Southern Copper Corp (SCCO) 2013 Q3 法說會逐字稿

Good morning, and welcome to Southern Copper Corporation's third-quarter and nine month's 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 third quarter and nine 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 not to 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. I will now pass the call on to Mr. Raul Jacob. You may begin.

Thank you very much, Darryl. And good morning, everyone. And welcome to Southern Copper's third quarter 2013 earnings conference call. Participating in today's conference call are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Daniel Muniz, Groupo 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 expenditures program. After that, we will open the session for questions.

Focusing on the copper market. Regarding the copper market during the past quarter, we have seen the strong fundamentals of this market coming back again to support copper prices. Inventories of the three major warehouses, the London metal exchange, COMEX, and Shanghai, decreased by 24% during the quarter. On top of this, we have seen China's refined copper imports in September increase by 32% month to month, to about 350,000 tons, or 18% year on year, clearly indicating to us the end of their destocking process. Even though the US represents today only about 8% of the world demand for refined copper, the ongoing recovery of its economy [affect] copper demand, since the US is the most important secondary copper consumer, affecting copper demand in other economies.

On the supply side, despite some evidence of a possible market oversupply for the coming year, we think that several structural factors, such as labor stoppages, technical problems, the scrap shortages, and other issues are affecting and will continue to affect copper supply, offsetting the net impact of additional production coming from new projects and expansions. Southern Copper believes that it is positioned to take advantage of the strong fundamentals of the copper market. Our Company will benefit a bit through its strong investment program of organic growth, aimed at the increasing production from its current capacity to 1.2 million tons by [2017].

Looking into our production of copper for the third quarter, production decreased by 5,286 tons, or 3.4%, in the third quarter of this year compared to the third quarter of 2012 due to a lower production of the Buenavista mine, caused by a temporary flood disruption. That disruption has been resolved, but we had also some problems with ore grade and recovery at our Toquepala mine. The ore production level of these operations were partially offset by higher production at the Cuajone mine, mainly due to high recovery. Due to lower production during the last quarter at the Buenavista operation in particular, for 2013 we are reducing our current production guidance to 630,000 tons of copper. Of these, approximately 610,000 tons will come from our mines and 20,000 tons from third-party copper concentrates.

Focusing on molybdenum production, it increased by 285 tons, or 6.4%, in the third quarter when compared to the prior quarter of 2012 -- the same quarter of 2012. It was due to higher production of the Peruvian operations, where we saw the Cuajone operation increased by 17.3% its molybdenum production and the Toquepala, 17.9%. This better production at the Peruvian operation has been also reinforced by the initial production of the Buenavista molybdenum plant that started operations in the past quarter. This molybdenum plant for the Buenavista concentrator started commercial production, as I say this past quarter, this past quarter, with 107 tons of molybdenum produce. The plant is expected to have an average annual production of 2,000 tons of molybdenum. For the year, we plan to produce 19,000 tons of molybdenum, 4% more than our 2012 production, including approximately 500 tons from the Buenavista new molybdenum plant.

Regarding silver. Silver production increased by 0.7% in the third quarter of 2013 when compared to the same quarter of last year. This was mainly the result of higher production at IMMSA that was partially offset by lower production at the Toquepala, Buenavista, and Caridad mines. Refined production increased by 6.2% in the third quarter to 3.6 million ounces from 3.4 million ounces in the third quarter of 2012. Zinc production increased by 14.9% in the third quarter of 2013 when compared to the same quarter of 2012. Mainly as a result of higher ore grade and recoveries, as well as the full effect of the production recovery at the Santa Eulalia mine after the flooding problems of the prior years were resolved.

Focusing on our financial results. For the third quarter of 2013, sales were $1.4 billion, $167.9 million lower than sales of the third quarter of 2012. That is a minus 11% of sales. Copper sales volume decreased by 2%, and price decreased by 8.3%. Regarding by-products, we have higher sales volumes of zinc, 32.5% more zinc volume sales, and molybdenum that increased 5.5%. That partially offset lower silver sales volumes and lower prices for all three of these by-products.

Focusing on operating cost. Our total operating costs and expenses decreased by $301 million, or 27.2%, when compared to the third quarter of 2012. The main cost reduction was in legal fees related to the AMC damage award that were $316.2 million a year ago. This was a one-time event that affected last year. Other cost decreases includes a lower purchases of copper from third parties, lower literal material inventory consumption, and lower workers' participation. These cost reductions were partially offset mainly by higher inventory consumption, higher energy cost, and all of the variances explained the remaining differences.

Looking at the EBITDA of the Company. The EBITDA for the third quarter watt $684.1 million. That is 49.4% margin, compared with $532.6 million, or 34.3% margin, for the third quarter of 2012. Focusing on cash comps. Our operating cash cost per pound of copper, before by-product credits, was $1.79 per pound in the third quarter of this year. This figure compares to $2.05 per pound in the second quarter of 2013. There has been a reduction of $0.26 in our cash costs quarter over quarter. This 12.8% decrease in operating cash cost reflects the combined effect of an 8% reduction in production costs and a 5% increase in copper production, mainly from our Peruvian operations.

Southern Copper operating cash cost, including the benefit of by-product credits, was $0.98 per pound in the third quarter of 2013. This cash cost was $0.11 lower than the cash costs of $1.09 for the second quarter of 2013. That is a 10.1% reduction in cash costs. Regarding by-products, we have a total credit of $269 million, or $0.81 per pound, in the third quarter of 2013. This figures compares with the credit of $304 million, or $0.96 per pound, in the second quarter of 2013.

Increased molybdenum sales volume has been offset by lesser volumes for silver and zinc and lower market prices for by-products. With the exception of zinc that increases its price by 1.2%, molybdenum by-product prices have decreased between the third quarter and the second quarter. In the case of molybdenum, a reduction of 13.3%; for silver, 7.4%; and for gold, 6.1%. Net income attributable to SCC shareholders in the third quarter was $344.2 million. That is 24.9% of sales, and per share, that is $0.41 per share.

Focusing on our expansion and capital projects, the current status of our major capital expenditures projects are as follows. For the Buenavista project, we have continued the development of our $3.1 billion investment program of this unit, which is expected to increase production of copper by approximately 175%, as well as an increase in our molybdenum production. That is for the year 2017. The new concentrator with molybdenum circuit project includes a concentrator with an estimated annual production capacity of 188,000 tons of copper and a second molybdenum plant with 2,600 tons capacity. The project also is expected to produce annually 2.3 million ounces of silver and 21,000 ounces of gold. The total capital budget of the project is $1.3836 billion, and through September 30 of this year we have a 56.4% progress, with an investment of $442.9 million. The project is expected to be complete in the first half of 2015, and we are currently in the process of installing the first two of six mills acquired for this project.

Regarding the equipment acquisition for mine operations, through September 30 we have expensed $464 million of a total budget of $504.8 million on this mine equipment. And we will have received 55 of 56 trucks, 5 of 7 shovels, and the 8 drills required. The SXEW III project is moving forward with an overall progress of 72.2%, at September 30 of the year. The total capital budget of the project is $444 million, of which we have expensed $284.7 million through September 30 of this year. The project's production capacity is 120,000 tons of copper cathodes per year, and it is expected to start operating in the first half of 2014.

On January 2013, the Board of Directors approve a total budget of $240 million for the construction of Quebalix IV project, which is expected to crush up to 60 million tons of minerals per year, improving the SXEW III copper production, by increasing recovery and reducing hauling cost, as well as processing time. The project is expected to be completed in the first half of 2015. The remaining projects to complete the $3.1 billion budget program includes several investments infrastructure and other facilities at Buenavista. Regarding our Toquepala projects, through September 30 we have spent a total of $269.5 million in Toquepala projects. These projects include the construction of a new MP crush crusher and conveyor belt system to replace current mine rail haulage, which we expect will reduce annual operating cost by approximately $5.5 million per year.

Regarding the Toquepala 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 project approval. On June 26 of this year, we signed an agreement with the National Water Authority, local authority, and the Candarave Board of Water Users for a hydrogeologic study of the Locumba river basin in order to improve the water utilization in the province. For Cuajone projects, through September of this year we have to spent $145 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 Roll Project, or HPGR by its initials. Actual production is showing the results of the Variable Cut-Off Ore Grade Project which was completed at a cost of $112 million.

The High Pressure Grinding Roll Project, which will produce a more finely-crushed material, is expected to start operations during the fourth quarter 2013, and we believe will improve copper production and generate cost savings by reducing power consumption in the crushing process. The total project budget is $45 million, of which we have spent $33 million through the end of the third quarter. We expect that both projects will be at full capacity by the end of 2013, completing the additional 22,000 tons of copper and 700 tons of molybdenum in annual production. The project to improve slope stability of the south area of the Cuajone mine will remove approximately 148 million tons of waste material in order to improve the mine design without reducing our actual production level. The mine equipment to be acquired includes one shovel, five trucks, one drill, and ancillary equipment. Besides preparing the mine for the future, this investment will avoid the reduction in average ore grade between 2014 and 2018, while maintaining current production levels. As of September of this year, we have to spend $22.4 million of our total budget of $65.1 million.

Regarding dividends, as you know it is the Company policy to review at each Board meeting cash resources and expected future cash flow generation from operations, the capital investment plan, and other financial needs, in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on October 17, the Board of Directors authorized a cash dividend of $0.12 per share of common stock payable on November 21 of this year to shareholders of record at the close of business on November 7.

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

(Operator Instructions)

And we have a question from Carlos de Alba. Mr. de Alba, you may go ahead with your question.

Thank you very much. Raul, and first question is, could you comment about the outlook for copper production beyond 2013? I mean, what do you expect for 2014 and 2015? And can also comment on molybdenum volume for those years? That would be great. That would be my first question.

Okay, Carlos. Considering our own production for 2014, we are expecting to produce 650,000 tons of copper. For 2015, 859,000 tons of copper.

On moly, next year we expect to produce 20,300 tons of molybdenum. That number should increase in 2015 to 22,800 tons when we have to combine effect of the new molybdenum plant that we just put in commercial operation, and the new one that we are building for the new concentrator in Buenavista. The numbers for -- the figures for 2014 are currently under review for a more refined adjustment for our annual plan of 2014.

And do these numbers include Toquepala, and I guess they do not include Tia Maria, right?

That's correct.

Do you have any guidance or outlook for cash cost?

Well, we indicated at the beginning of the year that we were expecting our cash costs to decrease through the year, and the most important effect of that should happen in the second half of 2013. In the third quarter, we have seen some of that already kicking in.

We expect this to be at the current prices, obviously, stronger during the fourth quarter since we will have some of the benefit of the new molybdenum production of the Buenavista plant, as well as some of the production, additional production coming from the Buenavista recovery, as well as the High Pressure Grinding Rolls project in Cuajone that will increase production a little bit in the fourth quarter.

So all included, that should improve our cash costs for the fourth quarter. For the next few years we're expecting our cash costs to be trending at current prices on cost towards $0.90 in the long term. Obviously, this will -- it will vary significantly, depending on fuel prices, power prices, et cetera, et cetera, but at currently prices that's what we have as an estimate.

And do you have a number for the estimate before by-products?

Yes, about $1.50.

$1.50, all right. And my last question --

Carlos, long term, that means that we finish with all of the projects we are considering, even on these, the contribution of Tia Maria, Toquepala, the Buenavista investments, et cetera.

Thank you, Raul. And just final question. And I don't know whom may be able to answer this in the call, but we continue to see the Company buying back shares. So I wonder if you can comment about what is the strategy of the Company, or of the parent company, towards this continuous purchase in the open market that we're seeing?

Thank you, Carlos, for the question. There is really no strategy from the parent company here. I mean, we have been seeing a lot of volatility recently in the copper markets, I mean the markets in general, and Southern Copper's share price has been no exception. So we have decided to present to the Board an increase in our progress to buy back. When we haven't bought any, I mean any relevant size of shares, we believe. I don't know if you have that numbers around here, Raul, that you can comment on for the year, for the full year, but that said, Carlos (inaudible).

All right. Thank you.

Our next question is --

We don't have anything to add to what Daniel said.

And our next question comes from Thiago Lofiego. You may go ahead.

Hi, thank you for the questions. I have two questions. The first one, in the press release we noticed there was a slight change on your prediction guidance for Buenavista from 488,000 tons to 495,000, and the delivery date by 2016 versus 2015 previously. So is there any specific reasons for this change? Could you just provide an update on where it is coming from?

The second question about the buyback. Could you given us some color on -- sorry, yes. Now you just -- it is about the Toquepala extension. How is the licensing process evolving and how confident are you with the second-half 2016 startup date?

I answer on the first question. We have to increase a little bit the expected productions for years 2016 and 2017 from Buenavista. We review -- the Company has review the ore grades, recoveries, and given the current plans, we think that we will increase the expected production in those years for Buenavista. That is the reason for the change, Thiago.

And for your second question regarding the news on the Toquepala licensing, I'm going to ask Mr. Oscar Gonzalez to address that topic.

Yes. About the expansion of Toquepala, we are planning to have the public hearing that was suspended one year ago, at maybe in December or in January. And that will give all the possibility, because we already have all of the engineering, it will give the possibility to start construction at the beginning of the first quarter of the next year after we have the public hearing and 30 more [days] for the approval of the environmental impact story that the Minister of Mines has since two years ago, or a year and a half ago with them.

If that is the case, we will take those two years for the construction. And that means that we will be ready in 2016 to start production in that expansion.

Okay. Great. Thank you, guys.

And our next question comes from Santiago Perez-Teuffer. You may go ahead with your question.

Hi, good morning. Oscar, Daniel, and Raul. Thanks for your time. I wanted to ask you if you can give some color as you did with Toquepala, the same sort of deals with Tia Maria. And also if you could comment on Caridad Pilares. Is there anything new there, or what should we expect from that project? Thank you.

About Toquepala, I just mentioned that we are planning to be --

Tia Maria.

Tia Maria. Okay, Tia Maria, we already have the first workshop, and we are planning to have the second workshop at the end of this week, and the public hearing is scheduled for December. If that is the case, is we already have to the engineering for Tia Maria, and we expect it to start construction in the first quarter of next year.

And that is again two years for construction. Then in the year 2016, we will be ready for have the first production in Tia Maria. If everything works like I was mention, and we have the approval of the communities over Tia Maria.

Perfect. Thanks, Oscar. And is there any comment on La Caridad Pilares?

I think that that right now is not programming to be ready in the near future. I think that we are going to wait until we finish the investment in Buenavista project in order to do something in the Pilares project.

Okay. Perfect. Thanks. And, Raul, just to clarify, the guidance that you gave for your own copper production for 2015 is 650,000?

Yes, it is 650,000. We may adjust it a (multiple speakers) little. Go ahead.

So it might have increased from Buenavista coming into the pipeline, would [be around] how much?

Well, Buenavista will be at full capacity next year. That's about between 180,000 and 200,000 tons. And then you have all the other operations plus the new production that we're expecting from the High Pressure Grinding Rolls project in Cuajone. I like to mention that this is basically our own production that we're considering here.

Perfect. Thank you. So from the SXEW III next year in Buenavista, you're expecting it to -- how much production from that project?

About 50,000 tons for the year.

Perfect. Thanks so much, Raul. Thanks for the color.

You're welcome.

And our next question comes from Juan Lopez, you may ask your question. Mr. Lopez, you're online with a question. You may ask your question.

Let's move on to the next question.

Okay, our next question is from Alex Hacking. You may ask your question.

Good morning. Or good afternoon, Raul and everybody. My question is about Qullaveco. You've expressed some interest maybe in partnering with Angelo American on this project.

Could you discuss your thought process there, given you already have a lot of organic opportunities for expansion? And then any update on the process and how it is going? Thanks.

(Technical difficulties) no news on this matter, Alex. We have no additional news on what has been indicated to the market a month or so ago. We think that there will be some synergies if we do this project together. However, as I say, we haven't had any talks or anything like that related to this project as of now.

Adding to this, Alex, I think that the Peruvian government is the one, mainly the Minister of Mines, interested to talk with (inaudible) trying to expedite the investment in this project because already has 20 years in the [council] Angelo-American, and they really do nothing during that time. And I think that the Minister of Mines is going to try to talk with Mr. Cutifani, CEO of Angelo-American, trying to seek out, they can have that project going.

And if during that time they are interested to talk again with us, because we talk with them two or three years ago, trying to make a joint venture, but for some reason, we never agreed on the conditions. But we are open to talk again.

Okay. It's clear. Would it be safe to say that your interest in Qullaveco would be increased if Mexico proceeds with the proposal for mining royalties?

Well, I think that we will not relate that between one thing and the other. Of course our investments in Buenavista are important, and we need to do something in Quallavco, maybe we will need to do with some participation of the banks, if that is the case, no?

Okay. It's clear. Thank you.

And our next question comes from Garrett Nelson. Mr. Nelson, you may ask your question.

Thank you. On the $2 billion share repurchase authorization, I was wondering how much availability remains on that? It looks like you repurchased about $59 million in stock in Q3, and then about $65 million in the second quarter.

Let me interject there.

Go ahead.

I mean in 2013, it was a purchase 5.5 million shares (inaudible) for a total amount of $158.7 million. That's the correct numbers.

Okay.

2013.

Okay. Thanks. And then I'm not sure if you gave updated capital expenditures guidance for 2014 and 2015. Has that changed at all?

Not significantly for this year. We're keeping our expectation of spending about $1.6 billion. For next year, we are maintaining our guidance of $2.3 billion in CapEx.

Okay. And then $1.4 billion in 2015, I think was your prior guidance?

Yes, that is correct. We're keeping that guidance as well. We will do a full review of them for the first call of the year in January.

Okay. Thank you.

And our next question comes from John Thomasos. You may ask your question.

Thank you. Could you explain a little more the High Pressure Grinding Roll project at Cuajone for $45 million? Some other copper mining companies or gold mining companies spent much bigger amounts of money on high pressure grinding rolls. Has the cost of that kind of machinery fallen? Do you build it yourselves? Do you get used equipment, and maybe you find a steel mill with good flat-rolled sheet rolls, instead of going to the mining engineering company? Is it just for a little bit of the Cuajone, or maybe pebbles or hard ore or something? But some companies spend 5 or 10 times more than you spend for this. You seem very splendid in the small amount of the cap out.

Well, just to illustrate that [we're all in this as well] the project consists in passing a portion, about one-third of the ore that is processed at the Cuajone concentrator through two rolls that basically fracture the mineral before going into the grinding part of the process. By doing that, we expect to increase production by increasing the throughput of the concentrator, as well as increasing the recovery of the concentrator.

Basically, we are working with the top leader in the technology of this process that has already made some applications of this technology in some other copper mines. So we are very confident that the project will be very successful for the Company. As I say, we're currently doing the testing of this facility, and expecting it to be at full capacity through the fourth quarter of this year.

Who is the contractor or supplier?

It's [Pollicis].

Thank you.

And our next question comes from Lally Marino. You may ask your question.

Hi, good morning. Hi, Raul. My question is regarding first Tia Maria and the first workshop, how do you deal with the result? According to local media, there were some arrest by a group that was opposing to the project, I believe. But if you can comment more on that.

And about your production guidance for next year, I believe in the last conference call it was around 700,000 and now you are talking about 650,000. I don't know what is the change about?

Well, let me address the last one. What I mentioned was our own production excluding third-party's copper processing on that, Lally.

Okay. Thank you.

On the Tia Maria, basically we conducted the first workshop. There was -- the meeting was calm. People in the meeting made several questions after the presentations of the Company officers that were there. However, on the outside, there was a group of anti-mining groups protesting, and the police had to intervene at certain point.

There was not disruption of the meeting, of the workshop. So that is why it was approve. And we are expecting to have better conditions for the next workshop. As it was mentioned before, it is scheduled for this week.

Okay, thank you. Thank you, Raul.

You're welcome.

And our next question comes from Alfonso Salazar. You may ask your question.

Hi, thank you. Yes. Just want to see if you can give us an update on the entitlement project and other projects that you have in Mexico in the pipeline, especially in [Imparmi] and [Alarko].

In the case of both Imparmi and Alarko, the Company has been conducting investments to prepare these two projects for the future. Currently they are not in our current pipeline of growth for the Company, and they will be consider looking at the circumstances of operations in Mexico, vis-a-vis what the Company could do in some other countries as well.

And the same for Alarko?

I meant that for both projects. For both we're doing some investments on engineering and land acquisition, et cetera, but they are still on the preparation side of our pipeline. They are not Board-approved.

Okay. Thank you.

(Operator Instructions.)

We have a question from Alexandra Bercuda, you may begin.

Yes, hello. Sorry. Given the statement from Groupo Mexico this morning where they suggested that they might have to redirect almost $5 billion of an investment commitment over the next two years if the (inaudible) was approved, how does that affect your capital allocation decisions for Mexico? And have you considered the options?

Is there a cost for discontinuing the expansion of Buenavista? Or, I guess how materially could that affect your capital allocation going forward?

Alexandra, I think it is important to bear in mind that what we are looking at here is the tax law has not been approved yet. However, we do believe that Southern Copper has options, as you know. We have (technical difficulties) grow, we have the Mexican (technical difficulties) we will continue to carry on business. (Technical difficulties) projects to complete that growth around common bond, and we are committed on that and we believe we are on time and on budget, and we will deliver that growth.

I mean however, I mean (technical difficulties) have, we will have to kind of like reassess and sit down at the Board level to try to see what makes more sense. I mean it is a very -- I mean it is a good thing that Southern Copper has this ability in two different countries, but that's really what we're trying to convey here. Regarding the other project, (inaudible) the projects that we have that are not really in the pipeline, those are the projects that will be just reanalyzing how they look, or would look with a different (technical difficulties).

Okay. But if were you to, say let's say discontinue or put Buenavista on hold, is there holding costs associated with that?

No. That's what I want make sure that the message is clear. We are not putting Buenavista on hold. (Multiple speakers).

Okay.

We're going to go through with Buenavista. We are already investing on, and it is already on the way. So we are going to finish on that expansion.

And then for the other projects, like (technical difficulties) all the other projects, in Buenavista we have the largest reserve in the world, and we probably have the best pipeline of growth, but we do have it here in Mexico, and we do in Peru, and we have been analyzing other parts of the Americas, too. That's further on.

Thank you.

Thank you.

And our next question comes from Alex Hacking. You may ask your question.

Hi, Raul. Sorry. Just one follow-up question. I just wanted to double-check on the guidance for next year and compare it with the previous guidance. I think you said 650,000 tons of copper next year from own production.

The last forecast I saw was 725,000 tons next year, but that will be including third-party sales. I guess would you be expecting to sell about 20,000 tons of third-party material again next year?

Well, Alex, let me clarify what I said. The 650,000 tons are related to the Company production to be sold, okay? That includes third-party's copper -- that does not include third-party's copper concentrate. Between the forecast that you indicated and the current one, there are two things that has adjusted the figure for 2014.

The startup of the Polaris project that has -- it is suffering some delay, as well as SXEW III production that we are expecting for the first year of the SXEW plant in Buenavista. Now, we are currently looking into these expected forecast for 2014, and it may be adjusted, and I believe it could be upward for next year. But at this point, this is what we have.

Clear, thank you.

You're welcome.

(Operator Instructions.)

We have no further questions at this time.

Well, thank you very much. And with this, we are concluding our conference call for the third quarter. We certainly appreciate your participation and expect to have you back with us when we report the fourth quarter and our annual report of Southern Copper in January of next year. Thank you very much. And have a nice day.

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