month it is just an expectation. As you know, this is up to the tribunals themselves and is our best estimation.

It could happen that it could be later. This is what I would say an informed estimation, and we consider that the main ruling will come from a so-called collegiate tribunal which is handling the challenge by the union itself. And legally speaking, once this case presented by the union is solved it will give the direction to the rest of the challenges because it's, as I would say, the substantive or the main litigation.

So this is right now what we can share with you and we are expecting the tribunal to perform their duties. We consider that the basis upon which this Mexican Federal labor court rendered its ruling is pretty sound and we are confident that we will prevail.

Okay, thank you.

Gloria Santaella, Santander.

This is Victoria Santaella from Santander. Good morning, gentlemen. I have two questions. The first one is if you can give us some indication of how is demand from the North American market, which I understand is your largest one, including Mexico and the US.

The second one is if you can talk a little bit about inventories. Unlike other mining companies where we have seen inventories coming down significantly, I have seen yours being maintained basically at the same level since last year. So if you can give us some idea on that. Thank you.

Yes, Victoria, regarding the North American market we are seeing a very slow recovery. Please keep in mind that the American market has been very slow in copper consumption since 2006 when the housing bubble started to burst. So we are basically seeing a very slow market, but recovering some how.

So you don't see it declining even further? You don't see a strong recovery, but you don't see it collapsing?

No.

Okay. Perfect.

Well, maybe some other producers are having more trouble than that to sell their copper, but that is not the case for us. And you have a question regarding inventories.

Correct.

Yes. Well, basically we tried to tell as much as we can each quarter and each month of course. Usually we shift the very last day of production at the end of the quarter, so that is why we have a very stable inventory in copper. We have reduced our copper in process by about 10% in the last few months, and that is something that is helping us as well.

Thank you.

Rodolfo de Angele, JPMorgan.

Good morning, everyone. I have a simple question. With the current prices of copper and also given that Cananea is still closed, do you plan on pushing your CapEx program anticipating some or --? Can you just give an overall update on what to expect, how do you think changes on your CapEx plans in the short, medium term?

Yes, Rodolfo, actually we are not changing our plans for capital expenditure program. As we mentioned, our ongoing project is at Tia Maria and Toquepala. And we are analyzing and we are taking some steps in relation with other projects that I already mentioned during my presentation.

For Tia Maria, we have $363 million committed with the suppliers for this project. We have spent $187 million since the beginning of the project. And, again, we are trying to handle this capital expenditure program very carefully in order to try to reserve cash and continue with the project with enough resources to complete the project in the dates that we are planning.

Just a reminder to our audience, our capital budget for 2009 is $305 million.

Okay. Thank you very much.

Rodrigo Heredia, IXE Broker House.

Good morning, everyone. Just two questions. I think I missed when you talked about the volume sales guidance for this year in terms of copper and zinc. Can you repeat that?

Good morning, Rodrigo. For the year 2009 we are increasing our guidance from 470,000 tons to 490,000 tons. For zinc we are also increasing our guidance from 101,000 tons to 105,000 tons.

Okay, thanks. The other one is do you have there the information about the cash cost without the by-products revenues for the second quarter?

Sure. Cash costs for the second quarter without by-products is $1.50 per pound.

Right. Thanks.

Anne Riley, American Metal Mark.

Good morning. Thanks for taking my call. I wanted to ask a question about the ASARCO settlement. ASARCO said it's unlikely to keep its reinstated Southern Copper shares and has contacted a number of bidders. And I am wondering if you have any role in this process.

Also, they have talked about bringing in either a hedge fund or a private equity firm to buy up those shares. So I am wondering what kind of impact that could have on your operations.

We talk of course on behalf of Southern Copper. For Southern Copper any settlement related to ASARCO it has bearing, it has no impact, at least no direct impact. So I don't think we have any opinion nor any comment looking forward.

Okay, thank you.

[Tyler Gentry], 40/86 Advisors.

Cananea, how long would it take you to ramp up production there?

Excuse me, sir. We couldn't hear the first part of your question.

On Cananea, if you guys achieve a successful decision with the labor unions, how long do you think it would take you to bring up production at that mine?

We expect it to be between three and six months and Cananea full production will be at about 180,000 tons per year.

This would happen gradually, because some sections of the production are ready to start. I am talking specifically about SX/EW plants. That would take us a very short term in order to start up the production. The other areas would take a little bit more longer.

But answering your questions, as Raul was mentioning, to reach full capacity that would be the estimate that we have as of today.

Okay, thank you. Your bond ratings are currently on low triple-B. Do you see any impact if you were to fall to below investment grade and do you remain committed to investment grade ratings?

No. No, we are not seeing any downgrading from the agencies. We are operating in a regular basis. We have not changed our capital structure and we are not expecting any change.

I think you are at negative watch at both Moody's and S&P. Are you guys in communication then with them?

Yes. The negative watch is more in relation with ASARCO matter, but well as Armando mentioned, we are not seeing or we are not expecting any impact in Southern Copper Corporation.

I guess it's (inaudible) from Southern Copper's point of view. What we are seeing is -- what rating agencies are seeing is that they might be needing more debt in order to service what happens at the [historical] bankruptcy proceedings or the rampant litigations. For Southern Copper Corporation we feel the capital structure is very adequate and that until something materializes that this litigation, there will be absolutely no impact. And we are not initiating on taking more debt.

Okay, thank you.

Alex Hacking, Citigroup.

Thanks for taking my call. Just a quick follow-up question on Cananea. Do you have an estimate on the amount of any physical damage at the mine? And also any estimate of the total one-time cost to repair the mine and get it back up to full capacity? Thank you. Hello?

Yes. Alex, it's about $50 million. It's about $50 million. But we aren't going to be sure of that number until we get the facilities and we evaluate how or what is the damage that at the mine or the facilities or the equipment [has offered]. That is our estimate of $50 million.

Okay, great. Thanks.

Alonso Aramburu, Santander.

Good morning. Just following on the Cananea questions, if the resolution is either positive or negative, (inaudible) hopefully, can that be appealed? That would be my first question.

My second question regarding the projects, if you can tell us what the thinking is on the Company regarding Los Chancas and the Caujone expansion and whether or not El Arco is taking priority over those projects?

With regard to the Cananea question, you never know with federal tribunals. But in principle, if our legal system works, that ruling -- in particular the ruling derives from the challenge put forward by the union -- should be a definitive ruling. It could happen that rather than answering to resolve this substantive challenge the court could, for example, find procedural or formal violations during the process. It could be a little awkward, but it could happen.

Then rather than having or counting with a definitive ruling, then this court would give back the file to the Mexican Federal Labor Board and order it to purge, to correct some of these formal violations. But this is a scenario that is in my basically opinion, in the Company's opinion it's an unlikely scenario. We are confident that this federal tribunal would render a definitive ruling.

Once it renders this definitive ruling, the rest of the challenges of the [apparos] should be solved in accordance with these decisions.

About the projects of Los Chancas and Cuajone, in the Chancas we are starting in the fourth quarter the basic engineering in order to proceed with that project. And if everything goes fine, we will be ready by the end of 2013 like we mentioned sometimes before.

About Cuajone, we are increasing the cutting grade from 0.4 to 0.5 in order to maintain the production. Meanwhile, we will define -- we will do an expansion to 105,000 like we mentioned before. That is the status of the two projects like you asked.

Great. Thank you. Just one final question on the cash cost. The cash cost this quarter before by-products were actually higher than the previous quarter, $1.50 versus $1.40. Can you comment on that and what is your expectation for the next couple of quarters?

Yes, the first quarter '09 cash cost was $1.40 and the second quarter '09 was $1.50. That is as a result of the -- well, first we have a negative effect for conversion between peso and dollars. The peso re-evaluates and we have a conversion effect.

The other is the cost of metals that we are purchasing, the prices increased. That is another item, and I will say that more volume is producing a little bit of more cost. That was the main reasons.

But as always, we are working in order to try to reduce costs and we are expecting that the next quarter will be regular rate.

And when you mean regular rate is that $1.50 or around $1.40?

Around $1.40.

Great, thank you.

Anne Milne, Deutsche Bank.

Good morning. Several of my questions have already been answered. One final one, could you just refresh us on your expected timing of the Tia Maria project and when would be the earliest, and perhaps a range of when this would be completed?

Yes, Tia Maria we are expecting by the middle of 2011, mainly because we are still waiting for the delivery of the power by the government with the 500 MW line that they constructed from the central part of the country to the south where we are established. And that is the main reason. The revision that we did of our budget in order to see that because we will be maintaining or reduce it with the engineering firms.

That is the reason and we are expected to have production at the middle of 2011 if everything works fine.

Okay. And what is the current status of the power line that you are talking about? Is it under construction?

Yes, it is under construction and is scheduled to be finished in the first quarter of 2011.

Okay. If that were to be delayed, your project would be delayed then by the same amount of time?

Yes. We plan it to be ready by the same first quarter of 2011. As soon as we have the power we will test all the equipment and then we will start the production by the middle of the year.

Okay, excellent. Thank you very much.

Christopher Buck, Barclays Capital.

Thank you, good morning. Your cash position is down considerably over the last couple of quarters. And I am just wondering if you have a long-term target for that or if you can just provide some information there. Thanks.

Yes. Well, the cash position has been lower as you are saying and this is basically as a result of our capital investments. We have been paying a substantial amount of dividends. We, and probably you, remember that we exercised our repurchase, share repurchase program during the last part of 2008, first part of this year. And that is basically the reason that the cash position has been reduced.

And do you see it staying at these levels for some time or where do you think it will go?

At the end of the year?

Can you repeat your question, please? We couldn't copy.

I am just wondering if you are really comfortable with cash at the current level or do you hope to increase that moving forward? And just where you -- a long-term cash target of some sort?

Well, we feel comfortable with the current cash levels. And of course, our budget for the rest of the year based on the current copper prices is going to give us a little bit of more excess cash that is going to permit us to continue with our capital investment programs and with our operations in a regular basis.

We are analyzing how to finance the Tia Maria rest of the project through ECAs or similar structures.

Okay, thank you.

Alejandro Luciano, Credit Suisse.

Thanks a lot for taking my call. I was wondering, just a quick follow-up on that. Can you just repeat the terms you are looking to explore some financing for Tia Maria? Is there any timing on that or any amount that you are looking to finance?

Yes, we are working with some financial institutions in this respect. We are thinking that for next year we are going to start financing the Tia Maria project through this kind of credit facilities.

Thanks. Then just one question. Just want to confirm in terms of your debt, did any of it have covenants related to your investment grade rating?

No, we don't have any covenants in that respect.

All right. Thanks a lot.

Rodrigo Heredia, IXE Broker House.

Thank you. My question has already been answered. Thank you.

[Dan Richmond], individual investor.

Thank you. Could you please tell us how many tons of copper you purchased in third-party concentrate and the effect on cost per pound gross and net of third-party concentrate?

Certainly, Mr. Richmond. We bought in the second quarter 6,700 tons of copper from third party. That impacted our total cost per pound by $0.208 cents per pound.

Thank you very much.

(Operator Instructions) [Nick Ivanoff], Prudential.

Hello. I have a quick question on the working capital cash needs for the first six months of this year. The increase in cash outflow, working capital cash outflow is due to the increase of copper prices assuming that your inventories are more or less unchanged, or something else?

Well, basically as you pointed out having higher copper prices made us to have higher accounts receivable, and that as you know increased the working capital. That is one of the reasons. We are getting more detail for this.

(multiple speakers) So, Nick, that is basically the main reason for the incremental and working capital. The one is that usually we end the year with some payments like taxes and workers participation that are due on the first part of the year and that also reduce our liabilities somehow. And that also is a source of capital, working capital.

We were trying to find the specific numbers for you, but we are not handing it at this moment. (multiple speakers)

Thank you very much, ladies and gentlemen, to assist to our conference. We hope that you again will join us for the third-quarter Southern Copper Corporation results conference call.

Thank you very much. I appreciate it.

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