Southern Copper Corp (SCCO) 2009 Q4 法說會逐字稿

Good afternoon and welcome to Southern Copper Corporation's fourth quarter 2009 results conference call. With us this evening we have Southern Copper Corporation's Mr. Guerrero, Chief Financial Officer, and Mr. Raul Jacob, the manager of Financial Planning and Investor Relations, who will discuss the results of the Company for the fourth quarter and answer any questions that you may 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, Casey. And good afternoon and thank you, everyone, again for joining us for the fourth quarter and full year 2009 Southern Copper earnings conference call.

Participating in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Genaro Guerrero, Company CFO. Mr. Guerrero will now lead the conference.

Thank you, Raul. Good afternoon, everyone, and welcome to Southern Copper Corporation's fourth quarter 2009 earnings conference call.

Today I will discuss Southern Copper's production, sales, operating cost, financial results, and capital spending program. After that, we will open the session for questions.

First of all, I would like to mention that even last year started with a very negative market resulting from a deep economic and financial crisis suffered at the end of 2008, through the year the commodity markets improved significantly on the prices front. Simultaneously, our Company has been focused in controlling costs, improving productivity, and carefully managed cash flow. As a consequence, the 2009 financial results have been higher than expectations.

I'm also glad to mention that Southern Copper Corporation operations have performed soundly during the year, exceeding our estimates for 2009. Southern Copper Corporation has one of the lowest cash costs of the industry, and that advantage has allowed the Corporation to generate free cash flow, to continue its investments in capital projects in accordance with the Company's organic growth, as well as to take full advantage of its copper reserves.

Now, let's start with our -- today's agenda. During 2009, we have seen a continued recovery of metal prices, particularly copper, molybdenum, silver, and zinc, which are the most important commodities produced by Southern Copper. At this time, we have a positive view on the copper market and it can be summarized as follows.

The London Metal Exchange copper prices have reached $3.02 per pound in the fourth quarter 2009, 40% higher than the third quarter 2009. The year average had been $2.34 per pound. This compares with $3.16 per pound in 2008. We are expecting a copper price of $3.00 and 25% -- and $0.25 cents, sorry, per pound for this year. Copper represented 71% of our sales in 2009.

Our expectations are based on the following factors. We believe that inventories of copper will start to tighten up during the year, reversing the last month's trend. Our estimates indicate a market relatively balanced for 2010. Emerging economies increasing consumption, led by China, will give support to growing copper prices in 2010.

Regarding the US and European economies, we expect a higher consumption as well. Another factor to consider is that some investors found -- are entering basic material as a way to protect themselves for inflation.

Southern Copper's first by-product is molybdenum. It represents 12% of total sales in 2009. As in the case of copper, the molybdenum market has improved through 2009 from $9.50 per pound at the beginning of the last year to its latest quote of $14.75 per pound. It is important to mention that molybdenum will start trading as a LME minor metal this February. We believe that LME trading should improve molybdenum market transparency in the long run. As a reference, we can mention that each year 200,000 tons of molybdenum are traded, building business for about $6 billion annually.

Silver COMEX price have averaged $17.56 per ounce during the fourth quarter 2009, a significant recovery from the 2008 year and for the 2008 year-end when it was quoted at $10.79 per ounce. We think that silver prices will be strong in the coming quarters due to inflation concerns and the recovery of industrial demand. Silver represented 7% of Southern Copper Corporation sales in 2009.

Regarding zinc, in the fourth quarter 2009 the LME price averaged $1.00 per pound, 100% higher than the $0.50 quoted at the beginning of the year. Zinc represented 5% of our sales in 2009.

In terms of production, we are glad to report that our mined copper production has maintained its good pace during the fourth quarter 2009. Mainly reasons for these results have been better ore grades and higher recoveries. Southern Copper Corporation's operating unit production for the fourth quarter of 2009 was 126,000 tons, 5% higher than the third quarter.

The Toquepala operation increased its production by 7.4%. The Cuajone mine operation increased production by 6%. La Caridad maintained its production level in fourth quarter, but increased it by 6% during the year. And our underground mines increased its copper production by 5.3%.

Regarding our melting and refining operations, the production increased by 18.8% and 0.1% respectively when comparing the fourth quarter 2009 with the third quarter 2009.

Our guidance for 2010 in copper production is approximately 500,000 tons of copper, not considering any production from Cananea.

Regarding molybdenum, we had excellent production in 2009, reaching 18.7 thousand tons. During the fourth quarter, production increased by 26 compared to the fourth quarter 2008, due to improved recoveries and higher ore grades at La Caridad and Toquepala operations. Molybdenum production increased in 2009 14% on a yearly basis. The Company expects to produce and sell 18.5 thousand tons of molybdenum for 2010.

Zinc mined and refined production increased by 3.3% in 2009. Our underground operations have obtained better ore grades as well as improved concentrators' recoveries. Refined zinc production increased also by 3.4% at San Luis Potosi zinc refinery. We produced 110 tons (sic - see Press Release) of mined zinc and 98,000 of zinc refined in 2009. The Company's 2010 plan estimates zinc sales in the line with 2009 production of 110,000 tons.

Silver mine production increased by 1% in the fourth quarter 2009 when compared to prior quarter. On a yearly basis, silver production increased 7% to 13.2 million ounces. Refined silver production increased 15% for the quarter and 21% for the year due to higher production in La Caridad and Ilo precious metal plants. The Company estimates to sell 60 million ounces of silver in 2010.

Now focusing on Southern Copper financial performance, net sales for the fourth quarter were $1,136 million, 1.4% lower than the $1,152 million in the third quarter 2009, but 153% higher than the fourth quarter 2008. This big difference is the result of $409 million adjustment of sales in the fourth quarter 2008 due to the important metal price reduction at the end of 2008.

Copper sales volume maintained its level in 2009. Molybdenum sales volume increase by 25% compared with its fourth quarter 2008 level. Silver volume sold increased by 27%, and zinc volume sold decreases by 2% when compared to fourth quarter 2008 volumes.

Talking about operating cost, we would like to mention that our operating cost and expenses have decreased by $400 million in 2009. The cost reduction results mainly from power cost decreases of $166 million, fuel cost decreases by $30 million, lower labor cost reduction of $40 million, and other cost and expenses reduction explain the remaining difference.

For the fourth quarter 2009, the operating cost was $607 million. This figure compares favorably with the $643 million in the third quarter 2009. As a result of the mentioned sales and operating cost variances, the fourth quarter 2009 EBITDA was $616 million or 54% of sales. This figure compares with the $592 million in the third quarter 2009, 51% of sales, and a negative $54 million for the fourth quarter 2008.

In terms of cash cost, let me first mention that our Company has challenged the methodology applied for cash cost calculation. We are now considering the net effect of third parties' copper production and sales as a credit. In the past, our cash cost only included the cost of copper from third parties but not the benefits deriving from this transaction. The practical consequence of this change in methodology is that our cash cost will track now more realistically the cost of our own copper production, not being distorted by the effect of market prices from third party cost.

The Company fourth quarter 2009 cash cost per pound of copper produced before by-product credits was $1.36 per pound, lower than the $1.42 per pound of the prior quarter. Southern Copper operating cash cost including the benefit of by-product credits was $0.37 per pound in the fourth quarter 2009. This figure compares to a cash cost of $0.13 per pound for the third quarter 2009. This $0.24 per pound variance resulted mainly from lower molybdenum prices.

Cash cost before by-product credits for the full year 2009 was $1.36 per pound of copper. Cash cost including by-product credits for the full year 2009 was $0.36 per pound of copper. The estimated cash cost for 2010 is approximately $0.38 per pound of copper produced.

The effective tax income -- the effective income tax rate for the quarter was 28%, lower than our historical tax rate of 32% to 34%. The variance in tax results from a non-monetary credit adjustment in our deferred taxes as well as some other future tax credits accrued in this quarter. We do not expect our tax rate to defer significantly from our long-term trend in 2010.

As a consequence of the better market prices, higher by-product volume sold, and the positive cost reductions reported, net earnings in the fourth quarter 2009 were $363 million, or diluted earnings per share of $0.43. This figure compares with the net earnings for the three quarter 2009 of $312 million, or diluted earnings per share of $0.37, a 16% increase.

Capital expenditures including exploration expense amounted $105 million during the fourth quarter 2009, a year-over-year decrease when compared to the $215 million expended in the fourth quarter of 2008. The full year CapEx for 2009 was $439 million.

We have announced in our press release that the Board of Directors has approved an investment program of $2.8 billion for the next three years to develop 342,000 tons of copper and 6,600 tons of molybdenum of new production capacity when this program is completed. The program also aims to improve cost competitiveness and efficiency.

The approved program considers some ongoing projects as well as new initiatives. The ongoing projects are the Tia Maria project, which will increase production by 120,000 tons of copper, the Toquepala unit expansion, which will contribute to copper production with 100,000 tons and 3.1 thousand tons of molybdenum, and the Cuajone concentrator expansion to increase production by 50,000 tons of copper.

To that, we are adding the following new projects. At Cuajone, mine and concentrator equipment investments to increase copper production by 22,000 tons of copper and 500 tons of molybdenum with approximately CapEx of $50 million. For La Caridad mining operations, we are planning a concentrator expansion that should add 50,000 tons of copper and 3,000 of molybdenum per year with CapEx of around $300 million. The Company intends to allocate approximately $1.8 billion to Peru and $1 billion to Mexico, of which approximately $600 million and $200 million are intended to be investment in Peru and Mexico respectively in the fiscal year of 2010.

The Board has authorized with the commencement of the investments in Peru. However, the investments in Mexico will commence depending on developments in the Mexican labor and legal environment. In our press release, we have reported the advancement in our projects, so let me move to some other issues.

As we have mentioned before, on April 14 last year, the Mexican Federal Labor Court issued a resolution based on force majeure considering the termination of Cananea's labor relationship with individual and unionized employees, as well as the termination of its collective agreement with its employees and with the National Mining and Metalworkers Union.

Such resolutions were challenged by most of the unionized workers, individuals, and the National Mining and Metalworkers Union as entities. As this point in the federal tribunals, as this means almost all individual cases filed by the workers, the ruling on the case filed by the union remains unresolved. We are positive that the situation will be resolved and operations will be fully restored thereafter.

Regarding dividends, I would like to state again that it's 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, on January 28th, 2010, the Board of Directors authorized a dividend of $0.43 per share. This dividend will be paid on March 4, 2010 to shareholders of record as of February 19, 2010.

Additionally, we have announced that in an effort to enhance the recognition of Southern Copper's common stock in the market and better reflect the Company global presence, the Board of Directors approved a change of the ticker symbol under which Southern Copper Corporation common shares are listed in New York Stock Exchange from PCU to SCCO. Such change of ticker symbol is expected to be implemented at the start of trading on Wednesday, February 17.

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

(Operator instructions.) Your first question will come from Rodrigo Heredia.

Hi, everybody. Thanks for the call. Just a quick question. I don't know if you are going to give some kind of guidance in terms of sales volume for this year for copper and molybdenum.

Thank you, Rodrigo. Well, we already have some guidance for production in copper and molybdenum. But, I'm going to give you the numbers again about our guidance. In terms of copper, we are expecting to produce 500,000 tons of copper. And in molybdenum, 18.5 thousand tons for 2010.

In terms of copper, we are not considering production, any production, from Cananea.

Okay. And one more, if I may. When do you think that Tia Maria will start production -- producing some copper?

Yes. Tia Maria, we are expecting to start operations at the end of 2011.

Okay, great. Thank you.

Thank you, Rodrigo.

Your next question will come from Rene [Quayweg].

Good evening, gentlemen. Just two things, really. One is if you can give -- there was a ruling expected in January as regards the situation with the unions, and if there's any update on timeframe for that. And then secondly, we're seeing signs from other players in global commodity industries in terms of customers restocking or ending their de-stocking. And I was just curious to see what you guys were seeing in terms of demand from your clients and how much tightness you see near term in the copper market.

Yes. Well, in respect of the timing for the Cananea resolution, unfortunately we don't have any date that we can mention at this point of time. This is, as I mentioned in the content, in light of a tribunal decision. And we -- it will be very difficult to control and to know when they are (inaudible - technical difficulties).

And in terms of demand from clients?

Yes. In that matter, I would defer to Raul Jacob to give you information about that.

Hello, Rene. Good evening to everybody. Regarding our client base, well, we had a very good campaign last -- at the end of last year regarding our production sales. In general, what we're seeing is a recovery on demand from the -- from our major clients in the US and Europe. This is not a very strong recovery, but it's -- there are steps in the right direction regarding copper consumption in the US and in Europe.

On the emerging markets front, they have been very strong in 2009. And we believe that some restocking has occurred already there in emerging economies. But, we believe that now we'll have reasonable demand. Probably a portion of that is not noticeable right now due to the Chinese New Year's Eve. But, I think that as soon as that passes, we should have some good news coming from emerging economies, and China particularly.

Thank you, gentlemen.

Your next question will come from Alejandro Luciano.

At Credit Suisse. I just have two questions. I was wondering -- I might have missed this if you talked about any hedging strategy or forward sales you plan for this year. Can you give an update if there's any strategy there?

Yes, of course, Alejandro. Well, as always -- we used to follow the markets and we were very careful with opportunities. But, I can tell you that at this point of time we don't have any hedging strategy decided for 2010.

Okay, great. And then, my next -- yes. My next question is regarding your financing plans for your CapEx, if you plan to finance the $800 million expected this year out of cash flow or if you expect to tap any financing. And then, further out long term for the full $2.8 billion CapEx plan, if you expect to need any financing on that. Thank you.

Thank you, Alejandro. In principle, we are expecting to finance our capital expenditure program for this year through our own cash generation. But, at the same time, we are analyzing our capital structure. And based on that, probably if it is favorable for the Company's results and the analysis is giving us more information, then probably we will decide to finance a portion of the capital expenditure program.

Great. Thanks for the update.

Thank you.

Your next question will come from Guillermo Allenende.

Hi. This is actually Bruno Montanari with Morgan Stanley. Thanks for taking the questions I have. The first question is can I have a guidance for the estimated CapEx to ramp up Cananea again when that takes place?

Sure. Well, we are estimating -- of course, this number is going to be defined as soon as we reach -- or as soon as we get the facility again. When we enter to the mine and to the operations, we will evaluate what has been the damage, and at this point of time we are going to have a number.

But, even today or currently, we are estimating between $50 million and $60 million.

Thank you. My second question is you touched about the production start at Tia Maria. I was wondering if there were any comments as to which Toquepala and then the Cuajone concentration expansions would take place.

Yes, Raul Jacob has information about Toquepala and Cuajone, and he will give you the information. Please, Raul.

Yes. In the case of Toquepala, we're expecting it to be starting production by mid-2012. In the case of the Cuajone project, probably by 2013 that should be moving forward.

Regarding the Cuajone, I'd like to point out that the new projects that we add to the Cuajone pipeline of projects will be in operation by next year.

Two thousand eleven?

Yes.

So, that's the 20,000 tons you were mentioning?

Twenty-two thousand tons that comes from the new set of projects in Cuajone, and 50,000 tons that will kick in in 2013.

Okay. And there was also some volumes of molybdenum within Cuajone, right?

That's correct, about 500.

Okay. Thank you very much.

The next question will come from Carlos [Shaffer].

Hi. Good afternoon. I would like to know if you have an estimate of price for molybdenum in 2010.

Well, our estimation for molybdenum for 2010 is $13.00. I don't know if -- well, it converts a little bit low against the current market, but molybdenum has been very, very difficult to predict. The market is very -- well, we have been seeing a lot of volatility and drastic changes. Therefore, the reason we are cover our self and we will -- and we are being conservative and we are estimating $13.00 for the rest -- as an average for 2010.

Okay. Thank you very much.

Thank you.

And at this time, there are no further questions. (Operator instructions.)

Well, if we don't have any further questions, thanks again for joining us for this conference call. And we hope that you rejoin us again in the -- for the first quarter of 2010. Thank you. Good evening, gentlemen.

And this concludes the conference call. You may disconnect.