Southern Copper Corp (SCCO) 2010 Q2 法說會逐字稿

Good morning and welcome to the Southern Copper Corporation's second-quarter 2010 conference call. With us this morning, we have Southern Copper Corporation's 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 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 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 over to Mr. Raul Jacob.

Thank you very much, Mona, and good morning, everyone. Welcome to Southern Copper's second-quarter 2010 earnings conference call.

Before getting into any material, I would like to apologize for any inconveniences that you may have had due to the delay on the conference call start-up time. It was not our fault, but, again, you obviously are not responsible for that. We take any responsibility on this one as well.

Today, we have Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Armando Ortega, our legal counsel with us. And we will discuss our views from the metal markets as well as Southern Copper production sales, operating costs, financial results, and capital spending programs. After that, we will open the session for questions.

Last quarter, we reported our satisfaction with the recovery of metal markets, compared to their 2009 level. At that time, we commented on the market's recognition and anticipation of upcoming recovering war demand for basic metals, particularly copper, molybdenum, silver, and zinc, which are the principal commodities produced by Southern Copper.

However, during the last quarter, the market world has deteriorated due to concerns about the recovery of the US demand, China's growth, and Europe's debt crisis. As a result, during the second quarter of this year, we have seen high volatility and weakness in basic metals pricing. Even though we believe there is no chance of a slowdown in the growth -- I'm sorry -- even though we believe there is a chance of a slowdown in the growth rate of the war economy, we also think that we're not close to a recession or so-called double dip, particularly in basic metals.

Focusing on copper, on the demand side, what we see is that the red metal's physical consumption is consistently increasing worldwide. According with CRU, during the second quarter of 2010, corporate demand grew by 4.8% worldwide when compared to the first quarter of this year, yielding a small deficit for the quarter.

The main demand drivers of growth came from the emerging economies led by China and the recovery of physical consumption in the US and Europe. While the Chinese government continues to employ monetary tightening measures to control inflation, growth remains robust and should continue to consume growing amounts of raw materials.

Chinese GDP grew 10.3% in the second quarter of this year versus 11.9% in the first quarter of 2010. Chinese fixed asset investment in urban areas in the first six months of the year increased by 25% versus a year ago, and fixed asset investments in rural areas for the first six months of the year increased by 22%. These are very strong indicators of growth and activity in China as well as some other Asian countries.

During the second quarter of this year as well, the US and European corporate demand for refined copper increased by 22% and 4%, respectively, when compared to the first quarter of this year. These are very positive developments that support our conviction of higher physical demand from now on.

On the supply side, current production growth is not catching up with demand performance. A clear sign of this is the consistent reduction in the combined copper inventories of the London Metal Exchange, [COM] extension high warehouses. At their latest peak in February of this year, the sum of their combined inventories was 815,000 tons. Currently, as of last Friday, they were approximately 625,000 tons, a reduction of 23% in four months. For the rest of the year, we believe that physical demand should increase even further after the end of the Norton hemisphere summer.

Looking into molybdenum, as you know, as this is first byproduct, in the second quarter of 2010, this metal represented 13% of the Company's sales. We are currently seeing consumption coming back to where it was before the economic crisis. For the rest of 2010, we are expecting a relatively balanced market for molybdenum.

Silver represented 6% of our sales in the second quarter. We think that silver prices will have the strong support for the remaining of 2010 and on, due to higher industrial demand as well as inflation concerns. Zinc that represented 4% of our sales in the second quarter has very good long-term fundamentals due to its significant industrial consumption. However, inventories are currently at a relatively high level, affecting zinc prices.

Looking into Southern Copper production, we are reporting a 4.8 reduction in copper from our mines when comparing the second quarter of 2010 with the same period of 2009. The major reason for this is in ore grade reduction at Cuajone and La Caridad of 8% and 9%, respectively, which resulted in lower copper production of 5,300 tons.

The remaining production decrease was caused by slightly lower ore grades and recoveries at our Toquepala and IMMSA mines. It should be pointed out that our second-quarter production has increased by 4% when compared to the first quarter's, due to a slight recovery in the Cuajone ore grade. In the second half of 2010, we are expecting higher production from the Peruvian unit, due to ore grade recoveries and some SX/EW production from Cananea starting in September.

Regarding our metallurgical facilities, we are glad to report a 21% increase in raw production, due to higher sales in Mexico and the US, allowing the Company to capture important corporate premiums over the spot price. This is a good indication of the recovery of durable goods demand in the US and Mexican economies. At this point, we are maintaining our copper production guidance for 2010 at 500,000 tons.

Regarding molybdenum, we had record production in the second quarter of this year, reaching 5,500 tons, a 26% increase when compared to the second quarter of 2009. The better moly production was a result of improved recoveries and higher ore grades at the Toquepala, which increased production by 55%; the Cuajone mine that increased production by 37%; and La Caridad by 10%.

These higher productions at all of our operations was the result of a slightly better ore grades and recoveries. We are increasing our 2010 molybdenum sales guidance from 19,000 tons to 20,000 tons.

Zinc mine and refine production decreased by 8% and 5%, respectively, when compared to the second quarter of 2009, due to lower ore grades at our Charcas mine, as well as lower production in Santa Eulalia, due to flowing problems which has been, since then, solved. The Company estimates zinc sales of 110,000 tons for 2010.

Regarding silver, mine production decreased by 7% in the second quarter when compared to the same period of 2009. Refined silver production decreased 3% for the quarter. We're expecting a recovery in silver production in the second half of this year. We're estimating 16 million ounces of silver sold in 2010.

Focusing on our financial performance, net sales for the second quarter of 2010 were $1.2 billion, 42% higher than the $825 million in 2009 -- in the second quarter of 2009. The main drivers for higher sales were the recovery in mineral prices and a 26% increase in the molybdenum sales volume due to higher production. When compared to the second quarter of last year, copper sales volumes decreased by 5.6% in the second quarter. Silver volumes sold decreased by 10.7% and zinc volumes sold decreased by 2.8%.

Looking into our operating costs, our total operating costs and expenses has increased by 111 million when compared to the second quarter of 2009.

The main variances include the following -- fuel and power costs increased by $14 million; labor costs increased by $3 million; other operating materials by $15 million; workers' profit-sharing, as you know, related to the higher sales and better results of the Company, by $38 million; royalties also related to higher sales by $3 million; third parties, copper concentrate purchase increased by $20 million; selling, general and administrative by $4 million; exploration expenses by $5 million; and other operational costs and variances explain the remaining difference to complete the $111 million cost variance.

As a result of the mention of sales and operating cost variances in the second quarter of 2010, our EBITDA was $612 million or 52% of sales. This figure compares with $380 million in the second quarter of 2009 that was 46% of sales.

Regarding cash costs, Southern Copper operating cash costs, including the benefit of byproduct credits, was $0.265 per pound in the second quarter of this year. This cash cost was $0.13 lower than the $0.396 per pound of cash costs for the second quarter of 2009. The improvement in cash costs was the result of continuing operational efficiencies and higher byproduct credits, principally molybdenum. As indicated before, molybdenum sales volume increased by 26% and its price by 77%.

The second-quarter cash cost per pound of copper produced before byproduct credits was $1.57 per pound, higher than the $1.35 per pound of the second quarter of 2009. This $0.22 variance is explained as follows -- the temporary reduction in production that the Company had in the second quarter of 2010 accounts for $0.08 of the $0.22 increase; $0.06 are due to higher costs of energy, fuel, and power; higher selling, general and administrative costs account for $0.02 of the increase; labor costs and royalty increases each increased cash costs by $0.01. Other variances in operating costs make up the remaining difference.

On April 16 of this year, the Company issued $1.5 billion in fixed-rate senior unsecured notes. These notes were issued in two tranches -- $400 million due in 2020 at an annual interest rate of 5.375% and $1.1 billion due in 2040 at an annual interest rate of 6.75%.

As a result of the better market prices, higher molybdenum volumes sold and efficiency gains, net earnings in the second quarter of this year were $313 million or diluted earnings per share of $0.37. This figure compares with net earnings for the second quarter of 2009 of $175 million or diluted earnings per share of $0.21, a 79% increase.

Looking into the Cananea situation, after the termination of the labor relations by enforcement of the law, the Company has aggressively started the repair of the facilities, and currently has more than 3,000 workers and contractors personnel who are working at the mine to restore the facilities.

The estimated cost to restore this mining unit is approximately $114 million. The Company's goal is to reach full capacity by February of 2011. The Company will continue with the social, educational and cultural programs that it usually conducts in all its mining operations in conjunction with the local communities. These programs were put on hold due to union labor disputes.

Expansion and capital projects -- as you have seen in our press release, on July 22, 2010, the Board of Directors approved a five-year $3.8 billion capital investment program in the state of Sonora, Mexico to expand production and improve cost competitiveness.

The program considered the following projects -- a $2.1 billion investment to expand Cananea's annual production from 180,000 tons to 450,000 tons of copper, an increase of 270,000 tons or 150% from the current production capacity. The major components of the Cananea CapEx are a new concentrator with an estimated annual production of 188,000 tons of copper, and three new SX/EW plants and a Quebalix throughput with a combined copper capacity of 82,000 tons per year. The plan also includes a molybdenum plant with an estimated annual capacity of 2,000 tons.

The first step of the Cananea investments is the restarting of the Quebalix 3 construction. Quebalix is a crushing and conveying system for the leeching material that is used by the SX/EW plants. This Quebalix has a capital investment of $56 million. It should be mentioned that 80% of this investment was made prior to the labor disputes.

Currently, the Company is at the final stage of analyzing contractor proposals to start building the third leeching plant at Cananea, which will have a capacity of 32,000 tons and an estimated capital investment of $180 million. This plant is expected to begin production in 2012.

During the next year, we will conduct [status] and engineering for Cananea for the Cananea concentrator and molybdenum plant, as well as for its fourth and fifth leeching plants. And we will also work in the detailed engineering of the copper smelter and refinery at Empalme also in the Sonora state.

The Pilares mine site development will send its mineral production for processing to the La Caridad concentrator. The estimated production of this project is 40,000 tons of copper per year at a cost of $195 million and it should be started production by 2012. The Pilares mine site development represents a change in scope for the La Caridad expansion, previously budget at $300 million.

Until now, we have had as part of our own projects the following ones -- the Tia Maria project, 120,000 tons of copper at a cost of $934 million; the Toquepala Brownfield expansion, 100,000 tons of copper and [3.1 thousand] tons of molybdenum at a cost of $600 million; the Cuajone Brownfield expansion, a capacity of 72,000 tons expansion for copper and 500,000 tons of molybdenum per year at a cost of $300 million.

To these projects, we are adding the Cananea indicated expansion as well as the smelter and refinery new projects -- and the Pilares. As indicated, we are placing for now La Caridad's expansion with -- at the [total] cost of 300 million by the Pilares mine site development at a cost of $195 million.

During this past quarter, the Company invested $92.9 million in capital expenditures. For the Tia Maria project, the technical group conformed by the Peruvian government, the Company and local communities, was partially formed and is scaled to initiate the review of the environmental impact assessment shortly.

The group will resolve which of the three alternatives for water supplies is more feasible. The Company has offered to build a dam with an increased capacity of approximately 40 million cubic meters of water that currently drain to the Pacific Ocean. The Company will only use 7 million cubic meters per year of this water. The remaining additional 33 million cubic meters will be available for the significant benefit of the Tambo Valley agricultural communities and the [slight] population.

The second alternative for water supply is [obstruction] of underground water [through] wells, and the third alternative is desalination of seawater. With the latter two alternatives, the local community will be deprived of the benefit of the additional 33 million cubic meters of water if the dam is not built.

We expect to receive the approval to begin construction of the project during the fourth quarter of this year. We anticipate beginning production during 2012. The Tia Maria unit will produce through its SX/EW process 120,000 tons of copper at a cost of $934 million.

Through June 30, 2010, the Company has spent a total of $100 million on the Toquepala concentrator expansion. Detailed engineering is now in progress. The use of high-pressure grinding rolls at the tertiary crushing stage was approved. Wet screening instead of dry screening is currently under evaluation. For the [AIE EIA] of this project, we're at the final stage of it and will be presented to the government at the end of August. An explanation of the project was recently presented to the local community.

Regarding the Cuajone facilities, during the past quarter, a 73 cubic yard shovel was put in operation. Also, 149 drilling machine was received from the supplier and it is being assembled. This equipment will support the work to optimize the cutoff grade at the mine in order to increase the copper production in the next 15 years. We are continuing work on the environmental impact assessment for the expansion project of Cuajone. As of June 30, 2009, the expenditures incurred were $23 million.

The Tantahuatay gold project, in which the Company has a 44.25% participation with [Wina Ventura], we will start operations in the second half of 2011, and it's expected to produce between 80,000 and 100,000 ounces of gold per year, and 426,000 ounces of silver per year for five years. This project will require a total investment of $110 million, of which $38 million has been already invested. Construction began in the second quarter of 2010.

On July 22, 2010, Southern Copper Corporation received a nonbinding proposal from its parent company, Americas Mining Corporation, offering to effect an all-stock business combination of Southern Copper Corporation and AMC, the parent company of ASARCO, in which we all public stockholders of Southern Copper Corporation will receive common shares of AMC in exchange for the shares of Southern Copper Corporation.

Under the proposal presented by AMC, the stock of AMC will be registered and list on both the New York Stock Exchange and the Lima Stock exchange. The Board of Directors of Southern Copper Corporation is in the process of appointing a special committee of independent directors to evaluate the merits of this proposal, and intends to announce the formation and makeup of this committee in the near-term. When formed, this special committee will be granted the authority to retain advisers, including legal and financial advisors.

If the proposed transaction is consummated, Southern Copper Corporation's public stockholders will have an indirect ownership interest in both Southern Copper and ASARCO through their ownership of AMC shares.

Regarding dividends, as you know, it is the Company policy to review at each Board meeting the capital investment plan, cash resources, and expected future cash flow generation from operations in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on July 22, the Board of Directors authorized a dividend of $0.37 per share. This dividend will be paid on August 25 of the year to shareholders of record at the close of business of -- on August 12.

Well, with this in mind, ladies and gentlemen, we would like to thank you again for joining us today, and we would like to open up the forum for questions.

(Operator Instructions). Carlos Diablo, Morgan Stanley.

Yes, thank you very much for taking my call. Just wanted to get your thoughts in terms of your views in the cash costs per pound that you foresee for the Company in the next few quarters in 2011. Do you expect a decline in these metrics? Or do you expect them to see relatively flattish during the previous time? That would be my first question. Thank you.

Thank you very much for your question, Carlos. I think that if you consider the current production based, I will say that our cash costs should be flat -- or bearing just in terms of any changes that we may have in few prices mainly. However, please keep in mind that we are including our Cananea production as part of the Company base gain. And Cananea was a low-cost operation that will certainly influence positively the cash cost of the Company from now on. I think that for 2011 at full capacity with Cananea, we should probably see a cash cost lower by between $0.15 and $0.20 from its current level before by [public trends].

And my other question is in terms of the production, how do you see the production going forward this year and in the next few years, now that you obviously are starting to ramp up Cananea? And yes, basically because of Cananea, because the growth doesn't start to kick in until really 2012.

Yes. On the -- well, in terms of our current production base, we mentioned that there is a 500,000 expectancy for the year 2010. That number should hold for 2011. And to that, you have to add what we're going to do on Cananea. We're expecting to have Cananea at full capacity by the end of February of 2011. It's about 15,000 tons of copper per month.

So, that will give you an idea of what I was expecting. Basically, about 150,000 tons of copper from Cananea in 2011 that should be added to the 500,000 that I mentioned, so that's about 650,000 tons for 2011.

Okay, and then, in terms of the CapEx, do you have an estimate of the CapEx on an annual basis for this year, next year, and 2012? Just to have a sense of when the biggest part of the divestitures -- or not divestitures, sorry -- for the future growth will take place?

Yes. Let me -- well, for this year, we have a total budget of $836 million, and from those you may reduce a little bit due to the [TMRE] expenditures that are mainly on hold at this point. For next year, our budget will be going about -- to about $1.1 billion. For 2012, about $1 billion. These numbers will be reviewed as we move on in time, obviously.

Excellent. My final question is regarding the proposed transaction with AMC. What -- do you have already a timetable for the next moves by the Board and by the independent committee that will be appointed to represent the minorities?

Not at this point, Carlos. Armando, would you like to comment on that?

No, the only thing I would like to comment is that the Board is in the process of forming the special independent committee, and, as appropriate, we will, once this is established, we will proceed to inform the market. And then, it will be up to that body to decide the timetable and the support that it will require for its duties.

Okay. And just could you remind us, the process to make the final decision regarding these transactions would be the independent Board will form a -- will provide a proposal to the entire Board and then the entire Board will vote upon this proposal?

Well, first of all, it is up to the special independent committee to assess the merits of the transaction. And if they consider the transaction to be fair to the unaffiliated stockholders, in that circumstance, they would propose the full Board to approve the transaction. And then, the Company would meet to call for a stockholders meeting to have the transaction approved as a holding.

Right. Okay, thank you very much.

Felipe Hirai, BoA Merrill Lynch.

I just have two follow-up questions here. Still on the CapEx side, Raul, you gave us the number [of shorts] 2011 and 2012. Do these numbers already include the new CapEx for the Mexican operations and how you're looking at the CapEx for the other years? And also, if you could give us any idea on how you expect to see the production ramp-up in Mexico for the [new mines] (multiple speakers)?

I couldn't get the last part of your question, Felipe. Could you repeat it please?

Felipe Hirai So, what I would like to know is if the CapEx that you said, the $1.1 billion for 2011 and $1 billion for 2012, if they already reflect these higher numbers for Mexico? And how do you see the CapEx after 2012? And relating to the new projects in Mexico, how do you see the production start-up for these additional capacity?

Okay. Let me first mention on the CapEx. For I mentioned already that for 2011, we have $1.1 billion; $1 billion for 2012; then $900 million for 2013; $700 million for 2014; $700 million for 2015 and '16. In terms of these, obviously, do include the program approved by our Board in July, the Mexican operations or the Cananea expansion as well as the Pilares expansion.

Okay. How do you see the expected (multiple speakers) of this?

Yes. Well, we already mentioned that the third SX/EW at Cananea will start operations by mid-2012. On the case of the concentrator or the traditional mining investment that has mine equipment and new concentrator and a molybdenum circuit, we're working on defining the basic engineering and looking to schedule these projects by -- to start production by [mid-2016]. In the case of the smelter and the refinery, those two should start operations by 2017.

Okay, and my second question was related to [a cycle]. Do you already have any indication of synergies that you could potentially have by combining the operations?

Raul?

Yes?

I think it is not appropriate for the Company to touch upon these issues, which are the authority and duty of the special independent committee.

Okay, thank you.

Victoria Santaella, Santander.

I want to focus on the cash costs during the second quarter. I see a huge increase versus the first quarter where you had a credit, and now we are back into an effective cost, even though we have -- or you guys registered a significant decrease in molybdenum, [northern] prices went up.

So you can elaborate basically what happened between the first and the second quarter in the costs and provide a little bit more detail. Just to confirm on Felipe's question, the production in second half of the year should ramp up significantly in order for sales volumes to reach some 500,000 [tons of] guidance. I just want to confirm, is this correct? Because you are way behind that guidance if we unrealize what we have seen in the first half.

Yes. Let me go to your last question, Victoria. We are including -- we're expecting to produce about 470,000 tons from our current operations, and we will get some new production from Cananea in the fourth quarter -- not at full capacity, but that will fill the gap for what you are saying.

So, actually there is a decline in your guidance because the 500,000 was without Cananea before.

Yes, you can say so, if you consider only the operations that are currently using, yes. Okay. Now, looking into your first question, what's the comparison between the second quarter of this year with the first quarter, we had -- in terms of total costs, we had a variance of $31 million. Fuel and power increased by $3 million; labor costs by $3 million; other materials increased by $11 million; mining royalties by $2 million. The rest is small expenses increases.

On the cash costs, we had a cash cost of $1.50 per pound before byproduct credits in the first quarter of this year. That number compares with $1.57 for the second quarter. A portion of that is explained by the reduction in production.

But mainly due to byproduct credits on the other metals -- I mean not molybdenum but silver, zinc, we had a reduced -- reduction on that, and as I say, costs increased by $31 million mainly for (inaudible) [fuel] and power and labor. And operating material -- general operating materials increased their costs a little bit in the second quarter of this year compared to the first quarter.

Okay. Should we be concerned about lowered ore grades going forward, both at Caridad and Cuajone's? Can this be a real problem in terms of your guidance (multiple speakers)?

I don't think so. I think that the Cuajone operation is increasing. It's increasing its ore grade as we move on further into the year. We're not getting to the level that we had last year, but we're closing the gap that you have seen in the first quarter mainly.

As I mentioned, this quarter's production increased when you compare that to the first quarter one. And that [trend] should be consolidating and that's why we increase our -- if you just double what we did in the first half of the year, you will not get to the number that I mentioned. It's -- we are having a better production coming from Cuajone and from Caridad as well.

Thank you very much.

Christopher Buck, Barclays Capital.

I'm just wondering if you can give us an update on your funding needs? The bond you issued earlier this year was partially to be used for CapEx spending, and at that point, the spending plan was a bit smaller. So, just wondering if you can update us on your plans there and how you plan to fund some of this CapEx? Thank you.

You're welcome. Well, we are -- we have our bond issue already and we're expecting to start using that money for our growth. A portion of that growth will be financed by our own [sun's] generation as well. Next year, we will have the benefit of having Cananea back and that is going to improve our cash generation. Later on in time, when we have Toquepala and Tia Maria moving into production -- the expansion in Toquepala and the Tia Maria projects -- we will consider -- we will review our current debt position and make a decision on that matter as well.

Okay, so the bottom line is for the foreseeable future, you have enough capital to proceed as you wish and you'll kind of wait to see how the cash flows develop and reevaluate at that point?

That's correct.

Okay. And it sounds like you're limited in what you can discuss regarding the AMC transaction. But any view on how that could change your funding plans or how capital will be distributed within the new entity?

No. No comments on that.

Okay. Thanks very much.

Jamie Nicholson, Credit Suisse.

Yes, my question was also related to ASARCO and just whether -- I mean, it looks like ASARCO throws off a significant amount of free cash flow, and whether you expect one of the benefits of the potential merger to be that that cash flow could be a portion of funding for Southern Copper projects?

Jamie, at this point, I think that we can't comment on these kind of questions. If you don't mind, Grupo Mexico will have its conference call later on today. I think that you may address that question to them.

Okay. And then -- yes, I appreciate that. And then I'm just -- here's another one I'm wondering if you can address --

You can always ask.

Yes, exactly. I'll try. So, Southern Copper being the surviving entity, I would assume ASARCO would not be a guarantor of those bonds. But if they are not a guarantor, would Southern Copper continue to disclose the guarantee entity to bondholders going forward? Can you elaborate at all on that or whether ASARCO would become a member of the guarantor group?

Well, ASARCO and Southern will be separated as entities. So, the bonds at Southern issue will be backed by Southern Copper and in the future, if this transaction ever consummates. At this point, there's not much information that we can elaborate on this, but that's one of the things that we can share.

Okay. So it sounds like, though, if they're separate subsidiaries, that you would be able to produce subsidiary information, like you do already -- or like Grupo Mexico does already. Is that your expectation?

That's our expectation. That's correct.

Okay, great. Thanks very much.

Raul, we probably would like to direct our colleagues to read again the Exhibit that Southern Copper filed together with its 8-K last Friday. It contains the letter filed by AMC describing, I would say, in a very clear manner, the structure of the transaction and the result -- the end result of the transaction for corporate purposes regarding both ASARCO and Southern Copper.

Mona, do we have any other questions?

Yes, we do have another question, and it comes from Alex Hacking from Citigroup. Your line is open.

Good morning, everyone, and thanks for taking the question. The first question, I just want to confirm that the proposed transaction with ASARCO will require a vote from the minority shareholders in Southern Copper.

We will check again with our [Outlet] Council, but upon our past experience, the normal procedure to approve this transaction is first, to have the formation of a special independent committee that would analyze and assess with the experts the merits of the transaction. And if they consider that this transaction is fair, then they would present this transaction -- they would recommend this transaction for the approval of the Board. And then, the transaction would be presented to all the stockholders in an ad hoc or special stockholders meeting.

We would like simply to doublecheck it. But that is the normal procedure, as to how these sort of transactions ought to be approved.

Okay. So, just to confirm what you're saying, is that it does not -- it would not require a vote of the minority shareholders, just of the entire shareholder base, which would obviously include Grupo Mexico's 80% who would vote presumably in favor.

Well, as far as our experience tells us and upon Delaware law that we are aware of, the interest of the minority stockholders are precisely safeguarded by the creation of the special independent committee. Their very duty is to ensure that the transaction is fair for the unaffiliated stockholders, and that is precisely what they are called to do. That is part of their fiduciary duty and the concrete mandates that they get to assess, to examine, to determine whether the transaction as proposed is fair or not for their stockholders -- and I'm talking about the minority stockholders.

And then, procedurally, if they reach the conclusion that it is, then they need to recommend the transaction to the approval of the Board, and later on, for the approval of all the stockholders in the context of a general stockholders meeting, where minority stockholders would vote.

Okay, so, thank you. That's very clear. The second question I have is just going back to the CapEx. Would you mind to just clarify the timing of some of the projects for me, i.e. when they would be completed? Specifically I'm talking about the new mine at Caridad, Pilares, and then also just the expansions at Toquepala and Cuajone. What's the target date for completion there? Thank you.

Okay. On Pilares, it's expecting to initiate production by 2012. On Toquepala, it's scheduled by mid-2012, as well as Tia Maria. In the case of Cuajone, it's scheduled for mid-2013.

Okay, that's perfect. Thank you very much.

[Tatiana Schimsky, American Metal Mark].

I just wanted to find out -- you've recently regained control of Cananea and you're planning to spend quite a lot of money. What is your visibility on any potential labor issues, given the history at the mine?

Armando, would you like to comment on that?

Well, right now, as you know, we have just regained control of the mine and we are in a very active, very aggressive process of reconstructing and rehabilitating the mine. Upon the timetable that has been provided to you, we plan to start slowly and increasing level producing again.

Once we terminate the rehabilitation and reconstruction process, we plan to formally hire, with a new labor union, new workers for the mine; and also to sign a new collective bargaining agreement, and more than a competitive one, in order to help us to support our production basics and a new era of labor relationships with a new union.

That is, I would say, in general terms, the profile of what we want to do and we expect to do. Right now we are working with contractors. Right now we are working with contractors, with several contractors, who are helping us in this endeavor. But as you know, this is just for awhile -- I mean, during the time in which we terminate our rehabilitation and reconstruction process.

But once again, in order to repeat myself, once this process, once this stage is terminated, we would start right away a formal labor relationship upon the umbrella of a new collective bargaining agreement with a new union, with a new labor union.

Let me add to that, Tatiana, that we have nine of our operations with the kind of contract that Armando has mentioned, where productivity, it's key to improving salaries. And workers of those other nine Mexican units that have these kind of contracts are certainly responding very positively to these kind of new labor arrangement.

May I ask one more question?.

Mona, do we have any other questions in the queue?

Yes, your last question comes [from] Victoria Santaella from Santander. Your line is open.

Raul, this is a follow-up question since no one touched on it. Any final comments on the perspective of higher royalties? Both in Peru and Mexico for next year, have you seen something that may affect the levels that the Company has been paying, especially Mexico, which are quite low?

Well, the simple -- the straight answer to your question is no. In Peru, there is no discussion about raising the royalties. Obviously, when Australia went out asking for higher taxes, some persons at the political arena start talking about that, that that was just a talk. Nothing particularly, specifically, has been presented or indicated about this by the government.

(multiple speakers) Go ahead.

Sorry. In Mexico, we have experienced in the last years, one or several congressmen launching or making statements regarding the likelihood of a potential new royalty to tax mine activities, and it has become almost a sport; but, at this juncture, we don't see (inaudible) at least not now, any new initiative.

It would not be a surprise if there is a new congressman announcing that they intend to [pass] a new initiative in that regard and -- but I don't think it's something that would be -- if it's passed by the whole Congress, it would need -- as a tax, it would need to go before the two Chambers of Congress, and I don't think it needs a duty, no? So, completely at this stage, we don't have anything that we need to disclose with you.

Thank you so much.

(Operator Instructions)

Well, do we have any other questions in the queue, Mona?

(Operator Instructions). Carlos Diablo, Morgan Stanley.

Yes, Raul, just wanted to clarify, the SX/EW's 4 and 5 in Cananea, is expected start -- ramp-up time is 2017?

No, 2017 is ramping up for the new smelter and refinery in Empalme in Sonora. The SX/EW plants will most likely be scheduled before 2015 -- let's say number 4 by 2014, number 5 by 2015, and the concentrator, new concentrator by 2015 as well.

Right. Okay. Thank you very much.

[Buteros Najim].

I was just asking to clarify regarding the minority votes. From what I understood, you said that the minorities will not have a specific vote, right? And that the votes will be all stockholders. That I assume would include GMex? So I just wanted to clarify -- is GMexico -- is (inaudible) voting? Will they be allowed to vote in that vote?

Yes. The concrete question is yes -- yes, of course. I mean, this transaction needs to be approved by all the stockholders, whether the controlling stockholder or the minority stockholders. It needs approval upon Delaware law by all stockholders.

I was emphasizing the aspect that, again, upon Delaware law, the very duty of the independent directors of the special committee is precisely to ensure that the interests of the minority stockholders is, again, safeguarded; is taken into account on a specific basis. And therefore, when this body is formed, it is empowered to engage their financial, legal, and other experts -- for example, mining experts or any other experts that they deem appropriate -- in order to help them independently to assess the merits and to analyze the merits of this transaction.

So, effectively, if I get it -- if I understand this right, as long as the special committee approves it, the transaction will be approved effectively, right? Because it's initiated by Grupo Mexico.

Effectively, yes. Effectively, yes. Because if they approve it, then they would recommend the Board to approve it, and then, it would go to a general stockholders meeting to have the transactions approved.

Right. Right, okay, I get it. Okay, thank you very much.

There are no questions at this time. I will turn the call back over to the presenters.

Okay, thank you very much, Mona, and thank you very much to all the participants in today's conference. We are expecting to have you with us later on when we report the third quarter or if we have any other conference call before that. Thank you very much to everyone. Good day.

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

Thank you.