Southern Copper Corp (SCCO) 2011 Q3 法說會逐字稿

Good morning and welcome to Southern Copper Corporation's third-quarter 2011 results conference call.

With us this morning, we have Southern Copper Corporation Mr. Raul Jacob, CFO of the Peruvian operations and SEC's investor relations, who will discuss the results of the Company for the third 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 U.S. GAAP.

Now I will pass the call onto Mr. Raul Jacob.

Thank you very much, Sarah, and good morning, everyone, and welcome to Southern Copper's third-quarter earnings conference call.

On today's conference call, we will begin by an update of our view on the metal markets. We will then talk about Southern Copper's key results related to production, sales, operating costs, financial results, and capital spending program. After that, we will open the session for questions.

Speaking about the metal markets and prices, during the third quarter metal markets have been affected by negative macroeconomic events that are delaying the recovery of the metal demand, the most important of which are the following.

The continuing weakness of the U.S. economic recovery, the high unemployment, and the stock market volatility in this market has created concerns in the rest of the world regarding the world economy recovery.

The evolution of the European debt crisis. Europe represents now at least 28% of the world economy, and this is affecting the confidence of investors in the euro and the economic stability of this region.

The impact of the mentioned events in the export-oriented emerging economies, particularly China, which, according with CRU, represents 36% of the world's copper demand. Any concern about the recovery of the world economy affects the basic metals demand and financial investment in them.

Moving to our specific market, the copper market, copper represented in the past quarter 77% of Southern Copper sales. Even though we believe copper demand is being affected by the negative macroeconomic outlook, we'll maintain our positive view on these metals fundamentals. Several sources, as well as our commercial intelligence, estimate that the copper de-stocking process is coming to an end in key markets, and inventories of copper in process are [tie], particularly in Asia. This should support demand growth for the next 12 months. Demand growth now is estimated at 2% for the next 12 months by CRU.

On the supply side, production has underperformed badly in the third quarter, due to labor unrest, adverse weather, and all grade declines. We consider that these events are likely to continue in the fourth quarter of the year and in 2012, maintaining the tight copper market. Currently, CRU estimates a market deficit of 300,000 tons for both this year and 2012.

Regarding silver, which represented 8% of our sales in the third quarter and is currently our main byproduct, its price has averaged $38.76 per ounce in the third quarter, pretty much at the same level as in the second quarter of this year. We believe that silver prices will have strong support in the next 12 months due to its industrial uses, as well as being perceived as a value shelter for economic concerns.

Speaking about molybdenum, in the third quarter of this year, this metal represented 7% of company sales. We're currently seeing a surplus in the molybdenum market that has affected molybdenum prices through the third quarter. As a consequence, the average market price decreased from $16.50 per pound in the second quarter to $14.44 in the third quarter of this year, a 12.5% decrease in price.

The demand for molybdenum has been affected by lower-than-expected [stainless] steel steel demand in the U.S. and China, as well as a weak recovery in Japan's power production. We believe these are short events -- short-term events and expect a rebound in this metal in 2012.

Moving into copper production for the year and for Southern Copper, copper mine production in the third quarter increased by 24.4% to 155,789 tons (sic - see Press Release), compared to 125,192 tons in the third quarter of 2010. This increase was mainly the result of 44,876 tons of higher production at our Buenavista mine, which restored full-capacity production in the second quarter.

Anodes, cathodes, and rod production increased by 82%, 62%, and 82.2%, respectively, in the third quarter of this year, compared to the same period of 2010.

Rod production increased due to higher demand, allowing the Company to earn copper premiums over spot prices. Comparing the past quarter with the second quarter of 2011, we had an increase in production of 9,448 tons, or 6.5%.

Moving into silver production, it increases by 3.4% in the third quarter of this year to 3.3 million ounces from 3.1 million ounces in the third quarter of 2010 and by 1.7% from the 3.2 million ounces we had in the past quarter, in the second quarter of this year. These increases were principally the result of higher production at the Buenavista mine, partially offset by lower production at the Cuajone mine.

In the case of molybdenum production, it increases by 6.3% to 4,787 tons in the third quarter of 2011, compared to 4,502 tons in the second quarter of this year. This was due to higher production at the Toquepala and Cuajone mines, which was partially offset by lower production at La Caridad basically due to changes in ore grade.

Focusing more on our financial performance, in the third quarter of 2011 sales were $1.7 billion, 38% higher than the $1.3 billion we had in the third quarter of 2010. This increase was mainly the result of higher metal prices, as well as higher copper sales volumes, which increased 19%. When comparing third-quarter 2011 sales volume to the prior-quarter volume, copper sales volume increased by 3%, molybdenum by 5%, silver by six -- 13%. However, same sales volume decreased by 3%.

During the third quarter, we had $77.8 million of negative adjustments related to provisionally-priced sales. Every cent of increasing future copper prices average represent approximately $0.8 million of positive [open] sales adjustment, considering the current position. We expect to have a positive adjustment regarding open sales in the fourth quarter of 2011.

Going into operating costs, our total operating costs and expenses has decreased by a second consecutive quarter. For the third quarter of 2011, we had a cost reduction of 2%, or $19 million, when compared to the second quarter of this 2011.

The important productivity of our operations allow us to offset some cost inflation through the quarter. We have cost inflation in fuel, power, and labor which, together, increased by $3.7 million. Purchased concentrates cost increased by $5.8 million. Mining royalties and workers' participation augmented together by $15 million. Those increases in costs were more than offset by higher capitalized leachable material of $11.7 million and an inventory buildup, net of other costs, of $31.8 million.

As a result of the previously-mentioned sales and operating costs, EBITDA for the third quarter was $1 billion. This amount is 55% higher than the $666 million that we have for EBITDA in the third quarter of 2010.

Regarding cash costs, Southern Copper's operating cash costs, including the benefit of byproduct credits, was $0.484 per pound in the third quarter of this year. These cash costs was $0.117 higher than the $0.367 of cash costs we had in the second quarter of 2011. Operating cash costs per pound of copper before byproduct credits was $1.65 per pound in the third quarter of 2011, compared with $1.68 per pound in the second quarter of 2011. The $0.03 per pound decrease in the operating cost is a result of the positive production increase from our Buenavista operation that managed to absorb the cost inflation coming from higher fuel, power, and labor.

Regarding byproducts, we had a total credit of $392 million, or $1.17 per pound in the third quarter of this year. This figure compares with a credit of $410 million, or $1.31 per pound, in the second quarter of 2011. The $0.14 reduction in byproduct credits were principally the result of lower revenues from molybdenum and zinc, partially offset by higher precious metal sales.

As a result of the better copper prices and higher volume from Buenavista, the net income attributable to Southern Copper shareholders in the thhird quarter was $663 million, or diluted earnings per share of $0.79. This figure compares with a net earnings for the third quarter of 2010 of $365.2 million, or diluted earnings per share of $0.43, an 83% increase.

Going into our expansion in capital targets, the Company capital expenditures in the third quarter of 2011 were $153.4 million, compared to $112.9 million in same period of 2010.

Regarding our Mexican projects, the SXEW III plant at the Buenavista mine obtained environmental permits necessary to begin construction. Basic engineering was completed, and we're moving forward with the detailed engineering. Contracts have been signed for the earthworks and other preliminary activities, which will begin shortly. This plant will increase production by 88,000 tons per year and should begin operations in 2013.

Associated with the SXEW III project, we are also building a Quebalix facility at Buenavista. This investment consists of a crushing, conveying, and spreading system that improves SXEW copper production by increasing recovery and reducing the required time to extract copper from mineral. The Quebalix project is moving forward with the construction of the crusher building and earthwork for conveyor platforms. Overall progress is 80%, and this facility is expected to begin operating in the second quarter of 2012.

The 2,000 ton per year molybdenum circuit for the existing concentrator of Buenavista is in the equipment purchasing stage, under an engineering procurement construction and management contract. Environmental permits are expected to be awarded shortly, and we expect to begin construction in the next quarter. That means the first quarter of 2012, and production in the second quarter of 2013.

The new Buenavista concentrator with a milling capacity of 100,000 tons per day is in process, as scheduled. Basic engineering is 95% complete and detailed engineering is moving forward. Environmental permits are expected to be awarded in the following weeks. We are evaluating several supplier proposals for the purchase of the main equipment.

As previously disclosed, the new concentrator will have an estimated annual capacity of 188,000 tons of copper per year and 2,600 tons of molybdenum. It is expected to begin operations by 2015.

Required infrastructure for these projects, including power, water, roads, shops, laboratories, town sites, et cetera, are contemplated in the master plan. A preliminary study has been delivered and is being evaluated in order to define our immediate course of action.

The Pilares deposit, close to La Caridad mine, is being evaluated. Prefeasibility studies are complete and an open-pit mining alternative has been defined. We're expecting to increase copper production by 40,000 tons per year with this facility, which should begin operations by the third quarter of 2013.

Focusing on the Peruvian projects, through September 30, 2011, we have spent $142.4 million on the Toquepala expansion, mainly on mine equipment which is being used for the initial stripping of the project. The scope of this project has been defined as an increase in milling capacity to 60,000 tons per day that should increase production by 120,000 tons of copper and 3,100 tons of molybdenum. The Environmental Impact Assessment was presented to the Peruvian Ministry of Energy and Mines in July 2011, and project completion is scheduled for the second half of 2013.

Through September 30, 2011, the Company has spent $48.5 million on the Cuajone expansion project. The purchase of mine and auxiliary equipment to support the work to optimize the Cuajone mine is in process. As part of the expansion plans, the project contemplates a variable cutoff grade methodology, which started to increase copper and molybdenum production at the end of the third quarter of this year. When finished, the project will increase copper production by 22,000 tons per year, approximately for 10 years. Project completion is scheduled for the third quarter of 2012.

Regarding the Tia Maria project in Peru, we have readdressed the 120,000 tons of copper per year project with the new government and are confident that good investment conditions, stability, and economic growth will prevail in Peru.

The Tantahuatay mine, located in the Cajamarca in the northern region of Peru, starts producing this year. In 2010, we -- as you know, in 2010 we began the developing of this property to exploit its gold cap, but production actually started in August of this year with 17,700 ounces of gold and 98,800 ounces of silver in the third quarter of 2011. Tantahuatay is expected to have an average annual production of 90,000 ounces of gold and 425,000 ounces of silver for five years.

We have a 44.2% participation in this project, and the remaining of the balance is owned by Compania de Minas Buenaventura and others.

The Company's year-to-date capital expenses were $337 million. For the full year, we're currently estimated the capital spending of approximately $600 million.

New mine royalty and special mining tax in Peru has -- as it is now on September 29 of this year, the new Peruvian government enacted three new tax laws which apply to the mining industry. The first is a change in the mining royalty. The old mining royalty charge was based on sales value, and the rate ranged from 1% to 3%, while the new one is based on operating income margin, basically an EBIT margin, and the rate ranges from 1% to 12% with a minimum royalty tax assessed at 1% of net sales.

The second tax that will affect the Company is a special mining tax. It is also based on operating income, and its rate ranges from 2% to 8.4% based on the level of operating income margin. This new tax replaces the voluntary contribution for regional development, which expired in December of 2010.

Both the mining royalty and the special mining tax are deductible for income tax purposes and are paid on a quarterly basis, starting in the fourth quarter of 2011.

The third tax is a special mining levy which applies to companies with legal tax stability agreements and does not apply to Southern Copper.

On October 14 of this year, the Court of Chancery of the state of Delaware issued an opinion on a lawsuit challenging the 2005 merger between Southern Copper, Southern Peru at the time, and the Minera Mexico, which is a subsidiary or was a subsidiary of Americas Mining Corporation (sic - see Press Release), the parent of Southern Copper. Specifically, the court found that Southern Copper paid AMC in excess for the transaction. Grupo Mexico, who owns 100% of AMC, has indicated that it will appeal the decision.

AMC's proposal to effect an all-stock business combination. On July 22 of 2010, the Company received a nonbinding proposal from its parent company, Americas Mining Corporation, offering to effect an all-stock business combination of Southern Copper and AMC, the parent company of ASARCO.

Grupo Mexico's Board of Directors, after recent communications with the Southern Copper's independent committee, has decided to withdraw the proposed transaction to combine Southern Copper operations with ASARCO.

Focusing on our share repurchase program, on July 28 of this year, the Board of Directors authorized increasing the share repurchase program from $500 million to $1 billion. Pursuant to the SEC common share repurchase program, in 2011 we have purchased 9 million shares at the total cost of $273.7 million. The average price per share was $30.25. The Company undertook this action to protect the share price, considering the relatively low valuation of Southern Copper stock due to recent share price and market volatility.

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, at the close to the market on October 27, 2011, the Board of Directors authorized a dividend of $0.70 per share. This dividend will be paid on November 29, 2011, to shareholders of record at the close of business on November 16 of this year.

With this in mind, ladies and gentlemen thank you very much for joining us, and we would like to open up the phone for questions.

(Operator Instructions). [San Diego professor], GDN.

Hello, thanks for your time, and congratulations on these outstanding results. I wanted to see if you could please shed some light regarding any development of your Peruvian project permit situation, especially Tia Maria or the Toquepala expansion. And also, if you could give us, if possible, your 2012 CapEx and production guidance? Thank you.

Okay, regarding the projects, for Tia Maria basically we are readdressing the talks with the government. We think that there is a very positive attitude from the government to move on with the project, but we still need to -- we're moving slower than what we thought on this matter.

Regarding the Toquepala expansion, as part of the Environmental Impact Assessment process, we had a public hearing on September of this year in Toquepala. About 1,300 people participated in the public hearing with no events, meaning by this that there were no disturbances or anything like that. The authority accepted the meeting.

However, while the meeting was taking place, protests and disturbances from some anti-mining groups were taking place at Lake Suches. Lake Suches is the facility -- is a Company facility located 80 km away from the Toquepala meeting, in this case.

This process [brought us] raised concerns related to water usage and pollution. Even though we have repeatedly stated that our Toquepala project will not use any additional freshwater and therefore will not affect availability of these resources for agriculture or human or uses, at the behest of the Tacna regional president, the Peruvian government subsequently declared the public meeting invalid.

The Peruvian government has started conversations with the local community and the region authorities in order to solve this impasse. The Company is waiting for the outcome of these discussions and expects that the authorities will schedule a new date and place for the public hearing.

Regarding production for 2011, we are maintaining our guidance of 630,000 tons of copper production. Of those, 7% will be imposed by third-parties copper concentrates.

In 2012, we are currently looking at our production plans. We are expecting an increase of our own production. This year, as an idea, we're producing about 585,000 tons of our own copper production, and the rest, some 630,000 tons, are coming from third-party copper concentrates.

For next year, we believe that our share of the total production should increase, meaning that we will consume that copper from third parties and use our own mine production as a base for copper production. We will either produce basically the same level that we have for 2011 or higher than that next year, but this is something that we're currently reviewing and adjusting for our final plans for 2012.

[Louis Fernari], Barclays Capital.

Hi, Raul. Thanks for taking my question. My first question is regarding the hedge strategy. I did not see any changes on the release. I just wanted to be sure that there was any changes from the second quarter? And if you have anything to say about your future hedges for 2012?

And also, related to the lawsuit against the Grupo Mexico on the measure of Minera Mexico and the SEC, is your -- could you have -- if you could comment a little bit on that. And just to clarify, this would impact the current shareholders of Southern Copper or just the ones that hold the stock during the merger. So this would be my two questions. Thank you.

Okay, Louis, thank you very much for your question.

Regarding copper hedging, copper hedges represented a positive adjustment to our sales in the third quarter of $20.7 million, and for next year, we're maintaining our hedge position. Approximately 13% of the first-quarter copper production, it is with zero-cost collars with an average floor price of $3.50 per pound and an average cap price of $5.18 per pound. So that's basically what we're doing, we're maintaining our current position.

We are not considering any more hedge activity at this point; however, as has been the case in the past, if there is significant market volatility that indicates for us that we have a possibility of protecting our production, as we have done in the past, we will proceed. Or no specific action is being scheduled at this point.

The second question was about what is the ruling on the AMC. I think these questions should be, if you don't mind, Louis, to our Grupo Mexico's colleagues because they know all the details. We are part of this ruling and not -- but not the specific part involves.

Rene Kleyweg, UBS.

Good morning, Raul, and thanks for the call. I was just wondering if you could expand a little bit on the level of third-party concentrates for the quarter. And in terms of the share buyback program, you spent $110 million for the quarter, but given where we saw the shares trade down to and the size of the buyback, is there any particular reason that you weren't more aggressive in terms of share buybacks during the quarter? Thank you.

I couldn't get your first question, Rene. Could you repeat it, please?

Just in terms of the third-party concentrates purchased and consumed during the quarter, could you just give us a little bit more color on what the tonnage was that you processed into your third-party -- within your sales number, how much was from third-party concentrates?

On the third quarter, we had a relatively small consumption of third parties copper concentrate, about 9,000 tons in total. That's basically where we are, where we have -- we have some contracts that were signed in advance and we're basically finishing them for 2012.

In general terms, I would like to mention that the Company does not consider to buy these concentrates unless we see an excess capacity in our smelting and refining operations. When we have some excess capacity and the commercial conditions are reasonable for buying these kinds of materials, third-party copper concentrates, we do that and process them through our facilities.

These allow us two things. First, to have an additional benefit using at full capacity our metallurgical facilities, and second, to absorb some of the fixed cost of these facilities through the processing of copper from third parties.

Will we see any (multiple speakers) -- in the fourth quarter, sorry, will we see any volumes from third parties or in third-party concentrates in the fourth quarter, or is it now finished?

No, we have about 10,000 tons that will be processed through the fourth quarter of third-party copper concentrates.

Your second question were referring to -- unless you have anything else on this matter, Rene.

No, that's it. Thank you. Sorry to interrupt you.

Okay, your second question was on the share buyback program. Well, for reasons that you may understand, we don't want to disclose what's our strategy on this.

The program is opened up to $1 billion. As I indicated, we have spent about -- a little bit north of $700 million on this and we are -- we have this as a way to protect the share price.

Sergio Matsumoto, Santander Asset Management.

My question has been answered. Thank you.

(Operator Instructions). Martin Pradier, AGF.

Thanks. Hi, Raul. My question is how many tons of concentrates have you bought in the first nine months of this year?

Let me -- I need to -- I can tell you there -- contain copper in those tonnages and an approximate number for the concentrate because I have -- we have bought -- for the full year, we have bought about 48,000 tons.

For the full year, okay.

Contain copper. That's contain copper, okay?

Now the number of concentrate tons depend on the grade -- of copper grade of those 48,000 tons. And that's difficult to say, so I like to stick to the 48,000 tons of copper contained in these third parties copper concentrates.

Now, I'm looking at the production, and I see 426,000 -- and 124,000 one. I'd say for around number 426,000. You're saying you're going to get 630, and out of that, 40,000 would be concentrate? Is that more or less how it works? So it's 590 of real production.

I'm sorry. Could you repeat your question, please?

Okay. So you produced already 426,000 in the first nine months --

Let me be precise on that one, Martin. That is our own copper production. That's not half third parties copper concentrate.

Yes, and the 630 includes third party? Right? That you're guiding?

About 7% of the total production for this year has third parties. [This beats] third parties copper concentrates.

Okay. So your number would be 585, okay, fair enough (multiple speakers) a hundred

Yes (multiple speakers) I think if you reminded me -- [do a comment] on this, Martin. I think that our own copper production for 2011 should be at about 585,000 tons. On top of that, we will have a little bit more than that, or about 48,000 tons of third-parties copper concentrate -- copper from third parties. You add those two numbers; we are very close to the 630,000 tons (multiple speakers)

Perfect, yes. Thank you for clearing that. In terms of the tax rate, I see the tax rate this quarter was lower than the third quarter last year. Any particular reason because I see now it's about 28% and it was like 33% same quarter last year?

Yes, our tax team did a review on our tax position, and we have included some tax credits in our third quarter's tax provision.

And this is a one-time (multiple speakers)

We will do some -- we're not sure yet. We will quantify these in our 10-Q filing.

(Inaudible question - microphone inaccessible)

There are no further questions in queue.

If we don't have any additional questions, I will certainly thank all of you for attending -- I'm seeing Rene Kleyweg coming back. Is that correct, operator?

Yes, it is. Rene Kleyweg (multiple speakers)

Hi, sorry. Thanks, Raul. Sorry, I thought I'd registered earlier. I was just wondering if you could explain a (multiple speakers) --

It's always (multiple speakers) Rene, so don't worry.

Just on the hedging, you mentioned there was $21 million of gains for the quarter. Could you expand on that a little bit, given that the range on the collars would not -- it would not appear obvious that the range on the collars would have been breached. So I'm just trying to understand the structure of those instruments a little bit better in terms of where those gains came from?

Certainly. According with the U.S. GAAP, we have to register as part of our sales the actual charges or benefits that we get from our hedges. That is something that originates the figure that I mentioned, $20 million figure that I mentioned, of benefits from the hedges. But we have an open position on them, and those are recorded in other comprehensive income on the balance sheet.

So the $20 million you referred to is not a realized gain, but it's a mark to market of those hedges. Is that correct?

No, no, no. It is the realized gain for the quarter and it's recorded on sales at $20 million.

The open position, it's capped as an account in the balance sheet that reflects the difference on where we are and where we -- the mark-to-market position of the Company.

So in U.S. GAAP, you have to reflect in your current P&L whatever final loss or gain you have with the hedges, while the position on all your positions for the future -- for instance, in this case, the fourth quarter decision and the first quarter of 2012 decisions that we have. It's in the balance sheet in the mark-to-market analyses and charges or benefits, depending on where you are in this -- where do you stand on this matter.

Okay, so -- sorry to continue on this point, but in terms of the public disclosures, you have an average swap at 408 and you have a range of 302 to 484 on the collars. So it's just a reflection of the fact that the ranges and the information that's publicly available is the average, as opposed to the products which are structured at various different levels.

That is correct, and the profit comes out (multiple speakers). Daniel, would you like to add something to (multiple speakers)

That is correct. That is the average on the swap that we had. As you know, we build a position on a very small amounts of tonnage (inaudible) tonnage. That is the average we had, and that we -- the benefit realized already for the quarter on the swaps.

As you just pointed out, on the foot level, they were not breached, and that is really the realized gain on the swaps (inaudible) for a variety of different swap levels that we have, which comprises our average.

Thank you.

And if there are no other questions --

There are no further questions.

Well, thank you very much to everybody to all participate in today's conference call, and we expect to have you with us when we report on the full 2011 results in January. Thank you very much for today's participation. Bye bye.

And this concludes today's conference call. You may now disconnect.