Southern Copper Corp (SCCO) 2013 Q2 法說會逐字稿

Good morning and welcome to the Southern Copper Corporation second quarter and six months 2013 results conference call. With us this morning we have Southern Copper Corporation

Mr. Raul Jacob, Vice President of finance and CFO, who will discuss the results of the Company for the second quarter and six months 2013 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 do not place undue reliance on these forward-looking statements. Southern

Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statements, whether results 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, Teresa, and good morning, everyone and welcome to Southern Copper's second quarter 2013 earnings conference call. Participating in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Daniel Muniz, Grupo Mexico CFO. In today's conference call we begin with an update review on 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. Focusing on the metal markets during the second quarter of 2013, metal markets continue to be driven by some negative macro economic events that affected consumer expectations. The most important ones for basic metals was the slowdown of China's economy and the continuing low consumption in Europe.

Regarding the copper market, despite the sound fundamentals for this market, we maintain a review that is being affected by concerns about the Chinese growth. Along the mental exchange stock increases, macro economic worries related to the end of quantitative easing in the US and Europe's continuing economic crisis. From these factors,the increments in the London metal exchange and other warehouses' inventories are creating some concerns regarding the copper market balance. We believe this is part of the commodities cycle and a temporary event. We expect in the quarters a recover of demand, particularly from Asia, which currently represents approximately 60% of world demand.

Regarding China, its GDP is growing at a rate of 7.5% per year. Generally speaking, due to its urbanization process, we believe that China's GDP growth produces a copper demand growth higher than (inaudible) rate. We expect this trend to start up again in the next three quarters as China ends its (inaudible) .

Even though today the US represents only 8% of the world demand for refined copper, the ongoing recovery of this economy is a key to copper demand since the US is the secondary copper consumer market, affecting copper demand in other economies. On the supply side, despite some evidence of a market oversupply, we think that several structural factors, such as labor stoppages, technical problems and scrap stoppages and other issues are affecting and will affect copper supply, reducing the next impact of additional production coming from new projects and expansions. Southern Copper believes that the if world economy continues to improve, it is positioned to take advantage of the positive future outlook for the copper market through its aggressive investment program of organic growth aimed at increasing production from its current capacity to 1.5 million pounds by 2017. Focusing on Southern Copper production, this quarter, production decreased by 13,816 tons or 8.2% compared to the second quarter of 2012.

That was due to a lower ore grade recovery at our Toquepala mine and lower ore grade at our Buenavista mine. This In the case of Buenavista, this was caused by a temporary flood disruption that is being resolved. The lower production levels of these operations were partially offset by higher throughput ore grade and consequently more copper production at our Cuajone mine. Due to the lower production at Buenavista, for 2013 we are reducing our current production guidance to 640,000 pounds of copper.

This, approximately 620,000 pounds, will come for our mine and 20,000 pounds will come from third party copper concentrates profits at our metallurgical facilities. Regarding molybdenum production. Molybdenum production decreased by 195 tons or 4.2% in the second quarter of 2013 when compared to the same quarter of last year.

This was due to lower production at La Caridad that decreased 7% and Toquepala that decreased production by 3%. At the construction of the first molybdenum plant for the current Buenavista concentrator is completed and it is starting commercial production. It is expected to have an average annual production of 2,000 tons of molybdenum. The plant had a total budget of $38 million and we are in line with this budget at this point.

For 2013 we plan to produce 18,800 tons of molybdenum, 3% more than our 2012 production, including approximately 700 tons from the Buenavista new molybdenum plant. Regarding (inaudible)production, it decreased by 4.1% in the second quarter when compared with the second quarter of 2012. This was the result of lower production at Buenavista and improving operations. Refined sugar productionincreased by 21.7% in the second quarter to 4.3 million ounces from 3.5 million ounces in the second quarter of 2012.

[Tin] production increased by 21.7% in the second quarter of the year, mainly as a result of higher grades and recoveries as well as full production recovery of the Santa Eulalia valley mine after the flowing problems of prior years were completely resolved. Focusing on our financial results for the second quarter of this year, sales were $1.4 billion, $249.7 millionlower than sales for the second quarter of 2012. Copper sales decreased by $7.1 million in volume and $9.2 million in price. Regarding byproducts, we had better volume sales of silver that increased 4.7%, zinc that increased 6.7%, that partially compensated lower prices for both.

Regarding molybdenum, volume decreased by 3.1% and price by 21%. Operating costs. Our total operating costs and expenses increased by $60.6 million or 7.7% when compared to the same quarter of last year.

The main cost increments were in depreciation, selling, general administrative, diesel and fuel, energy and labor and other operating materials. These cost increases were partially offset by lower exploration cost, mining royalties, workers participation, purchased copper, sales expenses and leachable material. Our EBITDA forthe second quarter was $675 million, 48% margin, compared with $972 million at 59% margin for the second quarter of last year. Focusing on our cash costs, operating cash cost per pound of copper before by before byproduct was $2.10 per pound in the second quarter of 2013.

This figure compares with $1.99 per pound in the first quarter this year. $0.11 per pound increase in operating cash costs is a result of a already mentioned cost increments. Southern Copper's operating cash costs, including the benefit of (inaudible) credits was $1.09 per pound in the second quarter of 2013. Regarding byproducts, we had a total credit of $320 million or $1.01 per pound in the second quarter of 2013.

These figures compare with the credit of $346 million or $1.08 per pound in the first quarter of this year. Increased volumes for silver, zinc and sulphuric acid have been offset by lesser volumes of molybdenum and gold. While all byproductprices have decreased between the second quarter and first quarter, credit has diminished most for molybdenum, sliver and sulphuric acid and maintained equal for zinc.

Net income was in the second quarter was $374.1 million, that is, 26% of sales. Net income attributable to FCC shareholders in the second quarter of this year was $372.7 million, 26.4% of sales or diluted earnings per share of $0.44. Focusing on our expansion in capital projects and before we go into the details, let me share with you that in light of the current market volatility, the Company recently conducted a review of our capital investment program the cash flow generation capacity of SCC price environment.

As a result of this review, we conclude that we have sufficient funds to finish our current capital projects even in a conservative low price scenario of $2.00 per pound of copper. We are moving forward in our capital program at full speed and we are expecting to finish with our projects as indicated to the market at this point. Capital expenditures in the quarter were $385.5 million, 67% higher than our second quarter of 2012 and represented 103% of net income.

As reported before, our current plans aim to increase copper production capacity by approximately 84% from the current guidance that we just gave of 640,000 tons for this year to 1,175,000 tons by 2017. The current state of our major capital expenditure project is the following. Buenavista projects. We continue the development of our $3.1 billion investment program at this unit which will allow us to increase its copper production capacity by approximately 170% from 180,000 tons to 488,000 tons by 2015 as well as an increase our molybdenum productions.

I already mentioned that we just finished the construction of the first molybdenum plant for the Buenavista operations and we are expecting production for a commercial production for this plant in the third quarter of this year. A new concentrator, so that's the second concentrator that the Buenavista mine will have, with molybdenum circuit that's another molybdenum plant, that investment includes a concentrator with an estimated annual production capacity of 188,000 tons of copper and as I say, the second molybdenum plant with 1,850 ton capacity.

The project will also produce annually 2.3 million ounces of sliver and 21,000-ounces of gold. The total capital budget for the project for this new concentrator and molybdenum circuit is $1.384 billionand, through 2013, it has a progress of 51% with an investment of $302 million. The project is expected to be completed in the first half of 2015.

The SXEW III project is moving forward with an overall progress of 62% as of June 30, 2013. An acceleration plant adopted in the first quarter of this year is expected to allow us to finish the project ahead of schedule and under budget. The total capital budget of the project is $444 million, of which we have spent already $218.4 million through June 30. The project production capacity is 120,000 tons of copper capitals per year and it is expected to start operating in the second quarter of 2014.

The Quebalix III facility achieved its full capacity in the second quarter of 2013. The product construction was completed in February and it started operations in March 2013. This project will allow crushing up to 15 million tons of mineral per year, improving the SXEW III copper production by increasing recovery and hauling costs and the necessary time to extract copper from mineral. The project was completed at scale and budget, with a total cost of $76 million. As you may have note, the total capital budget for Buenavista has increased from $2.8 billion to $3.1 billion.

These variances are the result of the inclusion of a new project, the Quebalix IV with a capital cost of $240 million. For those we are expecting to spend $48 million in 2013. Regarding our Toquepala project, through June 30 2013, we have spent a total of $257.7 million on the Toquepala project as a part of this include the construction of a new [MP] crusher and conveyor belt system to replace current mine rail haulage, which we suspect will reduce operating costs by $5.5 million per year.

Regarding the Tecolotes expansion, which is expected to increase average annual production by 100,000 tons of copper and 3,100 tons of molybdenum, we continue negotiations with local communities and authorities as part of the process to obtain the project approval. In the second quarter this year, we made a contribution of 45 Million Soles, which is $16 million, to the development fund of the Candarave Province, and together with its authorities, we are selecting what development projects will be built.

Regarding Cuajone projects, through June of this year, we have to spend $142.4 million of a total budget of $157 million on two projects to increase productivity through technological improvements in this unit. The Variable cut-off ore grade project and the high-pressure grinding rolls project. Actual production is already showing the results of the variable cut-off ore grade project, which has been completed at the cost of $112 million. The high pressure grinding rolls product, which will produce a more finely crushed material, is expected to start operations in the fourth quarter of 2013 and we (inaudible) higher copper recovery and cost savings by reducing power consumption in the crushing process.

A total project budget in this case for the high pressure grinding rolls is $45 million, of which we already spent $30 million. We expect that both projects will be at full capacity by the end of the fourth quarter of this year, increasing the annual production by 22,000 tons of copper and 700 tons of molybdenum. On April of this year, the Board approved $65.1 million for the acquisition of mine equipment to improve its slope stability at the south area of the Cuajone mine.

This project will remove approximately 148 million tons of waste material in the upper level of the mine. In order to improve the mine design without reducing our actual production levels. Mine equipment to be acquired includes one shovel, five trucks, one drill and all auxillary equipment. Besides preparing the mine for the future, with this investment, the company will avoid a reduction in average ore grade between 2014 and 2018 while maintaining current production levels. At June of this year, we have committed $62.1 million for the acquisition of this equipment.

Looking at our capital expenditures for the year 2013, at this point we are adjusting it, reducing it from the initial guidance of $1.8 billion to $1.6 billion. Regarding billions, 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.

That is on the order to determine appropriate quarterly dividends. Accordingly, I disclosed to the market on July 18 this year the Board of Directors authorized a dividend of $0.12 per share of common stock payable on August 20, 2013 to shareholders of record at the close of business on August 7, 2013. With this in mind, ladies and gentlemen, thank you very much for joining us and I would like to open up the floor to questions..

Thank you. We will begin the Q&A session. (Operator Instructions). Our first question comes from Santiago Pérez-Teuffer from Credit Suisse. Please go ahead.

Hi, good morning Raul, Miguel, and Oscar. Thanks so much for your time. I have two questions. The first one is related to [Analista]. Is the flow affecting the mine affecting production currently? And will it have any affect on this quarter? And the second one is related to Peru.

I wanted to ask if you can share more color on Toquepala. Would you share some expenditures and global inflation in many equipment, what CapEX are you expecting for this for this project now and in terms of time, when do you think you'll be able to submit public hearing. Thank you.

Okay. Let me focus on the Buenavista production profile. We have identified the source of the flooding, and we are already correcting that. By the end of this month, July, we expect to have a major control on the production of Buenavista.

If we achieve that, production should go back to the plan that we have for the year that was to produce about the same that we did last year in Buenavista. However, the tons that are already lost will not be recoverable through 2013. Regarding the Toquepala investment, let me ask Mr. Oscar Gonzalez to comment it, please.

Yes, in the Toquepala investment, we are just investing right now in the order of $85 million for these years. That includes the improvement in the technological arrangement in order to substitute the railroad with a conveyor and new [companion] equipment. And that is it, in addition what is warrant to reduce the $5.5 million that was mentioned and this will be used later on by the expansion of Toquepala, mainly the conveyor, no? And, with the addition of a second crushing equipment.

The other thing that this involves in the investment is the new chops for the trucks and the auxiliary equipment because the old chop was inside the expansion of the mine. For that reason we need to conserve the new one and that is $26 million for this year. And the other thing is the new warehouse, some superstation that we need to build. That may be $75 million, $80 million for this year, but we are not spending anything in the new expansion of the Toquepala for producing 100,000 tons until we have the approval of the community and of the government of the environmental impact study.

Oscar, if I may as a followon, what is missing for this approval? Is it only a public hearing? Or do you just have to submit another AIA and when will you expect to do this?Thanks so much.

No, the AIA is already submitted since last year, and the only thing we need to do again because we've cancelled is the public hearing and that we expect to have it, maybe, in this third quarter of this year in order we are going to start construction after the approval by the Minister of Mines maybe at the beginning of the year because we already have all the engineering for this project.

Thanks so much. And good morning to everyone.

Thank you very much for your questions, Santiago.

Our next question comes from Thiago Lofiego from Merrill Lynch.

Good afternoon. I have two questions. The first on the project in Peru.

If you could give your view on how these stricter regulations in Peru might affect your upcoming projects, and also if you can give an update on the potential timing for the Toquepala and the Cuajone projects, those would be my questions.

Regarding the Toquepala project we just mentioned, it will be, we expect to have the project moving forward with the holdings in the third quarter and with the initial construction of the project by the first quarter of next year. About the new environmental standards, we have to express our concern on the standard. It's the lowest in the world at this point.

I think that this is something that will affect investments in metallurgical facilities, and copper metallurgical facilities specifically in Peru. Currently, we don't have plans to expand our smelter or refinery. It's mainly we're expecting a correction on standards because we think these are unrealistic.

Okay. And what about the [Endonge] projects.

Well, we have the Toquepala project that already was commented and the Tia Maria project. We are working on environmental impact study that requires certain work with the communities before we submit it to the government and we are in that phase.

And at the same time in paralell, doing work with the local communities for getting approval of the project.

Okay. Thank you. And my last question is about the cost outlook.

We have seen some cost pressures over the last couple of quarters. What's the outlook going forward? Should we see a normalization of the operating costs or what is the outlook there?

We are seeing in the last few months the total cost in dollars is decreasing given the reduction in certain costs. However, that's very dependent on what happens with fuel costs, which is very important for us. Energy meaning, by this, electricity. In energy, we are reducing our costs, expect to reduce our costs at the Mexican operations due to PPA that the company has signed with the new plan constructed by Grupo México that will supply power to the Company.

Generally speaking, we are not seeing that much cost pressures as we have seen, say, a year ago at the same time and that is something we believe will be favorable.

Thank you.

You're welcome.

Our next question comes from Leonardo Correa from HSBC. Please go ahead.

Hi, good morning and good afternoon, everyone. Thank you. My first question is regarding hedging. We've seen the Company in the first hedge a part of copper production. Just wanted to know, given recent volatility in copper prices, and potentially more volatility going forward at least for the next two years, just want to know if hedging part of copper production would be an option.

And my second question is regarding M&A, and clearly the Company has been very focused on organic growth. It has a very interesting pipeline of projects. I just want to understand given Tier One assets that have been put up for sale, mainly in Peru, on the copper side, I want to understand what the recent stance on M&A is now from the Company. Thank you.

Those are the two questions.

Let me ask Daniel Muniz to comment on your questions. Thank you very much for it, Leonardo.

Thank you, Leonardo. First of all regarding hedging. As you know, in the past we don't have a real policy in terms of hedging.

We tended to just as evidence look at the market, do our analysis, look at our cash flow and CapEx needed and the financial structure and capital structure of the Company and decide to hedge at some point. We have not hedged whatsoever.

We believe in the strong fundamentals of copper, although Raul commented seeing a lot of different new flow from China and what have you, but we do believe in the fundamentals. We are experiencing how tough it is to put additional pounds of copper out there. We are very positive there.

That's why. Regarding M&A, we are seeing a lot of projects into play. There's a lot of talk about Las Bambas in Peru. These common ones. Many other projects that are out there for sale. We've been focusing on organic growth.

We believe, given the strong asset base of Southern Copper, and the very strong position in the cash costs of the industry, it's difficult to close a transaction and to acquire another asset given our pipeline, and the vertical project that we are going through.

But the project comes in the way to us and to our shareholders, we will definitely entertain the analogy, etc. But nothing to report at this point. But thank you for the question.

Very clear. Thank you very much.

Thank you.

Our next question comes from Carlos de Alba from Morgan Stanley. Please go ahead.

Thank you very much, gentlemen. My first question is regarding costs again. It was particularly concerning to see the operating cash costs of by products jumping to $2.10 per pound, but I would like to understand if you can quantify the impact that the Buenavista situation had in this increase.

Can you tell us how much, either on a per pound basis on your dollar basis it increased your costs in the second second quarter?

Well, all in total, Carlos, we lost about 5% of our production related to the Buenavista copper production. The concern is that even though we did reduce our production by about 5% directly from Buenavista is that we still spent pretty much the same amount of money in terms of the total expenses related to copper production at that time. It was spending pretty much the same with less production. What we're seeing, it's a mix of different elements.

I already mentioned some of them when we talk about the change in costs and hold on a sec, please. Let me give you some more details.

In terms of diesel and fuel, we had a cost increase of $8 million in the quarter. Power was about $7 million. On power, I forgot to mention that we are adjusting our cost through consumption of lower power as well as fuel. In Mexico, we are expecting a reduction coming from the new part we will take when the current power plant starts operations at full capacity.

On other expenses that affected cash costs, we had operating materials increasing by $28.5 million in the quarter. And, very important, we had a new agreement with the unions in Peru, and that represented an increase in labor cost of about $19 million for the quarter. So, I will say that we have higher labor costs that is impacting our cost position, higher diesel and fuel in the quarter, and those two are the most significant with power.

For the rest of the year, for the remaining of 2013, what we are expecting is a moderation of the total expenses as we have seen through the second quarter in terms of prices. And we are also expecting to have more production coming in. We expect the recovery of Buenavista, as we indicated before, and we're expecting new production or additional production from Cuajone, coming from the high pressure grinding rolls, that will increase production alone by 6% in the Cuajone mine.

Those two should be drivers of more production. And also, in the case of Toquepala, we will have a recovery, slight recovery, in the ore grade, which has been the problem in the last year coming to a more normal ore grade for Toquepala.

Sorry, assuming that Buenavista, the situation with the floating in Buenavista is solved at the end of July or early August, and the impacts that you just mentioned on Cuajone and Toquepala, what is the copper production outlook for the year and if you can just confirm that.

We indicated that we are forecasting 640,000 tons of total production for 2013 for copper. Of those, 20,000 tons will be from third party copper concentrate that we will process in our metallurgical facilities.

All right. And you expect to sell all of this output.

Yes.

Right. Any updates on the moly and zinc production guidance for the year given that those are the two most relevant byproducts?

Yes, in the case of molybdenum, we are expecting to produce 18,800 tons. That will have the contribution of the new molybdenum plant in Buenavista. That is already finished and it's been under testing in the second quarter and we expect to start commercial production in it through the third quarter of this year.

And for zinc, you have any number?

For zinc basically we will maintain our current production ratio. We are expecting to have about 100,000 tons of zinc produced from our mines for the year.

For the year. Okay. And I know I'm taking a lot of you are your time. Final question.

You mentioned an area in the call the Company will continue with at great CapExpress, even if copper went to $2 given the cash generation you see even under such a scenario. But what about dividends in that case? Would the Company still be able to do the CapEx projects and continue to pay dividends, or the dividends will be pretty much gone under such a scenario.

Let me ask Daniel Muniz to comment on that.

Carlos, yes, of course. We are taking this very straight scenario. We analyze all the projects and to 60 projects required approximately 20 copper prize in order to make up 15%. The scenario and the way that Raul has budgeted this scenario might not have been for a scenario may not be dividends but just for the sake of the argument, the capital generation position of the Company given under very dramatic copper prices.

Fair enough. Thank you very much, everyone.

Thank you very much, Carlos. Let me add to what Daniel said about the comment on the $2 copper price.

We don't expect that to happen, but we have to prepare for different prices scenarios, and as part of that we did a review of our possibility for moving forward with the projects at different price scenarios.

We also considered some other higher prices as well, but at this point it's important to report, for us, that we expect to move on with this project even if we have a serious deterioration in the copper market, which is not our current outlook, but we have to know what we would do in that case.

Our next question comes from Aguiar from Goldman Sachs. Please go ahead.

Thank you for the opportunity for the call. A bunch of my questions have been answered. But a couple, two, additional.

Mr. Raul, can you talk a little bit about the discussion on the new tax in Mexico. Where are we, do you have any view in terms of implementation schedule, how it's going to be calculated to beat revenues, that is going to be the first question. I'll make the second question afterwards.

On the Mexico royalty it was approved by the House of Representatives in the past legislature. We are currently at the summer break of the Mexican Congress, and we are expecting this to be at the Senate in the fourth quarter of the year.

What was passed was royalty based on EBITDA, 5% of EBITDA. This is not a finished low that has to be applicable. At this point we are waiting to see what was the end result of this discussion about new legislation in Mexico.

I wonder if I may, a company's position is that there shouldn't be any special tax in mining. Given the way Mexican electricity regulation works, profit sharing works, given the way that all these taxes that the mining companies are repaid, I think it's not fair to judge the mining industry elsewhere or worldwide in the same way.

Not only us, but the Mexican handle of mining has been doing strong lobbying with in order to try and make more stable, investment-friendly regime. That really is the official position that we've been taking. And just said, nothing official yet.

Fair enough. A little clarification here, if this is approved by the Senate in a month, this comes into play the day after or just on January 1, 2014?

It could be any time. That's their prerogative. It can be enacted and entered into force the day after. As I said, entering the day after and the publication could have a period. Depends on actually the legislative task.

Fair enough. Second question will be about your guidance for the long-term. Can you update us on your production guidance for copper in the next years and if you can, also the CapEx. I'm

not sure if you did any change for the last three months. And on the same tone, do you expect your cash cost for copper in 2014 to be lower and by how much compared to this year?

Okay. Let me talk first about the volume, the expected copper volumes for the next few years. As we indicated for 2013, we are expecting 640,000 tons. For 2014 we should have about 700,000 tons. For 2015, 860,000 tons. For 2016, 1.1 million tons and for 2017, 1.175 million tons of copper.

Regarding CapEx, we already mentioned we are reducing our CapEx guidance from $1.8 billionto $1.6 billion in 2013. For 2014, we are expecting to spend $2.3 billion. For 2015, $1.4 billion. For 2016, $600 million. And for 2017, $250 million. This includes our capital project expansion plan, as well as our maintenance capital expenses.

Just on, is Tia Maria included in this? When do you expect Tia Maria to start up in this?

Yes, we are including Tia Maria. With an expectancyof beginning productions by the end of 2016. Now, as you all know, Tia Maria is conditioned to receiving the approval of the national government as well as local community, so that project is conditioned to these two approvals to move on.

But we are considering using the legal limits that we have to submit certain information and to the government to answer us, we are estimating the beginning of this project by the end of 2016. In our 2017 forecast, we have Tia Maria production included. Regarding cash cost, we are expecting for next year to have the benefit of the higher production, as I mentioned.

We are expecting about 700,000 tons for 2014 of copper. So that should reduce the total cost of cash cost before any credits should be reduced, considering these new production. Regarding the byproducts, the question mark is what is going to be the price of the byproducts. We are considering increasing our volumes of molybdenum for about 20,000 tons for 2014.

In the case of zinc, we expect to recover our production at full speed in all the operations, that includes San Martin mine as well. That should increase our production by about 115,000 tons of zinc. Sliver this have a little bit more production in 2014, and gold will be pretty much as it is right now.

Thank you very much, gentlemen.

So generally speaking, we are expecting to have more copper production in 2014 as well as a more byproducts production. However, depends on the prices of the byproducts and the costs that we are facing next year to have an idea of where the cash costs is going to be.

Our next question comes from Marcos Assumpção from Itaú BBA. Please go ahead.

Hi, good afternoon, everybody. First question is related to Buenavista expansion. If you could comment, how long it will take after the startup to ramp up the capacity of this project.

And also the potential impact on Southern Copper's cash costs after the implementation of the project. And also, if you could comment on the market fundamentals as well.

You mentioned earlier in the call you're not hedging, you believe in the market and copper prices, the market is relatively tight. If you could comment a little bit on the second half of the year, what's your view right now for prices and also for 2014 as well, if you can. Thank you.

Let me start by the Buenavista question. We have two projects. The SXEW IIIplant that we will be operating next year in Buenavista and the new concentrator. In the case of the SXEW III plant, we have the ramping up of these kind of facilities is relatively steep. By that I mean that once you finish the plant and you have a decommissioning, during that period you usually increase the production very quickly in the quarter.

So if we finish the plant, let's say, in the second quarter, by the end of the third quarter, this plant should be up and running at full capacity. That is what we are expecting. In the case of the concentrator, the new concentrator, it may take a little bit longer than that, about six months to reach full capacity. We will enjoy the benefit of its production through the second half of 2015 and most likely at the fourth quarter, we will expect to have it at full speed as well.

That includes the molybdenum circuit, the second molybdenum circuit that we are building with this facility. Regarding the copper market, we are seeing for the rest of the year an environment where we have more production coming from expansions as well as projects. And some demand that is lagging from what is expected at the beginning of the year. We think that the news we are hearing at the macro economic level is affecting the demand for copper even though we some see very encouraging signs particularly in China regarding housing construction as well as the auto industry.

That is still not transforming into higher imports. But we do know that China is short of copper and that should eventually reflect in the market. Besides that, we have received, we are starting to receive still very low but news from Europe in the fact if it's not decreasing any longer, that is on the positive side given the size of the European economic crisis. And the US is recovering at a slow rate, though, but moving in the right direction.

On the supply side, usually we have each year a significant affect on supply regarding ore grade decay, labor problems and other concerns that are also affecting supply. This has been a trend that has repeated two different years and we don't think this year should be different than that. For 2014, I think it's even though a balance between supply and demand may show that there will be some more supply than demand that year, I think it's premature.

We need to see how the world economy is behaving by the end of the year and that will certainly change demand and supply balance. In this year, we have had a significant variance in the market view through the year so that varies a lot. That volatility we are facing at the macro level is affecting the copper market and that is a quite clear sign we see nowadays.

Okay. Do you have a sense of how inventories are in China right now?

We understand they were depending on the source at about 800 to 1 million tons in nonbonded warehouses at the beginning of the year, and that number has decreased to half of it, depending again on who do you ask about this.

Okay. And last question, when you mention about the stress scenario for copper prices in your budget, for that CapEx that you are making right now, what will be the kind of returns that you get using that stress scenario price?

We beat our project evaluation using $2.00 in most of the projects we are under taking now. We think that return is very positive. We don't disclose that information. Sorry about that, Marcos, but that's the view of the company and why we are committed to move on with these projects.

All right, thank you very much.

Our next question comes from Autumn Graham from Barclays. Please go ahead.

All of my questions have actually been asked. Thanks.

Our next question comes from Paul Benjamin from Wood Mackenzie. Please go ahead.

Hello. Thanks for a very interesting presentation. I wanted to ask about smelter capacity on the Caridad. I understand there's some refurbishment work going on there at the moment. So I was wondering whether we have any increase of capacity expected from that work, and then the future.

We don't have any Pacific plans to expand the capacity in Caridad.

Not yet.

Okay. So I was going to say, looking into the future with capacity at Buenavista increasing, whether you had any plans for increasing smelter capacity in that area.

Well, the company that's looking to build a new smelter in a different site named [Impaima] in Mexico. That is a project that we have been developing in the last few quarters. But there is nothing to report at this point in this matter.

Thank you.

You're welcome.

Our next question comes from Alfonso Salazar from Scotiabank. Please go ahead.

Thank you. I just want to check what will be the production level that you expect at Cuajones after all the projects are finished. It seems to me that it should be increasing to 180,000 tons but in the press release it says that production will stay flat (inaudible). I was wondering if you can qualify this.

Thank you for your question. Hold on a sec, please.

We are expecting, expecting to produce about 180,000 tons in Cuajone once these projects are finished and considering we already are investing in new equipment to maintain our ore grade as well as the slope of stability and the right standard of the company.

Thank you.

You're welcome.

Our next question comes from [Bautista Carr] from FBR Capital Markets. Please go ahead.

Good afternoon, guys, and thank you for all the color on production and CapEx guidance. Just a follow-up question on the project evaluation analysis. When you think about going ahead with these projects at the $2 copper price, does that take into account drawing down on the cash balance and probably borrowing, issuing additional debt to fund those projects, or is it purely from operating cash flow and cash balance?

Well, we did a bond issue in November of last year. Our cash needs we're currently very safe cash position that will protect us in case of a market reversal. And And on that base, we don't consider at this point that we will require any additional cash at this point, please. You Daniel, you may want to comment on that as well?

Thank you, Raul. What Raul was trying to convey to you guys was more of what happened if copper price drops dramatically and how strong the position of the Company is today, even under that same circumstances. We did issue on November and ordered to guarantee the completion of this project.

That's pretty much where we are. Of course, Capital structures have to be analyzedon a moment by moment basis, and it depends on the market position and keep on our capital structure. But the $2 mention mostly without additional debt and without paying dividends just to give you an idea how strong our financial position is today. Thank you.

Great. And does that assume anymeaningful improvement from the cost side. Because I know when we are talking about a $2 copper price, crude oil is not going to be $105 or $110. Does that take into account the cost side as well?

We haven't made any specific assumption on the fuel prices or some other key material prices so that will be in our favor in the sense that we do know if we face very low price copper scenario, that should also pull down some other prices but we are not considering that in our outlook.

Great. Thank you very much, guys. Good luck.

Thank you.

Our next question comes from Mandip Singh from JPMorgan. Please go ahead.

Hi, thank you. Hi, Raul. My question is related to the Quebalix IV project, which was added to the final list of CapEx. Could you please provide some more details about the project, its timeline and the benefits you expect to see after this investment is completed?

And the second question is related to the expected time frame to complete the construction of Toquepala after the approval is received, and when do you expect production to begin there? Thank you.

You're welcome. Thank you very much for your questions, Mandip. In the case of the Quebalix, generally speaking, the Quebalix facility have two significant benefits for the Company.

The first is that by reducing the side of the material, the mineral that will be leached, we get more copper out of them. That's the first benefit. And the second one is that we have a quicker recovery of the material of the copper contained in the mineral. That's generally speaking.

In the case of this fourth Qeubalix, it will accommodate our production at the three SXEW plants that we will have in Buenavista. Two of them are already operating, half of the Quebalix III to supply material for them. The fourth one, the third one it's requiring this kind of facility to maintain the production levels that we're expecting from it.

So, roughly speaking, we are expecting to have a more stable production coming from the SXEW portion of the facilities. Could you remind me your second question, please?

Yes. You mentioned the Toquepala.

The Toquepala expansion is expected for the first quarter of 2016 to start production. Conditions, as I said in this case to approval this year of the environmental impact study and the concurrence of the local communities. We

were expecting those two approvals in order to move on with the project. We are not doing anything until the project has appropriate approvals.

Thanks, Raul.

You're welcome.

Our next question comes from Pedro Fuenzalida from Larrain Vial.

Yes. Good morning. Hi Raul and everyone. Just two questions. The first is one is behind the revision in the CapEx guidance from $1.8 billionto $1.6 billion.

Is this a delay in projects or just lower CapEx. And the second one is on the physical premiums that we are seeing being jumping especially from the second quarter and how well positioned are you, is Southern Copper to take advantage of this or if you are massively committed in long-term contracts. Thank you.

Thank you very much for your question, Pedro. Regarding the CapEx, no, we are maintaining our capital budget as indicated.

It was about $6 billion for this year, now $6.3 billion. And the addition is a new project, the Quebalix IV that I addressed in the prior question.

Sorry, Raul. Particularly on 2013 from $1.8 billionto $1.6 billion.

Just postponing certain expenses and payments. When you do the budget, you have an idea of how much, what kind of amount of money you need. But once you are through the year you start negotiating with your vendors of equipment and constructors of the facilities, and then you establish a committed path for CapEx.

So in some cases, it's a little bit of postponement in expenses that has been already committed. In some other cases it's just delaying the time you will receive equipment. So that's why we are even though we spent about $700 million in CapEx in the first half of the year, we have, we are expecting to spend more than that, about $900 million, in the second half of this 2013.

Thank you. On the physical side, please.

Yes, on the premiums that you mentioned, we generally speaking, we have firm contracts that are for the year and have specific commercial conditions related with them. We are seeing premiums, particularly on refined copper, but those will be achieved through our spot sales. The reduced portion of our total sales.

Do you know how much you leave for this spot market?

I'm sorry?

Which portion is left for the spot market?

It varies from year to year and we don't disclose this information.

Okay. Thank you.

We have no more questions in the queue at this time.

Well, if we don't have any more questions,I'd like to conclude our conference call for the second quarter results. Certainly appreciate your participation and expect to have you back with us when we report the third quarter results in October. Thank you very much and have a nice day.

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

Thank you very much, Teresa.