Southern Copper Corp (SCCO) 2012 Q4 法說會逐字稿

Good morning and welcome to Southern Copper Corporation's fourth 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 fourth quarter 2012 as well as 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 statement, whether as a result of new information, future events, or otherwise. All results are expressed in the full US GAAP.

Now, I will pass the call over to Mr. Raul Jacob.

Thank you very much, Sandra, and good morning, everyone, and welcome to Southern Copper's fourth quarter earnings conference call. In today's conference call we will begin with an update of our view of 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.

Regarding metal markets and prices. During the fourth quarter, metal markets continued to be driven by the negative macroeconomic events that affected consumer expectations, the most important ones being Europe's debt crisis, the so-called fiscal cliff that affected the US economy, and the slowdown of the Chinese economy. As we have mentioned before, 2012 was also a transition year with administration changes or elections in several key countries, including China and the United States. Regarding the copper market, even though we believe these metals -- fundamentals are sound, demand has been repeatedly affected by the [mentioned] macroeconomic factors, and the economic slowdown that characterized elections and administration changes. At present, we perceive a more positive environment as some of these matters have been already solved or are perceived to have a more positive outlook from now on.

In China, after several monitary-easing measures were taken in the second half of 2012, different analysts expect a growth in Chinese copper demands of approximately 8.5% for 2013, much better than the 5% growth estimated for 2012. China represented 41% of the world demand in 2012. Suspected strong growth of this country and other emerging economies should give support for an estimated corporate demand of 5% in 2013.

In the United States, demand appears to be stronger, as consumer confidence has increased and the economy is recovering. This has been reinforced by positive news related to the car industry, the housing market, and employment that seems to have offset macroeconomic concerns related to the fiscal balance. Even though the US represents to date about 8% of the world demand for refined copper, the recovery of its economy is key to consumer demand -- to copper demand since the US is the most important secondary copper consumer worldwide, affecting copper demand in other economies.

Finally, after a severe 2012 where European demand is estimated to have decreased by approximately 7%, there are signs indicating a copper demand increase of 2% for 2013. It should be mentioned that Europe is now approximately 19% of the world demand for refined copper.

On the supply side, we think that several structural factors, such as labor stoppages, technical problems, and other issues are still affecting copper supplies, reducing the net impact of production coming from new projects and expansions. Southern Copper believes it is positioned to take advantage of this situation through our aggressive investment program for organic growth aimed to increase production from our current capacity of 640,000 tons to 1.2 million tons by 2017.

Regarding our copper production, in the fourth quarter of 2012, copper mine production increased by 1.5% to 163,799 tons, compared with 161,367 tons in the strong fourth quarter of 2011. This increase was the result of higher production at the La Caridad and Buenavista mines, partially offset by lower production in the Toquepala and Cuajone mines. These changes in production mainly were due to changes in ore grade and recovery in the [core] operations.

For the year 2013, we are expecting to produce 650,000 tons of copper. Of those, 640,000 will come from our mines while 17,000 from -- 7000 third-party copper concentrates. Molybdenum production decreased by 9.6 in the fourth quarter of 2012 when compared to the fourth quarter of 2011 due to lower production at the Peruvian mines, mainly resulting from lower recoveries. This production was partially offset by record production of La Caridad that had an increasing production of 4.7% due to higher grade on recovery.

For 2013, we plan to produce 19,800 tons of molybdenum which is 8% more than our 2012 production. Of this, approximately 1700 will come from our new molybdenum plant in Buenavista. Silver mine production increased 0.4% in the fourth quarter of 2012 principally as a result of higher production at our Buenavista mine that increased silver production by 10%, and La Caridad that increased production by 10.8%. These good numbers are due to performance from our Mexican operations were partially offset by lower production at the Peruvian mines that decreased their silver production. For 2013, we expect to produce and sell 16.3 million ounces of silver.

Zinc production. It increased by 11.4% in the fourth quarter of 2012 when compared to the same quarter of 2011. That was mainly as a result of higher grades and recovery, as well as a gradual production recovery at the Santa Eulalia mine after the flooding problems of prior years. These problems have been completely solved. In 2012, the Company zinc production increased by 7.3%. For 2013, we expect to produce 99,100 tons of zinc from our mines, a 10% increase in zinc volume when compared to 2012.

Regarding our financial results, for the fourth quarter of 2012, sales were $1.6 billion, slightly lower than sales of the fourth quarter of 2011. Copper sales decreased by 0.4%, but were helped with higher prices that increased 5.6% in the fourth quarter. And regarding [light products], we have significantly better volume sales of zinc. Sales of zinc increased by 18.5%, that allowed us to offset lower prices and lower volumes in molybdenum.

Operating cost. Our total operating cost and expenses increased by $71.1 million or 9.3% when compared to the fourth quarter of 2011. The main cost increments were in fuel and power costs that increased together $10.1 million, labor cost increased by $14.9 million, other operating materials $16.5 million, worker participation or profit sharing $17.3 million, exchange rate depreciation increased cost by $24.6 million, and these cost increases were partially offset by lower mining royalties, purchased copper from third parties that we obviously reduce after we have the recovery of our Buenavista operation, and inventory consumption.

Regarding our EBITDA, it's [clear the] legal fees for $316 million charged in the third quarter, EBITDA for the year 2012 was $3.7726 billion, that is a 56.6% margin of EBITDA to sales and for the quarter was $894.4 million, a 54.2% margin for the fourth quarter of 2012.

Cash costs. Operating cash cost per pound of copper before by [total] (inaudible) was $1.80 per pound in the fourth quarter of 2012 compared to $1.78 per pound in the third quarter of 2012. The $0.09 per pound increase in operating cash cost is the result of the already mentioned cost increments. Southern Copper operates on cash cost, including the benefit of byproduct credits was $0.903 cents per pound in the third quarter of 2012.

Regarding byproducts, we had a total credit of $342 million or $0.90 per pound in the fourth quarter of 2012. These figures compare with a credit of $337 million or $0.96 per pound in the third quarter of 2012. The higher byproduct credits come from zinc, molybdenum, and sulfuric acid, which compensates for the lesser volume, lesser values for silver, gold and [lead]. With the exception of molybdenum, all our product prices have increased between the third and the fourth quarter of 2012.

Net income in the fourth quarter was $531.8 million, 32% of sales. Net income attributable to Southern Copper shareholders in the fourth quarter was the same number, with diluted earnings per share of $0.63. Focusing on our capital expansion and expenditures, capital expenditures were a record of over $1.0519 billion for the year 2012. This is 71.6% higher than what we spent in 2011. The increase reflects our strong commitment to the Company expansion programs at Buenavista and other properties. In 2012, $615.6 million was invested in our Buenavista products. In 2013 we will continue our ambitious yet achievable investment program to increase copper production capacity by approximately 84% by 2016 from 640,000 tons to 1.2 million tons.

Our Buenavista projects. Are continuing the development -- we are continuing the development of this $2.8 billion investment program at this unit, which will allow us to increase it's copper production capacity by approximately 170%, that is from 180,000 tons to 488,000 tons by 2015. The new concentrator with the molybdenum circuit project includes a new concentrator with an estimated annual production capacity of 188,000 tons of copper in 1,850 tons capacity molybdenum [plant]. The project will also produce annually 2.3 million ounces of silver and 21,000 ounces of gold, a total capital budget of the project is $1.384 billion. Current overall progress is 36%.

Regarding mine equipment, through December 31, 2012, we have received two of eight shovels, 37 of 56 trucks, and seven of eight drills, and all of these units are in operation. The total capital budget of the project is $504.8 million and overall progress is 52%. The SXEW III project is moving forward. Plant equipment from Tia Maria has been transferred to Mexico and will allow us to increase the annual plant capacity from 88,000 tons to 120,000 tons. The total capital budget of the project is $444 million, and overall progress on the project is 39%.

The final testing of the Quebalix III concluded in January, and the project will start operations late in February. This project consists of a crushing, conveying, and spreading system that will improve SXEW copper production by increasing recovery and reducing hauling costs and the required time to extract copper from mineral. The total capital budget of the project is $75.6 million.

Regarding the construction of our molybdenum plant for the current concentrator, the final testing of the plant will start by the end of the first quarter of the year. The plant is expected to produce 1,700 tons of molybdenum in 2013, and to have an average annual production of 2000 tons of molybdenum per year. The total capital budget of the project is $38.2 million.

The Angangueo project. To develop an underground polymetallic deposit in Michoacan, Mexico, is moving forward as scheduled. After a recent evaluation of Angangueo resources, we are increasing the milling capacity of the project from 1,200 tons per day to 2,000 tons per day. Therefore, our Board of Directors approved total budget increase of $43.7 million, from $131 million to $174.7 million. The revised production plan indicates that Angangueo will have an average annual metal content production of 10,400 tons of copper and 7,000 tons of zinc in the first seven years of production. Over the life of the mine, average annual concentrate production will contain 2.4 million ounces of silver and 1,500 ounces of gold. These projects are scheduled to begin production in the first half of 2015.

Regarding the Peruvian project and focusing on the Toquepala expansion, through December 31, 2012, we have spent $231.8 million in this projects. These expenditures include initial construction work, build a new crusher and a conveyor belt system to replace current rail haulage and other operating costs which will allow for future savings estimated in $5.5 million per year.

Cuajone project. Through December 31, 2012, we have spent $136.6 million on two projects to increase productivity for these units, the variable cutoff ore grade project and the high pressure grinding rolls project. Current production is showing the initial benefits of the variable cutoff project. We expect that both projects will be at full capacity by the second half of this year.

In the case of our Tantahuatay investment, this mine in which we hold a 44.2% interest is located in Cajamarca in northern Peru. In 2012, we have recognized $48.7 million in earnings for our share of net income of the mine. For 2013, we expect to spend $1.8 billion for capital expenditures at our operations. Of those, approximately $1.4 billion will be in our Mexican operations and $400 million in the Peruvian projects.

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 close of the market on January 25, 2013, the Board of Directors authorized a cash dividend of $0.24 per share of common stock payable on February 26 of this year to shareholders of record at the close of business on February 13, 2013. 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.

Thank you. (Operator Instructions) Felipe Hirai from Bank of America.

Hi. Good afternoon, everyone. Thanks, Raul, for the presentation. My question is related to your CapEx for the next few years. (inaudible) would like to understand what happened with the CapEx for the Buenavista project, if there was any change in the CapEx, mostly because now you're showing a line of mine equipment with a total budget of $500 million. So just wanted to understand how this compares with your previous CapEx of $1.4 billion, if there's anything included in the $500 million?

Also, because we saw there are some differences between the pieces of equipment that you show, for example, the number of shovels or trucks. And my second question is related to the Tia Maria project. I can see that listed in your project. So, if you could just give us an update on what the status is, if there are any changes on scope, CapEx and timing? Thank you.

Okay, thank you very much for your questions, Felipe. Let me address first your concern on the capital expenditures. On this quarter, what we are reporting, we have made recaps of several expenses that were related to our Buenavista projects. One of them was this mining equipment that was spread through different investment initiatives, and we have now consolidated under mine equipment, and we are showing the budget that these projects has. This is not a new expense. This is basically geographic reorder of our capital budget.

In certain projects, there have been some slight adjustment regarding to their budgets. The current forecast for the Company for the years 2013 through 2017 are the following. For 2013, we are expecting to spend $1.8 billion in capital expenses. For 2014, $2.1 billion; for 2015, $1.4 billion; 2016 will be the year when we are completing this package of projects which should see a reduction in our CapEx expenditures. Where it may be currently about $600 million for that year, and for 2017 another $600 million. So, that's our current capital expenditures budget. And your second question was about Tia Maria. Could you repeat it your concern, please, Felipe?

Yes, before we go to Tia Maria, Raul, I just wanted to make sure, so this $500 million that you receive in mining equipment, where were those in your previous budget? Was that considered before in the Buenavista project, or any of the other projects or not? And actually my question on Tia Maria is just a general update on the project. Thank you.

Okay. Yes. The $500 million in mining equipment was part of our Buenavista project but was not identified as such. What we are doing, what we have done is to specifically group several small investments under this mine equipment budget of $504.8 million.

On Tia Maria, well, the Company has finished first review of the environmental impact assessment's tally. We are currently working with the local communities, as well as preparing the final draft that will be presented to the authorities during -- at the end of this quarter or the beginning of the second quarter.

Okay, thank you.

Rodolfo de Angele from JPMorgan.

My first question is on Toquepala. Could you talk a little bit about it. It seems the CapEx for this year was below the previous guidance. Any threats of a delay on that one? And also I would like to hear your thoughts on news flow about changes in mining taxes in Mexico. What are you're views? Anything that you think could happen there? Thank you.

Okay. Well, first in Toquepala, the Company is doing some progress in our talks with the local communities. Very recently we signed an agreement with the [Candarali] community. By this agreement, the Company will spend through the life of the project approximately $98 million for social work in this -- with this community. We think that this is a good step in the right direction for the Company and that will certainly help the project. Currently, we are scheduling the beginning of the Toquepala expansion by 2015.

Regarding mining royalties in Mexico, we are still at the very initial stage of the talks. We understand that government officials are considering this as an option, but we don't have at this point any official clearness on how it is going to be implemented.

Okay. Thank you very much.

You're welcome.

Garrett Nelson from BB&T Capital Markets.

Raul, you mentioned the CapEx guidance through 2017. Could you go over your copper production guidance through 2017 and has that changed at all?

Yes, Garrett. Thank you for your question. For this year, I mentioned already that we are expecting to produce 650,000 tons of copper. For 2014, we are expecting to produce 755,000 tons. For 2015, 941,000 tons; 2016, 1,181,000 tons; and 2017, 1,001,075 tons.

Okay. And the CapEx numbers you mentioned earlier, does that include Tia Maria?

Yes it does.

They include Tia Maria?

Um-hmm.

Okay. Great, thank you.

Alex Hacking from Citi Bank.

Hi, Raul. Thanks for the call. I have a couple of questions. First question, regarding the copper production guidance this year, 650,000 tons, is that all from your own mines, or is that including the third party concentrate? If you could clarify that, it would be good. And then second question, can you give us any guidance on what kind of cost inflation you would be expecting next year? I'm referring to the cash cost before byproducts if it's possible. Thanks.

Yes. Okay. Regarding production, our guidance for 2013 includes 10,000 tons of third-party copper concentrates. Now, we have more production from our own operations. We will replace that copper from third parties by our own copper that as you know is much more profitable than copper that you buy on spot or on the market.

Regarding cost inflation, we are expecting an increase in cost before by-product credits of about $0.09, and that increase should be offset by higher by-product credit contribution through the year. As I mentioned, we are expecting to increase our molybdenum production by a certain amount, as well as our zinc production.

The case of molybdenum, we are having the beginning of the operation of the new molybdenum plant in Buena Vista in 2013 that I will add to our molybdenum-based production about 1700 tons in 2013. In the case of zinc, we are recovering the production at our operations, as well as getting better all grades in the IMSA mines, and that will increase production by about 10% in 2013. So, when you value the contribution of these two byproducts, what you have is an offset in the increase in cash cost. So, for 2013 we are expecting to maintain our cash costs at its current level.

Thanks, Raul. Can I ask you to repeat the guidance for moly production next year? I missed it earlier. Sorry.

Sure. We are expecting to produce 9800 tons of molybdenum, that's 8% more than what we produced in 2012.

Thank you very much.

You are welcome.

One Juan José Lopez from UBS.

Yes, just to clarify, GBM, not UBS. Thank you. Thank you for your conference call. Could you give us an update on your labor negotiations that you have with unions in Peru? Did you get to any agreement so far?

Yes. In Peru we have eight unions. These eight unions have about 2900 workers on a total labor force of about 4500 workers, so about 65% of the workforce is unionized in eight unions. We are already signed a new three-year labor contract with three of these eight unions.

These three unions represent 13% of the unionized workforce and we are currently in talks with the rest of the unions in Peru to close a deal, and we are expecting to have a two-year labor contract. The labor agreement with the three unions that have already signed are calling for (inaudible) increases of 6% in the first year, 5% in the second year, and 5% for the last year of this three-year agreement. Peruvian labor cost currently is 9% of the total cost of the Company. So, with this, you may derive the effect of this in our cost. It's going to be moderate, basically speaking.

Thank you. When we could have more color in the agreement with the next (inaudible) union?

We are currently having talks with them. When we have any news on this matter, we will report it to the market, but currently this is a point where you are having discussions that are forgetting an agreement. We think that these talks are progressing in a very positive way and we are expecting to have a deal in short time. We can't report anything else at this point.

All right, many thanks.

You are welcome.

(Operator Instructions) [Matti Molino] from (inaudible).

Hello. How are you? I was wondering if you could provide us more guidance on Tia Maria. Perhaps your distribution of CapEx will be starting in 2013 or 2014?

Okay. Thank you for your question. For 2013, we are considering to spend $46 million in Tia Maria. That's our current budget. This is contingent to get the approval of the environmental impact assessment through the year. Our CEO has indicated that we expect to have these environmental impact assessment approved in the second half of 2013, or certainly consider that a condition for that will be having the goodwill from local communities regarding this project. So, that's what we have budgeted. If the project goes ahead, then we will be spending a little bit north of $250 million per year in order to build the plant and have it be finished and in operation by 2016.

Okay, thank you.

[Eugenia Fernandez from San Valdez].

Hi, hello, good morning. Thanks for the call. Just to clarify some things that you mentioned. The first one is, if I'm not wrong you said that you are estimating 640,000 of copper production for 2013. The second point is you mentioned the CapEx from 2013 to 2017, and as I understand, it's all these together it's about $6.5 billion of CapEx through this period? And regarding the Tia Maria project you have just said that -- you previously mentioned that you are waiting to receive the approval from the environmental impact by the first quarter of this year or the beginning of second quarter? Thank you.

Thank you for your question, Eugenia. First on the production, let me try to clarify information. We are expecting to produce from our own operations about 640,000 tons of copper in 2013. On top of that, we purchased third-party copper to fill up our smelters. We expect to produce from third party 10,000 tons of copper in 2013. Now, the addition of those two is an estimated production for the year of 650,000 tons of copper, that's for 2013.

On the Tia Maria, we will be presenting the environmental impact assessment by the end of this quarter or the first or second quarter of this year. That is the environmental impact assessment that the Company is preparing for this project. In the second half, we should have -- we expect to have a decision on the environmental impact assessment project. Obviously, we will certainly like it to be positive, in favor of moving forward with the project. That's what we're focusing on. We're currently working towards that direction.

Thank you.

Could you repeat your last question, please?

Yes, thank you for the previous answer. The last one is about the CapEx that you mentioned. You said that in 2013 you will spend $1.8 billion, then I understand $2.1 billion in 2014, $1.4 billion in 2015, and then $600 million in 2016 and '17 which implies $6.5 billion of CapEx in mining equipment. Is that okay?

Well, it's in the whole package of projects. The numbers are okay. I will repeat it for the benefit of our audience, as well. So, for the year 2013 is $1.8 billion; for 2014, $2.1 billion; 2015, $1.4 billion; and then for 2016, $600 million, as well as $600 million for 2017. That is our current expectation on capital expenditures. It's for the whole package of the Company projects.

Great.

Eugenia, that includes about $300 million for maintenance capital expenditures.

I'm sorry can you repeat that? $300 million?

For replacing equipment that has finished its economic life, we usually spend about $300 million per year.

Great. Thank you very much.

You are welcome.

(Operator Instructions) [Dan Richman], Private Investor.

Thank you. My question relates to the number of shares of stock outstanding. Your 10-Q for the third quarter said that there were 845.55 million shares outstanding as of October 25, 2012. Your income statement has 845.6 weighted average shares outstanding for the three months, but your balance sheet says there is 846.0 shares outstanding as of December 31. My question is, did you sell some treasury shares or otherwise issue shares? And, if yes, do you plan to continue to do so to finance your CapEx?

No. The second answer is we don't plan to sell shares in order to raise capital. What we are doing -- we require financial support for our projects is tapping the debt market. That's what we have done in 2012, as well as in 2010, very successfully. We're reporting that in our press release, as well.

The difference in figures that you indicated, Mr. Richman, is related to our activity or activity in the market. We go in the market and buy shares on a regular basis. We have a program that hasn't finished yet, and besides that, some of our Board members are being compensated with shares as indicated in our proxy statement.

So, the number of shares vary around the number that you mentioned, 845 million shares, 846 million shares depending on the time in the year. In this case, you are comparing the numbers that we have as of December 31 which were the mentioned 846 million shares with the weighted average through the quarter was 845.6 million shares. So, through the quarter we had some activity at the end of the process with the shares at the closing of the year of 846 million.

Thank you.

You are welcome.

(Operator Instructions) Alex Hacking from Citi Bank.

Hi, Raul. Sorry, just one quick followup. Can you remind us what you are sustaining CapEx is per year? Is it $400 million? Thanks.

About $300 million, Alex. I think a good proxy for that is our depreciation expense in our financials. It's around -- a little bit less than $300 million. That's what we are considering at this point.

Thank you.

You are welcome.

At this time, I'm showing we have no further questions. I will turn it back to the speakers for any closing remarks.

Thank you very much, Sandra. Well, this will conclude our conference call for the fourth quarter results. We certainly appreciate your participation and we expect to have you back when we report the first quarter of 2013 results by the end of April. Thank you very much and have a very good day today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.