Southern Copper Corp (SCCO) 2012 Q1 法說會逐字稿

Good morning, and welcome to Southern Copper Corporation's first-quarter 2012 results conference call. With us this morning we have Southern Copper Corporation, Mr. Raul Jacob, CFO of the Peruvian Operations and Investor Relations of Southern Copper, who will discuss the results of the Company for the first quarter and the year 2012, as well as answer any questions that you might have.

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

Thank you very much, Tracy, and good morning, everyone, and welcome to Southern Copper Corporation's first-quarter 2012 earnings conference call. Participating in today's conference are 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.

Going into our view on the market, during the first quarter, metal markets continued to be affected by negative macroeconomic events that affected consumers' expectations, being the most important one the European recession. Europe, as you know, is 28% of the world economy and [asset] prices. Copper, as you know, it is our main product, with 77% of total sales in the first quarter of 2012. Even though we believe copper fundamentals are sound for the years, demand is negatively influenced by the indicated macro outlook.

At this point, we perceive a different situation between the Asian and the developed markets. In China, several sources point to a growth in demand of approximately 7% to 8% for the year. In the US and Europe, inventories are extremely tight, and we see them increasing to more normal levels over the next 12 months, particularly in the US.

Demand from the emerging economies is also growing at a good pace, somehow offsetting weaker consumption from European and American markets. According to our sources, total refined copper demand growth is estimated for the year at about 2.5% to 3% for this year, 2012. If we consider global copper demand at about 19.3 million metric tons, this represents approximately 500,000 tons of additional refined copper tons required in 2012.

On the supply side, production has underperformed badly in 2011 due to labor unrest, power shortages, weather conditions and ore grade declines. We are seeing these events continuing in 2012, maintaining tightness in the copper market. Currently, we estimate supply growth of about 0.5% for 2012, and we also estimate a market deficit of approximately 550,000 tons for the year.

Focusing on our own operations and our copper production for this quarter, let me start by mentioning that we have a remarkable first quarter in 2012. Our mine production increased by 23.1% to 152,900 tons, which compare with 124,000 tons in the first quarter of 2011. This increase was the result of higher production at all of our open-pit mines, led by Buenavista, which increased production by 70%. Higher ore grades and recoveries at our Toquepala and Cuajone mines increased their combined production by 12%. Finally, higher throughput and ore grade at La Caridad mine improved production by 3.4%.

Regarding our molybdenum production, it increased by 8.2% in the first quarter of this year when compared to the same period of 2011 due to higher production at the Toquepala mine as the result of higher grade and recovery. This was partially offset by lower production at the Cuajone mine.

Focusing on our financial results, for the first quarter of 2012, sales were $1.8 billion, 13% higher than the $1.6 billion that we had in the first quarter of 2011. This increase was mainly the result of higher copper and byproduct sales volumes, which more than offset the lower prices that we had for copper, molybdenum and (technical difficulty) in the first quarter of (technical difficulty).

When comparing the first quarter 2012 sales volume with the same period of 2011, copper sales volume increased by 25.5% due to Buenavista full recovery of production; silver sales in volume increased by 27%; and molybdenum by 7.6%.

Our total operating costs and expenses have increased $65.6 million when comparing the first quarter of 2012 with the prior quarter -- that is the fourth quarter of 2011. Higher cost inflation in energy, labor, workers' participation and inventory consumption were partially offset by lower third-party copper costs and other cost variances.

Our EBITDA in the first quarter of this year was $1,057 million, which is a margin of 58.5% of EBITDA sales, and this figure compares with $965.2 million in the fourth quarter of 2011, an increase of about 10%.

Regarding cash costs, we had no significant variance regarding cash costs in the first quarter of this year. Southern Copper's operating cash costs, including the benefit of byproduct credits, was $0.522 per pound, and this cash cost was slightly lower than the $0.525 per pound that we had in the fourth quarter of 2011.

Operating cash costs per pound of copper before byproduct credits was $1.82 per pound in the first quarter compared with $1.64 per pound in the fourth quarter of 2011. The $0.18 per pound increase in operating costs results from the indicated cost inflation already mentioned, partially offset by production increase from our operations.

Regarding byproducts, we had a copper credit of $423.9 million, or $1.30 per pound, in the first quarter of 2012. These figures compare with a credit of $382.7 million, or $1.11 per pound, in the fourth quarter of 2011. The higher byproduct credit results from an increase in zinc sales volume of 10%, as well as higher prices for molybdenum, about 7% increase on that matter, zinc another 7% and silver when compared to the fourth quarter of 2011.

Our net income attributable to SCC shareholders in the first quarter of 2012 was $621 million, or diluted earnings per share of $0.73. This figure compares with net income for the first quarter of 2011 of $478 million, or diluted earnings per share of $0.56, a 30% increase. Diluted earnings per share were $0.63 per share for the fourth quarter of 2011.

Focusing on our expansion and capital projects, as you know, our Board of Directors approved a $1.5 billion capital expenditure program for 2012 that will be mainly used for our projects in Buenavista, Cuajone, Toquepala and maintenance and replacement capital.

Regarding the Buenavista expansion, we are building a Quebalix facility at this property. This investment consists of a crushing conveyor and a spreading system that improves the SXEW copper production by increasing recovery and reducing the required time to extract copper from mineral. Overall programs is 95% and this facility is expected to begin operating in the third quarter of this year. Through March 31, 2012, we have invested $53 million of the $70 million budget for this investment.

Also, the SXEW III plant construction is moving forward at the Buenavista mine, and we will be using equipment originally purchased for the Tia Maria project. This will allow us to increase the annual SXEW plant capacity from 88,000 tons to 120,000 tons. Basic engineering was modified by the supplier and includes the construction of an additional conveyor line. The detailed engineering work was transferred to Mexico.

[Earth moving] has reached 40% of completion for this project, and the new plant should begin operating in the first half of 2014. The total budget currently is $444 million, with $16 million spent through March 31 of this year.

The new Buenavista concentrator, with a milling capacity of 100,000 tons per day, is also in process, with an estimated annual production of 188 pounds of copper and 2600 pounds of molybdenum. Basic engineering is completed. Detailed engineering and equipment acquisition are moving forward as scheduled. The bidding process for steel structure and earth moving were performed. The project has a total budget of $1.4 billion and it is expected to begin operations by 2015.

The Angangueo basic project, which is a zinc, silver, gold project that the company has included in its pipeline, has its basic and detailing engineering moving forward as scheduled, and we are estimating the total investment of $131 million in this project. Angangueo will have an annual production potential of 36,000 tons of copper concentrate, 4.5 million ounces of silver, 41,000 tons of zinc concentrate and 6600 tons of lead concentrate. The project is scheduled to begin operations by the second half of 2014.

Regarding the Toquepala expansion, through the first quarter, we have spent -- I'm sorry -- up to the first quarter of this year, we have spent $202.9 million on this project. These expenditures include technological investment to reduce hauling and other costs. Current project completion is scheduled for the second half of 2014. The Toquepala expansion will increase annual production by 100,000 tons of copper and 3100 tons of molybdenum.

On the Cuajone expansion, through March of this year, the Company has spent $100 million on this project out of the $301 million budget. This is scheduled to start operations in the third quarter of 2013 and will add an annual production of 22,000 tons of copper and 700 tons of molybdenum.

For Tia Maria, we are working on the new environmental impact assessment that is taking into account local community concerns, government new guidance and observations from United Nations agency, UNOPS, retained by the Peruvian Ministry of Energy and Mines for this purpose. We are confident that this initiative will allow us to obtain the approval for this project of 120,000 tons of copper per year.

As a result of this process, we have rescheduled the startup of operations for the first half of 2015. Meanwhile, we have reassigned equipment previously purchased for Tia Maria to our Buenavista, Toquepala and Cuajone mines.

Another investment that the Company has finished is a joint venture with Buenaventura and others regarding the Tantahuatay mine, which is located in Cajamarca in the northern part of Peru. Production for this operation started in August of last year and it produced 46,200 ounces of gold and 216,000 ounces of silver in 2011. For 2012, Tantahuatay is expected to have an annual production of 105,000 ounces of gold and 592,000 ounces of silver.

We have, as I said, as partners in this operation Minas Buenaventura and others, and our participation is 44.2% of the [total].

Regarding the (technical difficulty), as you know, it is the Company policy to review at each Board meeting the capital investment plans, cash resources and expected future cash flow generation from operations. In order to determine the appropriate quarterly (inaudible), accordingly, as disclosed to the market on April 23 of this year, the Board of Directors authorized a cash dividend of $0.53 per share of common stock, payable on May 24 of this year, 2012, to shareholders of record at the close of business on May 11, 2012.

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

(Operator Instructions) Felipe Hirai, Merrill Lynch.

Thank you. This is actually (inaudible). Good morning, Raul, Oscar and Daniel. Thank you for the questions.

I have two questions. My first question is regarding CapEx. I know you just mentioned the $1.5 billion budget. But just to be clear, since you only invested $177 million in the first quarter, do you still believe you will reach this budget, and what kind of ramp-up can you expect in the coming quarters? That is the first question.

And the second one, if you could provide a guidance for copper production in 2012 and what we can expect on ore grades going forward, if we still see improvement. Thank you.

Let me address the second question first, Felipe. And then I will ask Mr. Oscar Gonzales to comment on the capital expenditures forecast for the year.

On production, where we have guidance at the beginning of the year of 640,000 tons in total production for 2012, we're still maintaining that guidance. That should also consider a 5% third party's copper in that number. So for 2012, we are maintaining our initial guidance of 640,000 tons of copper.

And on the CapEx question, I will pass to Oscar Gonzales to answer it, please.

Yes, we are still expecting to spend most of the $1.5 billion. We will start slow in the first quarter, but we already asked for some purchasing of equipment in about $300 million for the second quarter. And we expect that we are going to be very close to $1.5 million, because Buenavista is spending a lot of this $1 billion that they have for this year, and southern Peru only has [387] that we expect to be very close to that amount in the year 2012.

Okay, perfect. Thank you, Oscar and Raul.

[Luis Fenari], Barclays.

Good morning, everyone. My first question is related to the hedging strategy. Did you have any changes in the hedges for this year? And also if you have any expectations on future hedges? This would be my first question.

And my second question is related to the Cuajone project. We know that the start-up of the project was delayed by one year, so I just want to have more color on the main reason for this delay. And also, if you could comment about the process of the environmental license for the Toquepala expansion, it would be great. Thank you.

Okay. Daniel, would you like to comment on the hedging strategy for the Company?

Thank you, Raul. Well, as we've mentioned in the past, the hedging strategy for the Company is analyzed every quarter at the Board level -- I mean, and analyzing capital needs, cash flows for the projects, the market, et cetera; that is how we make decisions, as you know. Our last hedges were just for the first quarter of 2012. Currently, we have no more hedges in place, and at this Board meeting, the decision was not to take (inaudible), at least at this level (multiple speakers).

-- Oscar, you can answer the delays in the Peru projects. That was the question, right?

Yes, on the first -- the question on production. For Cuajone, basically, we have two projects that are being developed at the Cuajone operation. One is what we call a variable kind of rate, that it is getting to its completion through this year in 2012. And we will have a slight improvement in production resulting from this project.

And for next year, we have -- by the end of the first quarter of 2013, we have to schedule the startup of a high-pressure grinding rolls facility that we are also building in Cuajone. This facility will basically fracture a mineral before it gets into the middle of Cuajone, and by doing that, we expect to improve the recovery and possibly the production or the throughput that the Cuajone concentrator can process on a daily basis. As a result of these two projects, we are expecting an increase in production of 22,000 tons, as has been reported to the market.

We have basically rescheduled something that was for the high-pressure grinding rolls (inaudible) by the end of 2012 to the beginning of 2013. It is not a one-year delay.

On the Toquepala license, let me ask Mr. Oscar Gonzales to comment on that, please.

In the Cuajone, we are doing the feasibility study with M3, an engineering company from Tucson, Arizona. And it's to go from 85,000 tons that we are milling right now to 120,000 tons. We are expecting to have that result by the middle of this year, and then take the decision and go ahead with that expansion, that will be additionally of what Raul mentioned of the 22,000 tons of copper per year and 700 tons of molybdenum for the variable cutoff grade.

And about the Toquepala, in Toquepala we are waiting from the Ministry of Mines to approve the new date for the public hearing that we are going to have with the population of the Tacna region, and we hope that will be approve, even if the regional government of Tacna is not in favor of that project because they are trying to get some water back from the concessions that we have with the national government.

But if that is the case, we are going to be ready for start construction because we have 95% of the engineering done, and then the construction will take 18 months in order to be ready for production. I don't know if that answers your questions.

Yes, perfect. Thank you.

[Ramon Arzate, GBN].

Hi, Raul, Daniel and Oscar. Thank you for taking my question. My first question is regarding third-party concentrates. The sales at this time are near to the Company's all-time low, so we should be expecting this to continue?

My second question is about the joint venture you mentioned in Buenavista. Maybe you can give a little more color about that joint venture, please.

Buenavista, no, we are the sole owners of Buenavista, Ramon. I think that you probably meant Tantahuatay.

Yes, with Buenaventura. Sorry.

Yes, well, basically, it is a project that we started a few years ago with Buenaventura. As we indicated previously, we have a 44.25% participation on this project. It is a gold/silver mine at this point. However, there is a copper body underneath the silver and gold, the (inaudible) that we are currently exploring.

No specific plan has been developed at this point to tap on the copper portion of the mine, but obviously, it is a very interesting resource for the future for the Company. And what we are seeing here is the benefit of this investment, basically the cash cost per pound of gold, it is under $500 per ounce. And I mentioned already the estimated production for 2012.

And your second question was on third-parties concentrate. Well, we do buy and sell concentrate in the market to adjust our metallurgical facilities' capacity to our production capacity. So at certain parts of the year, we may acquire third parties' copper concentrate and process them. And at certain parts of the year, we may sell concentrate.

And the driver, it is basically the match between the production capacity of our smelting and refining facilities in Mexico and Peru and the production from our mines. For this year, we are expecting much better production from our own operations, and obviously our own copper production is much, much lower in cost than the third parties' copper. At the end of the day, you pay market price less discounts for the third party's copper, while for our own operation, it is what it costs to produce it. And as you know, we are very, very competitive in cost.

So for us, it is much better to use our own material than third parties, but we need to acquire copper from other operations now and then.

But giving a little more detail of -- in the concentrate for this year, we are going to buy only 50% of what we buy -- we bought last year. And we are going to have more production for that reason, we are going to request less amount of concentrate from the third parties.

Okay, perfect. Thanks a lot.

Daniel Rohr, Morningstar.

Thank you very much for taking my questions, gentlemen. Just a couple brief ones. The first concerns the Angangueo project. You mentioned in the press release and then in your opening remarks, I believe, 36,000 tons of copper concentrate and 41,000 tons of zinc concentrate. I just wanted to confirm -- do those numbers refer to the contained metal or to concentrate tonnage?

It refers to concentrate tonnage, because the ore grade of the concentrates may vary -- the metal content may vary. However, we have an estimate at this point; I could mention it now. For copper, we are expecting about 11,000 tons of copper production contained in this copper concentrate. For zinc, will be 22,000 tons of zinc on a yearly basis. For silver, 4.5 million ounces of silver per year. And on lead, about 3500 tons of lead.

I also like to point out that production will come -- first, we will have much more copper production in the life of this project. And later on in time, seeing that there are mining plans, they will have much more zinc production. What will be relatively stable will be the silver production that will hold at about the average that I mentioned.

Thank you very much for that information, Raul. And then if I may, regarding the Quebalix facility, how much additional copper throughput do you see that facility contributing to the Buenavista operations in 2012, and how much in 2013, with a full year of operations?

For now, Tantahuatay is just gold/silver mine. We found a resource that we (multiple speakers).

I apologize. I am referring to the Quebalix facility.

Well, the Quebalix, it is part of the equipment that we use for the SXEW plant. And the benefit will be captured by the SXEW plant that we have -- for both, the current two SXEW plants that we have and the new SXEW plant that we are building in Buenavista.

Let me rephrase it. Just to the extent it is increasing recovery that you get out of the SXEW process, how much incremental tonnage from those improved recovery rates?

(multiple speakers) Well, for -- let me say it a little bit differently. Quebalix, it is a facility that increases the production and improves the recovery. So these are the two effects, and these are tied to the project. So we will -- in order to produce 120,000 tons of refined copper at the new SXEW plant, we need to have several Quebalix. In order to produce in our current SXEW plants, we have to use our Quebalix at full capacity. We don't do the project with and without the Quebalix, even though we know they are important in terms of the benefit that they provide.

Okay, thank you very much. I appreciate it.

Garrett Nelson, BB&T Capital Markets.

Thanks for taking my question. I notice that your copper, zinc and the silver sales volumes all exceeded mine production during the quarter, so it appears you had a pretty significant inventory drawdown. Should we view this as a positive readthrough for overall demand, and can you comment on your current inventory levels?

Our inventories are basically in our refine operations, probably less than a day. And in general terms, what we have had is some copper in progress that was -- in process -- I'm sorry -- copper in process, that we had that were inventories in our production lines at the end of the fourth quarter that has been finished (technical difficulty) and sold through 2000 -- through the first quarter of this year.

Our inventories in Peru, we had in process about 12 million pounds that went out to the market in the first quarter. And in Mexico, about 9 million pounds. Basically, our copper in process was reduced by that much through the first quarter.

Okay, great. Thanks very much.

Ivano Westin, Credit Suisse.

Thank you for the question and congratulations for the strong results. My first question refers to operating cash costs, which increased in Q1. Could you please provide a forecast of your cash costs in the remaining part of the year?

And the second question refers to a corporate price. Given production is (inaudible) by (inaudible) mining companies worldwide, do you expect higher corporate price in the second semester of the year? Thank you very much.

On the cash costs, basically, we are expecting it to be at about these levels. And here we have a big question mark related to how are we -- what is going to happen with the energy market. Basically, our main cost, as you know, it is power and fuel. Fuel is about 12% of our total cost and power about another 24%. So depending on the cost of these two main inputs to our production process, that will affect our cash costs.

In terms of currency appreciation, we are seeing some currency appreciation particularly in our Peruvian operations. In Mexico, it is still depending on how Mexico is going out of the economic slowdown that has affected the US.

And the second question was on copper price. Basically, we have a positive view for the rest of 2012. At this point, our price -- internal price forecast is in line with the market. Obviously, we believe that the fundamentals of this market are very positive, and we think that Southern, having very low cash costs, probably the lowest among their similar-sized companies, will take significant advantage of the current price environment.

Got it. Thank you very much.

(Operator Instructions) [Ramon Arzate, GBN].

Thank you for taking another question. My question is regarding byproduct production. Do you expect them to keep these levels for the rest of the year? And also to ask you if you could please repeat something regarding your hedging strategy.

Regarding byproduct production, we are expecting to maintain it as it is now. We gave guidance on the production forecasts at the beginning of the year. Our main byproduct, which is molybdenum, is expected to be at about 17,500 tons for the year. We expect to improve it a little bit, but at this point, it will be -- we can't be sure about that.

So on zinc, basically, we are seeing the results of having our Santa Eulalia operation back -- not on track, still on the process of recovering at full capacity. This facility was affected by a flood in the last couple of years, and we are solving the flooding problems through this year.

And on the other point was regarding hedging. We will (technical difficulty) explain the Company position on that. Basically, we evaluate the market circumstances, on an opportunistic base, we take action on hedging. At this point, we have no hedges at all.

Okay, Raul. Thanks a lot.

Mandeep Singh, JPMorgan.

Hi, Raul. Thanks for taking my question. We saw a sharp jump in dividends for this quarter after a sharp drop in the last quarter, which was attributed to a more prudent stance in light of the upcoming CapEx schedule. Since the CapEx has not changed, how should we think about dividends going forward?

And do you think the higher dividends this quarter could be maintained in the upcoming quarters? Thank you.

Well, thank you very much for your question, Mandeep, and sorry to say that we can't comment on what the Board will think about when they discuss our cash position and their view on the market later on through the year.

As I mentioned before, our -- the way that the dividend is set in the Company is not tied to a payout ratio or a fixed amount of dividend per quarter. It is something that it is discussed on the base of the outlook for the market, the Company cash position, the amount of capital that is required by our projects. So that is how the dividend is set.

Now, having said that, as you know, the Company has been very keen on rewarding the shareholder through dividends. So basically, the track record is something that -- it is a reference of what the Board may do in the future.

Thank you.

(inaudible), Deutsche Bank.

Good morning. Thank you for the conference call. I just want to have an update on Tia Maria project, to know if you keep the startup for the first half of 2012 -- '15, and if someone else was (inaudible) on that project. Thank you.

We are still maintaining the guidance of startup operations for the first half of 2015. That certainly has as a condition that we receive the approval of the environmental (technical difficulty) -- no?

We already have started working on a new environmental impact assessment study. After we discussed our options with the Peruvian government, the government has also gave us -- well, you do know that we have a new government in Peru that took office in last July, and they have passed on some new guidance regarding certain (technical difficulty) we should consider for study and we want to address these conditions; the questions made by the local communities regarding the project and the observations or the points made by the consultant at the Ministry of Energy and Mines of Peru hired from a UN agency last year. So all of this is being considered as part of a new environmental impact assessment.

Jean Bruny, BBVA.

Hi there. I just have one little question. It is on your cash flow statement. I just want to know whether positive $294 million is coming from investing activities, it is a set of short-term investments.

Could you repeat your question, please?

Yes, sorry, sure. It is just on your cash flow statement, you had in investing activities, in the line of (inaudible) of short-term investments, you have this quarter a positive $294 million. Just want to know where it is coming from exactly.

Okay, in our cash flow -- let me see if I copy you well. You are saying that on the cash flow, we have on investing activities the sale of short-term investments that amount for a net of $294.7 million. Is that your question?

Indeed, yes. I just want to know where that comes from.

Basically, it is a change in the cash position. We -- following US GAAP accounting principles, we have to book as short-term investments investments are usually longer than a three-month maturity. So in this case, some of our investments went from a longer than three month period to less than three months, and that is why we have to book them as short-term investments, coming back to our cash position.

Now for a more proper view, these -- basically what we have in our balance sheet as cash plus short-term investments are basically the cash position of the Company.

Okay, perfect. Cheers.

Thank you very much.

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

Well, with this, we conclude our call for this quarter. We certainly appreciate your participation in it, and we expect to have you back when we report the second quarter of this year. Thank you very much, and have a very good day, all.

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