Southern Copper Corp (SCCO) 2011 Q4 法說會逐字稿

Good morning, and welcome to Southern Copper Corporation's fourth-quarter 2011 results conference call. With us this morning we have Southern Copper Corporation's Mr. Raul Jacob, CFO of the Peruvian Operations and Investor Relations of Southern Copper, who will discuss the results of the Company for the fourth quarter and the year 2011, as well as answer any questions 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 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 onto Mr. Raul Jacobs.

Thank you very much, Kurt, and good morning to everyone, and welcome to Southern Copper's fourth-quarter 2011 earnings conference call. Participating in today's conference call is also Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Daniel Muniz, Grupo Mexico's CFO. In today's conference call, we will begin with 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, expansion projects, and capital spending program. After that, we will open the session for questions.

Let's focus on the metal market and prices. During the fourth quarter, metal markets continue to be affected by the negative macroeconomic events such as the European recession and the debt crisis. Copper, as you know, is our main product, with 77% of total sales in the fourth quarter of last year. Even though we believe copper demand is negatively influenced by the indicated macro outlook, fundamentals for [refined] metal improved in recent months, due to the end of European [destocking], a rebound in Chinese consumption, and the [structural under-performance] of supply.

Several sources as well as our own commercial intelligence, estimate that the copper destocking process finished in both Europe and Asia, as I said, and the recent growth in Chinese copper imports to about 1 million tons for the past quarter, 0.5 of it in December, shows the recovery of visible consumption in this country. Demand from emerging economy is also growing at a good pace, offsetting weaker consumption from the European and American markets. According to CRU, total demand growth is estimated at 2.2% for 2012. If we consider global corporate demand at about 19.6 million metric tons, this represents approximately 430,000 tons of additional copper tonnage required in 2012.

On the supply side, production has under-performed badly in 2011, and particularly in the last quarter of the year, due to labor unrest, power shortages, adverse weather conditions, and ore grade declines. We consider that these events are likely to continue in 2012, maintaining tightness in the copper market. Currently, CRU estimates supply growth of 2.2% for 2012. It also estimates a market deficit of approximately 400,000 tons for the year.

Focusing on silver, which is our main by-product in the fourth quarter -- was our main by-product, it represented 7% of our sales, and is currently -- is currently, as I said, our main by-product. Silver prices average $31.81 per ounce in the fourth quarter of last year, 18% less than its price in the third quarter of 2011. We believe that silver prices will have a strong support in 2012, due to its industrial uses, as well as being perceived as a value shelter in times of economic uncertainty.

In the case of molybdenum, its sales also represented 7% of the total Company sales in the fourth quarter of 2011. Even though we saw a 5% molybdenum demand recovery in 2011, we are still in a surplus market in this metal. As a consequence, the average market price decreased from $14.44 per pound in the third quarter of 2011, to $13.20 per pound in the fourth quarter, an 8.6% price decline. At current price levels, we are seeing some production cuts, particularly from high-cost Asian producers. We expect that in 2011 that this will help to balance the market and decrease the current market surplus, thereby improving market prices in the near future.

Focusing now on production, I started by our main product, which is copper. Our copper mine production in the year 2011, increased by 22.8% compared to a year ago. This increase was mainly the result of higher production at our Buenavista mine, which is currently operating at 100% of its installed capacity. Refined copper and rod production in 2011 increased significantly too, compared to 2010, allowing the Company to earn copper premiums over its spot prices. Total copper production for 2011 was 638,810 tons. Of those, 8%, about 51,000 tons were from third-party copper concentrates.

In 2011, we completed all the repairs to the Buenavista property at a total cost of $212 million. That -- allowing for the restoration of full production at these operations. Of the total repair costs, $81.1 million were charged to operating cost, and of those $81 million, $45.2 million were charged in 2011. For 2012, we are expecting production of copper of about 640,000 tons, of which about 5% will be from third-party copper concentrates.

Looking into molybdenum, molybdenum production decreased by 9.5% in 2011, due to lower production at the Cuajone mine as a result of changes in grade and recoveries. These lower production was partially offset by higher contribution of our La Caridad and Toquepala mines. For 2011, our guidance on molybdenum production is about 17,200 tons for the year.

Regarding silver, silver mine production slightly increased in 2011, as a result of 1.5 million ounces of higher production at the Buenavista mine. This better or higher production from Buenavista was offset by lower production from the other mines. In 2011, we sold 14.2 million ounces of silver, and we expect to sell a similar amount in 2012.

Going into our financial results, and before we review these -- the details on our financial performance, let me say that 2011 was a remarkable year for Southern Copper. A reflection of this is the record levels achieved by the Company in sales, EBITDA, and net income. 2011 sales were a record, as I just said, of $6.8 billion or 32.4% higher than the $5.1 billion that we had in 2010. This increase was mainly the result of higher copper sales volume from Buenavista production, and higher copper, silver, and zinc prices for the year 2011.

For the fourth quarter of the year, of last year, sales where $1.7 billion, 11.4% higher than the $1.5 billion that we had in the fourth quarter of 2010. This increase was mainly the result of higher copper sales volumes from Buenavista, which more than offset the effect of lower prices for copper and molybdenum in that quarter. When comparing fourth-quarter 2011 sales volume to a prior quarter, copper sales volumes increased by 4%, molybdenum by 4.8%, silver by 5.8%, zinc by 12.8%, and sulfuric acid sales by 18.7%.

Our total operating costs and expenses have decreased for the third consecutive quarter, improving the Company's profitability. For the fourth quarter of 2011, we had a cost reduction of 2%, or $16.5 million, when compared to the third quarter of the previous year. Basically, higher [reachable] material capitalization and lower worker participation, allow us to offset higher inventory consumption and cost inflation in fuel, repair materials, and contract for services.

Our EBITDA in 2011 was also a record of $3.9 billion, compared to $2.9 billion in 2010, an increase of $1 billion or 36.4% higher, with a margin of 57.3% in 2011. That compares to 55.6% in 2010. EBITDA for the fourth quarter was $965 million, 5.3% higher than the $916 million that we had in the fourth quarter of 2010.

Operating cash cost per pound of copper before by-product trades was $1.66 per pound in 2011, and this was compared with $1.52 per pound in 2010. Operating cash per pound in 2011, net of by-products, was $0.41, making Southern Copper one of the lowest cost producers in the industry. Looking at the fourth quarter, Southern Copper's operating cash costs, including the benefit of by-product trades, was $0.525 per pound. This cash cost was $0.041 higher than the $0.484 of cash cost that we had in the third quarter of 2011.

Operating cash costs per pound of copper, before by-product trades, was $1.64 per pound in the fourth quarter of last year. This compares to $1.65 per pound in the third quarter of 2011. The $0.01 per pound decrease in operating cost before any credit, is the result of the positive production increase from our Buenavista operation that managed to absorb cost inflation coming from higher fuel, repair materials, and contractors.

Regarding by-products, we had a total credit of $382.7 million or $1.11 per pound in the fourth quarter of last year. These figures compare with a credit of $392 million or $1.17 per pound in the third quarter of 2011. As previously mentioned, most of our by-product sales volumes increased in the fourth quarter of 2011, when compared to the third, and consequently, the $0.06 reduction in per-pound credits that we had in the last quarter, were the result of lower by-product prices.

Net income for the year 2011 was an all-time high of $2.3 billion, 50% higher than the $1.6 billion that we had in 2010. Net income for the fourth quarter was $537 million, 9.1% higher than the $492 million that we had in the fourth quarter of 2010. Diluted earnings per share were $0.64 per share in the fourth quarter of 2011. This figure compares with diluted earnings per share of $0.58, a 10% increase. For the year 2011, earnings per share were $2.76, 51% higher than the $1.83 of earnings per share obtained for the year 2010.

Discussing our expansion and capital projects, in the year 2011, capital expenditures were a record of $612.9 million, which represent 26.2% of our net income. Capital expenditures in the fourth quarter were $275.9 million compared to $127.6 million in the same period of 2010. Regarding the Buenavista expansion, after obtaining the necessary environmental permits, construction has started at the SX EW III plant at the Buenavista mine. Some of the equipment originally purchased for the Tia Maria project will be used for this SX EW plant. This will allow us to increase the annual SX EW plant capacity from 88,000 tons to 120,000 tons. The new plant should begin operating in the second half of 2013, and the project has been adjusted to $444 million.

Associated with the SX EW III project, we are also building a Quebalix facility at Buenavista. This investment consists of a crushing, conveying, and a spreading system that improves the SX EW copper production, by increasing recovery and reducing the required time to extract copper from mineral. Overall progress is 88%, and this facility is expected to begin operating in the second quarter of this year. The Quebalix project has a total budget cost of $70 million, of which $48.7 million has been spent through December of last year -- December 31, of last year.

The 2,000-ton per year new Buenavista molybdenum [circuit] is in the equipment purchasing stage, under an EPCM contract. Environmental permits will be obtained shortly, and we expect to begin construction in the next quarter, with production beginning in the second quarter of 2013. Deferred capital total cost of $38.2 million.

The new Buenavista concentrator, with a milling capacity of 100,000 tons per day, is in process. Detailed engineering are moving forward as [we scale]. Environmental permits have been obtained, and we are evaluating several suppliers' proposals for the main equipment. Purchase orders for crushers, primary and secondary [gold mill], and motors has been placed. The new concentrator will have an estimated annual production of 188,000 tons of copper, and 2,600 tons of molybdenum. It is expected to begin operations by 2015. The total budget of this project is $1.4 billion. Required infrastructure for these projects including power, water, roads, shops, laboratories, town sites, et cetera, are included in the master plan. A preliminary study has been completed for this project as well.

Regarding the Pilares project, on October 27, the Board of Directors approved the development of the second stage of the Pilares mine with a budget of $136.3 million. In 2008, we acquired 100% ownership of Pilares, with the intention of operating it as an open pit facility. Current mineral resources are estimated at 43.4 million tons, with 0.789% of copper sulfide content, and 0.077% copper oxide. We expect to increase copper production by 40,000 tons per year, by sending minerals from the Pilares site to our La Caridad concentrator. Pilares should begin operations by the third quarter of 2013.

Also in October, the Board of Directors approved an expenditure of $131 million for the development of the Angangueo mine. This mine is located in Michoacan, Mexico, and it's a polymetallic deposit with an annual production potential of 36,000 tons of copper, 4.5 million ounces of silver, and 41,000 tons of zinc. The project is scheduled for completion in the second half of 2014.

Regarding the Toquepala expansion, we have begun the expansion to increase our -- the current milling capacity to 120,000 tons, which should increase annual production of copper by 100,000 tons, and the molybdenum production by 3,100 tons of additional molybdenum production. Through December 31 of last year, we have spent 33% of the $600 million approved, and project completion is scheduled for the first quarter of 2014.

In the case of the Cuajone operation, a first stage of this expansion-- of the expansion plans that we have for this mine, includes the increase milling capacity and a change to a variable cut-off grade methodology. The project completion of this stage is scheduled for the third quarter of 2012, and it is expected to add 22,000 tons of copper production per year. Through December 31 of last year, the Company has spent 27% of the $300 million budget at this [point].

Regarding the Tia Maria project, we have initiated a bidding process to prepare a new environmental impact assessment study for the project that will address recent government guidance on these studies, as well as the concerns expressed by the neighboring community. We're confident that this initiative will allow us to obtain approval for the development of the 120,000-ton annual production copper project. Assuming the new EIA study is approved, due in 2012, we are rescheduling the project start-up to 2015.

Regarding the dividends, as you know, it is a 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 of the market on January 27 of this year, the Board of Directors authorized a cash dividend of $0.19 per share of common stock and a stock dividend of 0.0107 shares of common stock per share of common stock. The stock dividend will be paid with shares of common stock held in SCC's treasury. Please keep in mind that shares held in treasury, on the record date, will not be entitled to either the cash or stock dividends. SEC [DTC] that the dividends will provide stockholders a return on their investment while the Company maintains its strong cash position.

The cash and stock dividends are payable on February 28, 2012 to shareholders of record at the close of business on February 15, 2012. The mechanics regarding the announced stock dividend will be consistent with market practice for stock dividends and the treatment of fractional shares. In consultation with the SEC's transfer paying agent, DTC, and its participants, including among others, the Peruvian [Cavali]. The investor relations department of -- at SCC is available for -- to address further questions on this matter.

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

(Operator Instructions)

Santiago Perez Teuffer, from GBM.

Hi, good morning Raul, Oscar, and Daniel, thanks for taking our questions and congratulations on your results. Some [other] sources have been mentioning that Southern Copper is meeting with a community and authorities in order to discuss the Tia Maria project in the next 15 days. What outcome could we expect at this meeting? And also, could you give us more color on the Angangueo project? Will it be like concentrate? Or will it contain any processing facilities? Thank you.

Sure, how are you, Santiago? On the first question was on the Tia Maria project? I couldn't copy you well.

Yes, it was regarding the Tia Maria project. There have been several papers mentioning that Southern Copper will meet with authorities on the following 15 days, in order to discuss it with local communities. Is there anything we could expect from this meeting?

Basically, the Company has been in talks with the governmental authority in order to understand their concerns. And we do know what are the concerns of the local community, and we plan to address these questions and these concerns through our -- the new environmental impact assessment that the Company is preparing.

Regarding, Angangueo, which was your second question, this is a project that would produce concentrate that will yield approximately the production mentioned. I will repeat it just for reminding. It is 36,000 tons of copper, 4.5 million ounces of silver, and 41,000 tons of zinc. This is a polymetallic deposit and it is located in Michoacan, in Mexico.

Thanks a lot, Raul.

Andre Pinheiro, Itau BBA.

Good morning, Raul and everyone. Well, I just have two quick questions, the first being that, I would like to know if you could provide a little bit of guidance on the Company's copper hedging strategy for 2012? And secondly, if you tell can us what you're expecting in terms of ore grade level impacts on production this year? That would be great, thank you very much.

Okay, let me focus on the last part. Our production for the year will be approximately 610,000 tons of copper from our own operations. On top of that the Company will process about 30,000 tons of copper from third parties, so the total production for 2012 in copper, it's 640,000 tons. Basically, in terms of ores, ore grades, the Company is seeing a regular year with no important variances. We're seeing some recovery from Cuajone production in our current plans. I mentioned already that we have an initiative to improve production at the Cuajone operation.

Regarding the hedging, will you like to address that, Daniel?

Thank you, Raul. Just, first of all, to remind you all that we hedged, for the first quarter 2012, 7,000 monthly, for metric tons, at a zero cost [callers] and we did that a long time ago, and it was $3.50 the put and $5.18 the call. That gave us 3.14% of estimated production hedged. We haven't addressed that in the Board. And the view now, our hedging policy depends on what are the capital needs? What are the capital requirements? How are we looking at stocks and the copper fundamentals? And we've done it on a quarter-over-quarter basis with the deliberation of Board meetings. So, at this point, I mean, we've only hedged for the first quarter of 2012, as I said, and nothing else has been hedged or addressed in the past [quarter].

Okay, great. Thank you, Daniel, thank you Raul.

Rene Kleyweg, from UBS.

Good morning, gentlemen and thanks for the presentation. I just wanted to follow up on your comments in terms of the dividend outlook, given the CapEx program is now up to $1.5 billion. Could you give us -- I presume the intention is still not to use the balance sheet to pay dividends, so if we look at how 2012 will unfold, in terms of CapEx intensity, can you confirm that the first half of the year is a bit lighter in terms of CapEx intensity, and therefore the dividend yield -- the dividend payments could be higher in the first half of the year, or will you be managing the cash balance for an even dividend distribution through the year?

(Multiple speakers) It's the first time we've given a mix of cash and stock dividends. As you know, we've acquired an important amount of buybacks in the past. So, I mean, the Board, as you know, every quarter we meet, and we deliberate, what is the dividend should be based, as you just pointed out, on the CapEx requirements, going forward. And the idea here was to capitalize on the profitable stock buybacks and saving cash for those CapEx programs.

Of course we haven't been able to expend as fast as we wanted in the past, but we think this is a year that we could, and that's part of the rationale for dividends. Whether next quarter is going to be stock and cash, we still don't know, and we are going to come and we will have to talk about that at the Board meeting.

But if I look at the stock -- the stock comparing this time, is taking you back up to $8.50. Is there a possibility that you will continue to pay stock dividends beyond that? Or is that dependent on the stock that you buy back in the market? Or is there--?

I think again, it will depend on how efficient we are at pushing the gap on the project and expenditures. As you know, sometimes there's a lot of purchases due before, and you allocate commitments, and you give anticipated payments for lead time improvements, et cetera. So that's how we are going to go into the second quarter, or end of the first quarter Board Meeting, and I know I [got]. At this point, to be honest, (inaudible) doesn't have any point of view on that. And definitely is going to be discussed at the Board Meeting -- at the next Board Meeting.

Thank you and if I may just a quick -- we've touched on Tia Maria, but is there any update that you can provide in terms of timetable on programs at Toquepala and how things are expected to unfold during the rest of this year? I believe that you have got about $200 million of CapEx on the expansion of the concentrator capacity at Toquepala earmarked for this year. What does that assume in terms of your ability to start moving forward on CapEx spend at Toquepala, in terms of which quarter does that imply spending -- starting?

For the full year, Rene, we are expecting to spend close to $75 million regarding -- relating directly to the Toquepala expansion. Besides those, we have the different -- some other projects that will increase the expenses, specifically at the Toquepala operation. But it is strictly related to expansion, and this is a project that relates to an improvement in cost, we have $75 million. I wonder if Mr. Gonzalez Rocha would like to make a comment on this?

The only thing that there that we are going to expense in the expansion, after we get the approval of the government and impact studies that we think that will take at least, maybe three months more. In the second half of the year we plan to spend in the project expansion around $60 million. As in the operation, CapEx, we planned to spend in the order of $150 million. That would be for Toquepala.

Totally, for Southern Copper in the Peru area, we have a CapEx of $470 million.

Thank you, gentlemen.

Jamie Nicholson, from Credit Suisse.

Hi, thanks for the call. I just want to clarify what you were saying about funding your CapEx plan. Did I hear correctly that you are planning to fund that out of cash flow or do you have any plans to perhaps tap the debt markets for funding this year?

At this point we are going to use our cash position as well as cash generated by the operation in order to fund our projects. As we move on with the projects, and they will start operating, we will probably consider going back to the debt market for issuing more funds to develop other stages of our capital plan.

Okay, great, thanks. Then just to clarify, the short-term investments, the $522 million on your balance sheet, that's fairly liquid, if I remember correctly. Is that something you could sell to also fund your CapEx plan?

Basically, that's correct, Jamie. They are short-term investments, considering US GAAP rules, we have to -- at a certain point in time, we have to clarify them as short-term investments, and not as cash positions. It is mainly treasury investments -- or funds that are available for investing in our project.

It's due to cash flow.

Steve Myers, from Citizen Trust.

Hello, gentlemen. Thank you for taking my question. Did you mentioned the present copper content reserves is 0.7896?

That was for a specific -- for the deposit of Pilares. That's one of the deposits that the Company acquired in 2008, and we are developing it to explore it as an open pit mine that will supply its minerals to the concentrator of La Caridad.

Overall, what is Southern Copper's ore grade, please? And -- as -- what did -- the trends did not -- what please?

Yes, hold on a second, please. I will tell you right away. Okay, you've seen what we believe are our long-term prices for copper.

Yes.

Currently, the copper average is about 0.5% in our reserve base. That's the average for the open pit mine, it is 0.466%. This includes for Cuajone, 0.359%, for Toquepala, 0.56% for Buenavista, 0.56, for La Caridad, which has a very high molybdenum content, it is 0.26%. The average of those, the weighted average is 0.46% -- 0.47%, and [IMMSA] ore grade is also -- is 0.5%.

Okay. Question please. The trend, you say, is on average is 0.5%. Okay. Say five years ago, what was the average ore grade? What I'm getting at is just the overall trend of the last five years, sir?

Yes. It has decreased a little bit from five years ago, and the reason for that is that we are also considering a higher price of copper for our long-term plans, so that makes that certain part of the mine, that in the past were not profitable, now they are. That's one of the sources for having the reserve base that we had. So I don't have the number right here. But if I get it through the call, I will mention it. It was close 0.6%, if my recollection of this is correct. I will tell you in a few minutes.

Okay. Thank you so much.

Daniel Rohr, from Morningstar.

Hi, thank you for taking my call. I'm sure many investors appreciate the attractive cash dividend you guys continue to pay. But what was the purpose of the in-kind stock dividend in the quarter?

Well, basically it is a matter of being prudent. We, at the end of the day, in a very volatile market, and the Company has an aggressive portfolio of projects to develop, so cash management for us is important. We have been very prudent on this since day one, and we have this stock position in our hands and we want to provide our shareholders with a value that will come through the shares, rather than cash out from the Company that will be applied to our (inaudible).

Yes, I certainly understand the cash preservation logic behind it, but what's the purpose of any in-kind stock dividend at all? I mean there is no economic content. I mean, aren't you just cutting the same pie into smaller pieces?

Well, the reason for that is to provide to our shareholders, with the shares that will acquire at a much lower price than what -- the market currently is.

All right.

That is really the cash preservation that you are pointing out, for this [stock].

Okay. And then I apologize, I had to jump on late, so if you addressed this question I'm sorry, but I didn't see unit cash cost numbers for the fourth quarter in the release. I did the full year numbers, but could you share those numbers before and after by-products if you haven't already?

Yes. Hold on a second. Okay, the fourth quarter cash cost, including the benefit of by-products was $0.525 per pound. Before subtracting the credit was $1.64 per pound.

Okay. So it looks like it's a -- before credits -- it's come down a little bit from second-quarter and third-quarter, is that purely attributable to the full ramp-up of Buenavista, or is there some other benefit you guys are realizing?

Yes, well its mainly it is Buenavista operation increase. I mentioned at the beginning of the conference that the Company has managed to reduce its operating cost of sales in the last -- since the second quarter -- each quarter has been lower costs compared to prior one in absolute terms or in dollar terms, but we have basically some cost inflation coming from higher fuel, repair materials, and contractors that were more than absorbed by the higher production of Buenavista.

Right. Thank you very much for the additional color.

John Tumazos, John Tumazos Very Independent Research.

Thank you for taking my call and for your various explanations. The mine output rose by 109,000 tons in 2011. Buenavista's capacity is larger, I believe, 288,000 tons or so. Did other mines experience declines, or did Buenavista run at a low capacity utilization in the first half of 2011?

It is the second option. Buenavista was producing under capacity in the first quarter of 2011. In the second quarter was a full capacity quarter from there on. We have a lower contribution from our Cuajone operation. Cuajone was about 25,000 tons less through 2011. You compare that to 2010.

And then you have a little bit less production in Toquepala and La Caridad, but that's basically the source of the difference that you indicated, was mainly the difference between the contribution of Buenavista, less a slightly lower production in Toquepala and La Caridad, and a much lower production in Cuajone, that will be fixed in the next few quarters. I'd like to comment also that Buenavista has a capacity of 180,000 tons of copper equivalent, considering it is milling capacity as well as the SXEW plant capacity that it has.

If I can ask a second question, and forgive my high level of interest, is the current capacity roughly 0.6 million metric tons adjusted for grade fluctuations? And the capacity additions, about 0.5 million metric tons, to yield a 2015 capacity projected of about 1.1 million tons?

Well, long-term, that would be our goal in production, to be over a million tons. That will certainly vary based on the -- all grades variances, but once we develop all the projects that we mentioned through the call, our production should be, in terms of capacity, over a million tons, close to 1.1 million tons.

If I could bother you one more time, could you rank the five projects by rates of return? Buenavista expansion, Angangueo's, Toquepala expansion, Cuajone expansion, Tia Maria?

Well, we do that, but we don't disclose that, sir.

Thank you.

Christopher Buck, from Barclays Capital.

Thank you. Just a very quick follow-up regarding funding. It sounds like you guys not are expecting to come back to the bond market until you have some EBITDA coming online from some of your additional projects. So, I'm just wondering if you guys have a leverage target in mind, and as -- where you already have quite low leverage ratios. So, wondering, a long-term target?

Yes, basically --

I mean, as we pointed out, we feel that no tapping the markets needed for this phase of CapEx and for our projects. Of course we recognize that there are a few good conditions out there and [it's interesting, one of the] peer companies in the copper production went to the market yesterday. I mean there are grade conditions left to be achieved, I mean we don't need that, and we just analyze if we will tap the markets in the near future, but at the moment we are looking at funding the project with cash flows.

Okay. And do you have sort of a leveraged target in mind?

I mean we do understand that our balance sheet is underutilized, however we've been conservative in using the balance sheet, given the cyclicality and the uncertainty that macroeconomic events have developed in the near past. So we will just, I mean we don't have a specific target in mind. We will look at how macroeconomic things happen, and what happens with the copper prices, and the speed of our projects, and thoroughly analyze it, and take it one step a time.

Okay, fair enough. And final one for me, just wondering if you have a level of cash that you are comfortable, on the downside. So what's the limit that you are willing to let your cash get down to? And sort of as is similar to the prior question, do you have somewhat of a cash target for your balance sheet? Thanks.

Well, basically we believe that we can operate with a very low cash position, that's -- it's hard to say, but in general terms about $200 million will be a very low limit to have as cash position to maintain our operations with no inconveniences at all.

Perfect, thank you very much.

Before we take the next call -- let me answer on the question regarding the ore grade that the Company had five years ago. Looking at the 2006 10-K, our ore grade was 0.598% at that time. At that time I'd like to remind our audience that the copper price that used was $0.90 per pound of copper and $4.50 per pound of molybdenum. Certainly we are using now a much higher price than that.

Santiago Perez Teuffer, GBM.

Hi, Raul. Once again, thank you for taking our questions. I just have two brief follow-ups. Regarding expansion in Toquepala, has the environmental assessment been approved? And also what price are you using currently to value your reserves? Thank you. That's on copper, mainly.

Well, until last year we used to $1.80 to value our reserves, to estimate our reserves. Now we will be using $2 from now on. And on the environmental impact assessment, would you like to comment on that Mr. Gonzales?

Yes. We are waiting for this dialogue between the local governments and the central governments and the Company. We plan to have the public audience again at the end of March. Then after that it is approved, then we can get the approval maybe in about 30 more days after the public audience, from the Minister of Mines and we can start construction right away.

Thanks, Raul and thank you, Oscar.

Rene Kleyweg, from UBS.

Thanks for the follow-up opportunity. I was just wondering what you could tell us on Angangueo and Pilares in terms of the gross cash cost estimates there?

Well, Pilares is going to be at very low cost, similar to the one that we have for La Caridad on a per pound basis. Basically, let me explain, and thank you for the question, Rene, because it will allow us to explain a little bit on this. What we are doing here is using the deposit enhancing exploited in the past as an underground mine. We will exploit it at the beginning as an open pit and we will send about 15,000 pounds of mineral per day with the ore grades that I mentioned, much higher than our La Caridad ore grade, and replace, at least at the very beginning of these projects, replace a portion of our mineral in La Caridad, by Pilares mineral, which is over three times richer than La Caridad's. That will allow us to produce more copper by just replacing a higher content of copper mineral at the concentrator.

In the case of Angangueo, well, it is also very competitive. Depending on the mineral that you are looking at if you think of it as a zinc mine or copper mine, the cash cost is different. At this point we don't disclose the cash cost for Angangueo, because we are still doing some more work on that matter.

Thank you.

Dan Richmond, private investor.

Thank you. A nice quarter. Would you please give us an update on the El Arco project that you had talked about a year or so ago?

Well, basically, for El Arco, we are acquiring some properties -- let me, just for illustrating our audience, let me explain a little bit on this project. El Arco is a copper deposit located in the state of Baja California, in Mexico. Exploration work at the site indicates that we have about 1.2 billion tons of mineral sulfite material with an average copper content of 0.5% and [0.205] grams of gold per ton. And also we have 290 million metric tons of copper oxide with 0.35% of copper grade. These are very good ore grades by industry standards nowadays. In this (inaudible - technical difficulty) a big drilling program of about 1,214 meters indicated that we have another or additional 390 million tons of mineral like material with 0.62% of copper content below the current [limits]. That means that we will basically have more mineral than what we thought.

So the program for developing these properties has been moving forward. In 2009 we identified a water source for the leaching operation of these projects, and in 2010 we found four wells -- we developed four wells to have underground water for the project. The feasibility study was finished in 2010, and we're basically evaluating the next step for this project. If developed as indicated in the feasibility study, we will produce, in this project, 190,000 tons of copper, 105,000 ounces of gold per year. We are still investing in land acquisition, energy facilities, and other required auxiliary facilities for this project.

Thank you. My question essentially was, are you still moving forward with this project? And obviously the answer is yes. Thank you.

You're welcome.

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

Well, thank you very much ladies and gentlemen for joining us on this conference call. And we certainly welcome you to attend the next one when we have the results for the first quarter of 2012. Thank you very much and have a good day, all of you.

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