Southern Copper Corp (SCCO) 2013 Q4 法說會逐字稿

Good morning, and welcome to Southern Copper Corporation's fourth-quarter and year-2013 results conference call. With us this morning we have Southern Copper Corporation, Mr. Raul Jacob, Vice President Finance and CFO, who will discuss the results of the Company for the fourth-quarter and year 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 to not place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. All results are expressed in full US GAAP.

I'll now turn the call over to Mr. Raul Jacob.

Thank you very much, Adriana, and good morning, everyone, and welcome to Southern Copper's fourth-quarter earnings conference call. Participating with me in today's conference is Mr. Daniel Muniz, CFO of Grupo Mexico.

In today's 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 cost, financial results, expansion projects, and capital expenditure program. After that, we will open the session for questions.

Regarding the metal markets and prices: On the copper market, during the past quarter we have seen the strength [and momentum] of this market coming back again to support copper prices. As of December 31 of last year, inventories of the three major warehouses, that is the London Metal Exchange, the COMEX market in the US, and the Shanghai Chinese market, have decreased by 427,300 tons, or 45%, since their peak in June of 2013. This decrease in trend has continued during the month of January of 2014, with inventories of refined copper currently 6% lower than the 2013 close.

We are optimistic about the current macroeconomic scenario. The IMF has consistently increased their growth forecast for the world economy, expecting a 3.7% increase in global GDP growth for 2014, and 3.9% for 2015. A driver for the world economy is the synchronized growth expected for the US, Europe, and Japan, which together represent about 54% of the world's GDP.

These three major economies consume directly about 31% of the world's copper production, and are an important driver of indirect demand for copper. We think that the sustained recovery of these major economies, in conjunction with the year-to-year increase in Chinese copper imports of 6.5%, will reduce the chance of an oversupply, particularly of refined copper that represents about 90% of our copper sales in 2014.

On the supply side, despite some evidence of a possible market oversupply for the coming -- for this year, for 2014 -- we think that several structural factors, such as labor stoppages at the recent strikes in Chile; excessive taxation or governmental intervention, as we are seeing in Indonesia; technical problems; 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 strength and momentum of the copper market. Our Company will benefit from it through its aggressive investment program of organic growth, and of the increasing production from current capacity to approximately 1.2-million tons by 2017.

Focusing on the Company production in last year, in the last quarter, copper, that represents 78% of our sales in 2013, had reduction in production in the fourth quarter of 0.8%. That is a little bit more than 1,200 tons. That was the result of a lower production at the Buenavista mine caused by a temporary flood disruption that has been resolved already. The lower production level of Buenavista was partially offset by higher production at our other three operations of Toquepala, that increased 6.5% its production when you compare the fourth quarter of 2013 with the same period of 2012; Caridad, that increased for the same period by 3.6%; and Cuajone by a little bit more than 3%; in the three cases, due to higher recovery.

For the year 2014, we're expecting to produce and sell 672,400 tons of copper from our mines. We don't expect to process copper concentrate from third parties in 2014. As we have reported, the new SXEW III plant at Buenavista will start operations during the second quarter of the year, and we expect it to produce 53,400 tons of copper during 2014.

Regarding molybdenum, it represented 7% of our sales in 2013. Molybdenum production increased by 1,322 tons, or 29%, in the fourth quarter of 2013 from the fourth quarter of 2012. That was due to higher production at the Peruvian operations. In this case, Toquepala increased its production of molybdenum by 63.2%, Cuajone by 23.6%, and La Caridad -- also our Mexican operation of La Caridad, by 9% in the last quarter.

In 2013, annual molybdenum production includes a new record mark of 11,742 tons at our La Caridad mine, and 359 tons from the first production of the new molybdenum plant at Buenavista. For the year 2014, we plan to produce 21,500 tons of molybdenum, 7.6% more than our 2013 production, and a new Company record for 2014.

Silver represented 7% of our sales in 2013. Silver mine production increased by 260,000 ounces when we compared the fourth quarter of 2013 with the fourth quarter of 2012. That is an 8% increase in production of silver. This was the result of higher production at the Peruvian operations, Buenavista, and IMMSA.

Refined silver production increased by 5.5% in the fourth quarter of 2013 to 3.6 million ounces from 3.4 million ounces in the fourth quarter of 2012. For 2014, we expect to produce and sell 16.3 million ounces of silver.

Zinc represented 3.4% of our sales in 2013. Production increased by 2.4% in the fourth quarter of 2013, when compared to the same period of the prior year. This was mainly the result of higher ore grade and recoveries, as well as full production recovery at the Santa Eulalia mine after the flooding problems of prior years were resolved. For 2014, we expect to produce 95,200 tons of zinc from our mines.

Looking at our financial results for the fourth quarter, sales were $1.5 billion, $115.9 million lower than sales of the fourth quarter of 2012. Copper sales volume increased by 4.4%, but value decreased by 5.5% due to lower copper prices of about 10% lower than in the comparison period.

Regarding by products, we had higher sales volume of molybdenum, a significant 30% increase in volume of molybdenum, and silver sales also increased their volumes by 7.2%. That partially compensated for lower prices for both. Regarding zinc, volume decreased by 2.4%, and price by 2.2%.

Our total operating costs and expenses increased by $80.8 million or 10% when compared to the fourth quarter of 2012. The main cost increments were due to higher inventory consumption that increased by $71.7 million, [the precision] $21.3 million, fuel costs $14 million, and labor costs $11 million. These cost increments were offset by lower purchased copper and other cost variances. The EBITDA for the fourth quarter of 2013 was $723.9 million, a 47.2% margin, and that compares with $894.4 million or 54.2% for the fourth quarter of 2012.

Cash cost: Operating cash cost per pound of copper before byproduct credits was $1.90 per pound in the fourth quarter of 2013. This compares with $1.79 per pound in the third quarter of 2013, an $0.11 increase. This 6.3 increase in operating cash cost is the result of the already mentioned cost increments. Southern Copper's operating cash cost including the benefit of byproduct credits was $1 per pound in the fourth quarter of 2013.

Regarding byproducts, we have a total credit of $329 million or $0.90 per pound in the fourth quarter of last year. These figures compare with a credit of $269 million or $0.81 per pound in the third quarter of 2013. Total credits have increased for molybdenum by 49%, in the case of silver by 25%, zinc 9%, and lead 1%, having decreased only for sulfuric acid by 11%.

Net income attributable to SCC shareholders in the fourth quarter of 2013 was $406.2 million. That is 26.5% of sales, or diluted earnings per share of $0.48 per share.

Looking into our expansion and capital projects, capital expenditures in 2013 reached a new record of $1.7 billion. That was about $650 million higher than the prior record set in 2012, and represents 105.2% of net income.

Our growth program to develop the full production potential of Southern Copper is in full steam. For 2014, we plan to invest $2.3 billion in capital projects, an increase of $600 million over 2013 spending, and 142% of last year's net income. As we have previously reported, our investment program aims to increase copper production capacity by approximately 87% from 630,000 tons to 1.2 million tons by the year 2017.

Looking at the projects in Mexico. The projects for Buenavista are -- we are continuing the development of these projects that has a total budget of $3.4 billion this unit. By 2015, we expect to increase Buenavista's total production capacity from 180,000 tons to 488,000 tons, a 171% increase. As part of the expansion program, we will initiate in the second quarter of this year the production of our 120,000-ton capacity SXEW III plant.

Also, in 2014, will be the first year of full production at our 2,000 capacity molybdenum plant at this unit. 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 a 2,600-ton capacity. In addition, the project 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 $1,383.6 million, and through December 31 of last year, it has a 62.9% progress with an investment of $544.9 million.

The project is expected to be completed in the first half of 2015. Four of the six [bull mills] required for the project have been installed, and we are currently in the process of installing the remaining two. Regarding the mine equipment acquisition for Buenavista expansion, through December 31 of last year, we have spent $481.7 million of a total budget of $504.8 million, and have received 60 of 61 trucks, 7 shovels, and 8 drills required for the project.

The SXEW III project is moving forward to completion with an overall progress of 81.6% at December 31 of 2013. The total capital budget of the project is $444 million, of which we have spent $373.6 million through December of last year. The project production capacity, as I said, is 120,000 tons, and we expect it to start operating actually at the beginning of the second quarter of this year.

The Quebalix IV project has had a change in scope. As was previously reported, this project will improve the SXEW copper production by increasing recovery, and reducing hauling costs, as well as processing time. Recently, the Company has analyzed the Quebalix IV project crushing capacity, and found that by increasing it from 40 million to 80 million tons of material processed per year, we will eliminate the need for an additional Quebalix facility in the future and operate at a lower unit cost.

In January of this year, the Board approved the described change in scope, increasing the total capacity budget of the project by $100 million to $340 million. The project is expected to be completed in the first half of 2015. The remaining projects to complete the $3.4-billion budget program for Buenavista, including important investments in infrastructure, land acquisition, and other facilities.

Regarding the Peruvian projects, in the Tia Maria project in the fourth quarter, we successfully held the two workshops and public hearing required as part of the approval process for the project's new environmental impact assessment. We expect to receive approval of the environmental impact assessment by the end of the second quarter of 2014. Considering this timeline, the Tia Maria project is expected to start up production late in 2016. The project capacity is 120,000 tons of copper per year.

We are currently working in harmony with the local communities and with the government authorities to expedite the completion of this important project. We are hopeful that this is the beginning of many positive new developments in Peru that will benefit the country, our Company, and the nearby communities.

Regarding the Toquepala expansion project, we continue progressing favorably after having reached agreements with local communities. This project has an estimated cost of $1,050 million, and is expected to increase annual production of Toquepala by 100,000 tons of copper and 3,100 tons of molybdenum.

Regarding the Cuajone projects, through December 31 of last year, we have spent $146 million of our total budget of $150 million on two projects to increase productivity through technological improvements in this unit. One of the projects is the variable cut-off Ore Grade Project and the other one, the high pressure grinding rolls project, or HPGR project, by its initials. Our Cuajone production incremental 6.2% in 2013 shows the results of the variable cut-off Ore Grade project, which was completed in the first quarter of 2013 at a cost of $112 million.

The high pressure grinding rolls project, which will produce a more finely crushed material, is currently in the ramping-up stage, and we expect to reach full capacity during the first quarter of 2014. The project will generate cost savings by improving copper recovery, and reducing power consumption in the crushing process. The total project budget is $45 million, of which we have spent $34 million as of December 31 of last year. We expect that both projects will be at full capacity by the first half of 2014.

The project to improve slope stability at 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 acquired includes one shovel, five trucks, one drill, and ancillary equipment. Besides preparing the mine for the future, this investment will avoid a reduction in average ore grade between 2014 and 2018. At December of last year, we have spent $59.4 million of a total budget of $65.1 million.

Dividend announcement: Regarding dividends, as you know, it is the Company policy to review at each Board meeting cash resources, expected future cash flow generation from operations, the capital investment plan, and other financial needs in order to determine the appropriate quarterly dividend. Accordingly, at the close of the market on January 30, 2014, the Board of Directors authorized a cash dividend of $0.12 per share of common stock payable on March 4 of this year to shareholders of record at the close of business on February 18 of 2014.

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

(Operator Instructions)

Our first question comes Santiago Perez from Credit Suisse. Go right ahead.

Thank you. Good morning. I have a couple of questions.

First one is related to your shares outstanding. We have seen a decrease in the Company shares outstanding and at the same time Americas Mining corporation has increased its stake in Southern Copper. Can you comment on the strategy behind this?

And the second one is related to your Toquepala concentrator project. For this expansion I wanted to know if there is a need for a public hearing to approve this around here and if so do you have any time frame as to when do you plan to hold this?

Okay. Let me focus on your last question first.

Regarding the Toquepala project, yes, we have -- the project -- we have the environmental impact assessment finished and delivered to authorities in 2011. And as part of the environmental impact assessment process of approval we have to have a final hearing.

And so when we finish our talks with the local community we will ask for the final hearing. And after that we will expect the approval of the environmental impact assessment after the government provides any observations or comments on this [tally] that they may have. On the second question, would you like to comment on that, please, Daniel?

Sure, Raul. Raul, the point here is as you remember last quarter, the Board approved a program to keep on carrying out buybacks of shares. And of course the increment of Americas Mining Company as a consequence of Southern Copper buying back shares.

We've seen the share price of Southern Copper expressed [in a raise bound] that we hadn't seen since the financial crisis. So Southern Copper's board has authorized to keep on conducting these buybacks as the dividends have decreased and just as prudently and opportunistically whenever those share prices [extract].

Thanks, Daniel. Thanks, Raul.

Thank you.

You're welcome.

And our next question comes from Carlos de Alba from Morgan Stanley.

Good morning. I have two questions. First one is could you confirm, Raul, if your CapEx estimates include Tia Maria for -- if the cap assessment for the year includes already Tia Maria, and how much or for that break have you included there?

Yes. It does include Tia Maria, and we are considering about $18 million for Tia Maria in this year.

All right. And then on -- what happened to the Buenavista CapEx? I noticed that from the present lease that was published in the third quarter to the one published yesterday CapEx increased from $3.1 billion to $3.4 billion, and yet the increasing production declined from 175% to 170% -- sorry, from 175%, yes, to 171%. Was there any -- can you tell us what changed in the last three months or so that prompted these revisions?

Yes. In the case of CapEx, as you will notice, we have increased the total budget for the projects in Buenavista and the detail is as follows. We increased our infrastructure spend -- investments in Buenavista by about $150 million. We have included a budget for land acquisition and for other -- and I mentioned already a change in scope for the Quebalix.

In the case of the production variance, it's resulting from our newest production plans for Buenavista. It is slightly changed. We expect to maintain the production level as we have indicated in our press releases. But we're currently doing a small adjustment on that.

And that adjustment promotionally (sic) is due to lower grades?

It's more continuing on the mining plants. As we move on into the new part of the mine, you have better information that allow you to know what kind of production you may expect for the future.

Also, please, since this is a percentage, please keep in mind, Carlos, that we have been operating Buenavista over its capacity. The mine has capacity of 180,000 tons. About 125,000 tons coming from the conventional mining process of concentrators, melting, et cetera, and 55,000 tons coming from SXEW production.

The last one, SXEW production, has been very strong since we reopened Buenavista, and we are producing a little bit more than the mentioned 55,000 tons that I indicated of capacity of the SXEW plants. That is very encouraging as well for our new plant for the future. But currently we have been a little bit more conservative in our expected goals for the project.

All right. And my last question is if you can comment a little bit about the outlook for cost. We saw an increase in the fourth quarter, quarter-on-quarter, and I just wondered if you have any trends that you can comment upon on your cost in the next coming quarters?

Yes. We indicated that we had higher labor costs, higher fuel and higher power costs. In the case of labor, I think that, as you know, we close a new three-year labor program with our unions here in Peru.

And as a result of that they are entitled to certain adjustments in their salaries that are about 5% per year. In the case of our Mexican operations, we are increasing our works over there, and that requires a little bit more of working hours, and that's also something that is reflecting on the labor cost.

Regarding the fuel well, we are increasing fuel consumption a little bit as we have a deeper or longer distances to drive with our trucks. I already mentioned that the Company has received already 60 -- over 61 new trucks on the Buenavista operation that will do the stripping for the mine, preparing it for the expansions. By the way, that kind of expense is not capitalized.

The pre-stripping that you do is by US GAAP -- you have to charge that into cost. And that is something that is affecting the operations of the Company in general. For power, we believe that we will have better power performance in 2014 since we are having the new power plant of Grupo Mexico supplying power at a more competitive cost than what we have been paying in the past for power.

I think the labor cost will be higher. Not higher, but at a level that we have seen for this past quarter. On fuel, depending -- it's contingent on what happens with international price of different fuels. And on power we expect to have a controlled cost for 2014.

So is it safe to assume then that you see a relatively flattish cash costs before by-products in 2014 versus 2013?

We expect it to increase a little bit. It's a different -- it's difficult to answer this, Carlos. Let me explain to you why.

We will have an increase in certain works that are related to our expansions that, and following US accounting rules, we cannot capitalize them. We have to incur them as costs. That will increase costs.

On the other hand, we will have the benefit of the initial production of the SXEW III at Buenavista. We are expecting to have low cost production coming from this new operation through 2014. Regarding cash cost, I think that a view of it on the flattish side is more likely to happen through 2014. We will certainly like to be at the lower, but let's assume that for now.

All right. Thank you very much, Raul.

You're welcome.

And our next question comes from Marcos Assumpcao - Itau BBA Marcos, go ahead.

Hi. Good afternoon, everyone. First question is regarding the production guidance for the years ahead. You mentioned for 2014 around 670,000 tons. Similar to the previous guidance that you were sending before to the market.

Can we continue to assume like for 2015 a number close to 850,000 and for 2016 already a number above 1 million tons? That's my first question. And second question. If you could explain a little bit the calculation that you did to estimate the impact of the royalty increase in Mexico?

Okay.

Let me focus on the production profile first. Let me say something on the forecast for 2014. Last time that we talk about this we indicated that it was 650,000 tons on our own copper and 20,000 tons of third-party's copper. We have changed that.

We believe that we will be able to produce all of the copper from our own operations and that will certainly improve the Company return in 2014. So you do have the number for 2014, it's 672,400. For 2015, we're decreasing a little bit our forecast because of the delay that we're seeing in the Toquepala project that is impacting our current forecast, reducing it from about 850,000 tons of copper for 2015 to about 840,000 tons for the same year.

For 2016, we have a little bit more than 1 million tons. It's 1.06 -- sorry, 1.08 million tons. And for 2017, 1.2 million tons for production.

On the Mexican taxes, basically we know that the law was enacted. We have much more better understanding on how it will be applied. We're currently -- the numbers that were provided at the press release basically indicate to our best judgment how do we think this is going to impact the Company.

We want to have an estimate under royalty charge that was based on the copper price we think is more representative on what we're going to see through the next few quarters than the current prices. That's why we used 350 --. Go ahead, Daniel.

I was just going to add, what we're doing -- this is net of income tax, which of course is deductible for purposes of the royalty. And bear in mind this is only our mining operations. It's the concentrators of the SXEW that are being taxed here. So that is how we come up with the number.

Perfect. That's clear. And just a follow-up question here, if you can comment a little bit about the copper price and the market.

If we are starting to see like high-cost producers starting to reduce capacity whenever we hit the level of below or close to the $7,000 per ton level. So if you really believe that this is a strong support for prices going forward?

Well, we think that -- we don't want to do a forecast on prices. Generally speaking, that is not our business. Our business is to produce copper at the most competitive cost and provide the return on that, on those investments to our shareholders.

But we are seeing basically that demand is coming back at the developed economies. The developed economies indirectly are the most important copper consumers in the world. And directly they have, I'd say today, it's about 31% of the world demand for refined copper. You see the projects that are out there in the market.

There are some of them coming into production in this year and next year. After that most of the analysts are indicating that we should expect a deficit in the copper market again. So we believe that the fundamentals for copper are still very strong, and even though we may see some pressure in prices due to higher volumes, the reality in the physical market currently shows the opposite. As I mentioned, we are seeing a significant reduction in inventories that is certainly maintaining prices at good levels for us.

Okay. Thank you very much.

You are welcome.

Our next question comes from Juan Lopez from BTG. Juan, go ahead.

Hi. Good morning. Thank you for the conference call. I have two questions.

The first one is, if you could detail looking at the CapEx of Buenavista of $3.4 billion, it seems that there are $700 million that you mentioned of additional investment related to infrastructure and works. If you could detail what percentage of completion you have and what is scheduled for this CapEx?

Well, I just indicated that for each of the projects, Juan. Just to be sure, we have increased the budgets from $3.1 billion to $3.4 billion. That is $300 million of additional CapEx. If I say that there are distributed between the infrastructure, land acquisition, and other facilities, mainly social facilities as well, and $100 million on the Quebalix where we already had a budget of $240 million and we increased it to $340 million.

For the new concentrator with the molybdenum circuit, the progress at the close of the year last year was 63%. That is an investment of $544.9 million. For the mine acquisition, we pretty much finished the project. We're waiting for one truck to be delivered and some final payments after we assemble the equipment and confirm that they are operating fine.

On the SXEW III project we have an 81.6% of completion on the total budget of $444 million. If you divide the number of dollars spent by the budget, usually it gives a slightly different percentage than what we're reporting. And the reason for that is what we're reporting is the general progress on the project that is computed by our engineers and that number is not necessarily the same as the pay-out that you have to incur already on the project. On the Quebalix, we are doing a change in scope, and this is affecting the project.

It was mainly because we sum up all the operation you mentioned and the percentage of completion, there is still $700 million in which you don't mention like a percentage of completion. So just to know.

Oh, okay. Well, those are several projects that have different speeds of advancement. Our goal is to have them finished when we deliver these package projects. Some of them are related to the SXEW operations as the case of the Quebalix. Some of them are related to the new concentrator, and some of them are for social purposes in the Cananea town.

Would you say you are at 15% completion?

No. I don't have a percentage number to share with you right now.

Okay. Thanks. And then the second question is related to the free cash flow. We look at that investment activities, an inflow of $165 million due to asset tilt. Could you detail a little bit on that?

Could you repeat your question, please?

Yes. Looking at your free cash flow in the investment activities there is an inflow of $165 million related to sale of assets or investments. And if could you detail --

Yes. Those are short-term investments. This is accounting, basically, Juan.

When you have -- when you acquire -- you do investments that are a little bit longer than three months, the US GAAP accounting rules require us to register under a short-term investments. And you can see our position on that at the balance sheet of the Company. So it's activities related to that through the quarters.

Is that mining related investments or like Treasury?

No, it's Treasury. To say different, if you want to know how much cash the Company has available, it's what is in cash and cash equivalents plus short-term investments. It is Treasury mainly.

Okay. I see. And then the last one would be if you can comment what percentage of the cash cost can be related to these additional works you're doing for the investment on the expansion?

That's hard to say right now. But basically it's -- these are expenses that are for what we call the pre-stripping of these investments. In the case of Buenavista, we're opening up a little bit more of the mines so we can handle more mineral in the future. That is an extra cost for the Company. An easy way to understand this is to see the long-term stripping ratio for our operations and compare that to our current stripping ratio. The delta, it's basically what we're incurring on the additional works to prepare the mine -- to prepare the operation for the future.

Okay, I see. Thanks. And how much capital are you considering for Toquepala this year?

We're considering about $140 million for Toquepala.

Okay. Thank you very much.

You're welcome. Our expectation for both Toquepala and Tia Maria is that we will receive the permits through the first half of the year and start putting purchase orders on the -- at the beginning of the second half of this year and spending money in the fourth quarter. You usually have to pay some money in advance. That will be -- those are the budgets for these two projects.

And our next question comes from [Mandeep Sahai] from JPMorgan.

Hi. Good morning. Congratulations on the results and thanks for taking my question. I want to go back to the production guidance of copper for 2014 about 670,000 tons. Could you please explain a little bit the breakdown of this?

You mentioned that about 3,000 ton of that would be from Buenavista SXEW. Looking at your press release, the fourth quarter you did an annual run rate of about 660,000 tons of copper from owned mines, and also if you can comment if there is some benefit from Cuajone in some of the additional production that you are expecting in 2014? Thank you.

Yes. Thank you very much for your question, Mandeep.

Well, basically, we will have some more production coming from Cuajone. But the main driver of our production will be Buenavista with the new plant and the recovery of the current operations from the flood that we had last year and affected our production through 2014.

So it's a combined result of having the concentrator and the SXEW plants that are currently in operation at Buenavista running at even a little bit higher on top of their design capacity. And the effect of the new SXEW III plant that we expect to start production at the beginning of the second quarter of this year.

Thanks, Raul. But just as a follow-up, if I just look at the recent production and add 53,000 ton from Buenavista SXEW and on top of that slight increase from Cuajone, it seems to me that 672,000 is a bit consecutive. What I really wanted to ask was are you really expecting the production from the current levels to go down from the existing operations?

Well, in the Toquepala operation we're doing -- we are working on the walls of the deposit, and that usually has a lower ore grade than the fork -- than the expected ore grade for long term of the mine. That may affect a little bit the production of Toquepala in 2014.

But the other operations will be basically as they are right now in terms of their productivity. So when you consider that, the net effect is slightly lower than just a simple addition that you mentioned. And I understand that you are a very smart person by looking at these numbers.

But basically what we are doing is it's giving you the full estimate for the year. One of our operations may have a little bit more -- less production. We expect it to be -- once we do the plan, we focus on improving the results of the plan through the year. So we expect to improve these results, but at this point this is what we think it's going to be 2014.

That's great. Thanks, Raul.

You're welcome.

And our next question comes from Mitesh Thakkar from SRB Capital Markets.

Good morning, everybody. This is Mitesh, and that is FBR Capital. Thank you very much for all the color which you provided on the production side. Can you give us some idea about how the CapEx changes as we look out from 2014 to 2015, 2016, and maybe 2017?

Yes, Mitesh. We already mentioned that we're expecting to produce $2.3 billion by 2014. For 2015, that number will decrease to $1.6 billion. For 2016, $900 million. For 2017, $500 million.

And when you think about a sustained -- sorry. So my follow-up was just, the maintenance and the replacement CapEx once your capital investment cycle is over. How should we think about that?

A good proxy of our maintenance CapEx is our depreciation rate since we use the expected life, the actual expected life of the equipment for the appreciation. In the budget I had mentioned already we're considering about $350 million per year on maintenance CapEx. That is about our depreciation rate right now.

Okay. Great. And just a follow-up on the cost question, which was asked earlier. How much pre-stripping expense did you expense in 2013, and how much do you expect in 2014 which was part of your cost?

Could you repeat your question, please?

Yes. There was a question before on the call regarding the details on the cost increase and you mentioned that you expensed some additional pre-stripping required by the US GAAP. So I was just curious how much was that in 2013, and how should we think about 2014?

We are increasing it a little bit in 2014.

Okay. Any magnitude?

No, it's embedded in our current budgets.

And as you -- one characteristic of mining operations, particularly open pit mining operations, is that as more time pass mine operations incurred more costs because of the distances are longer and the climbing that the trucks have to do is higher. So that usually impacts long-term costs. On the other side, we do have the technology that helps us to contain those kind of cost increases.

However, when you do an expansion, as we are doing now for Buenavista and some other operations, you do have to incur these different costs. This is not something that concerns us in terms of our current cost structure. We are expecting to have our cash cost pretty much in line with what you have seen in the last quarter for the year 2014.

That is great. Thank you, Raul.

You're welcome.

And our next question comes from Alex Hacking from Citi. Alex, go ahead.

Hi, Raul. Good morning. A couple of questions. First question.

Do you have any guidance on copper grades in 2014 compared with 2013 at the four main mines? And then, second question, how should we think about the grade profile of Buenavista as you expand production and access new areas of the deposit? Thanks.

Ore grades will pretty much hold where they are in 2014 for the Company. We are not seeing any ore grades decline in the next few years for the Company. Ore grade specifically for Buenavista will be pretty much around where it is right now.

We're expecting to, as -- when we go into a deeper part of the mine, that's where the better ore grades are. Last year we couldn't do that because we had the flood that obstacle our operations at that part of the mine. But for 2014 we're expecting to come back to the best part of the mine and mine where our mining plans indicate and allow us to obtain a very good and very productive operation over there.

It's clear, thanks.

Thank you.

And our next question comes from Daniel Rohr from Morningstar.

Thanks a lot for taking my question. Just one about costs in the long term. So you all mentioned on the third quarter call that the Company expects $1.50 cash cost in the long term.

Provided that's still a reasonable target, hoping you could walk us through how we get from where we are today around $1.90 down to $1.50? Do we need to assume weaker local currencies or lower input costs, or is that purely going to be from the benefit of the expansion projects and Tia Maria as well as getting some of these expansion costs, including pre-stripping, behind you?

Well, Daniel, thank you for your question. Let me point out that when we mentioned that last quarter, we indicated that at that time costs for different prices for fuel, power, et cetera.

So our expectation is that as we move on in time we should have a lower cost per pound. Including the by-products we indicated that we were expecting to reduce our cash cost by about $0.10 in the long term. That is the result of having the SXEW III at full capacity as well as the new concentrator in Buenavista and at Tia Maria and Toquepala projects.

At this point we would rather wait for the projects to be up and running and see how they perform in reality than to have more detail on this, because as we move on in time, circumstances change, and we are seeing some cost pressures that may not be there in the future or be even worse in some other times. So we gave this as an indication of how do we think these projects will perform long-term.

However, it's conditioned on several variables that may affect current costs. So I think that the most prudent view on our side is to just to wait and see how these projects that are very, very profitable for the Company kick in, in terms of their resulting operations.

Thanks. Yes, I understand that there is certainly a lot of variables at play here. When you threw out that $1.50 was that predicated under the assumption of flat prices for oil and explosives, or some sort of deflation, I guess?

No deflation. No deflation, but flattish view on different prices. At this point, to be quite honest, I don't remember that I said $1.50. I do remember that I said that we were expecting a reduction in cash costs of about $0.10 per pound.

And that latter figure is after by-product credits?

That was after by-product credits, yes.

All right. Thank you very much.

You're welcome.

And our next question comes from Andreas Bokkenheuser from UBS. Go right ahead.

Thank you, gentlemen, for hosting the call. A quick follow-up question from me. Most other questions were answered already.

On Toquepala, when and if you get the final sign-off to proceed, how long will you say it's going to take you to start getting production out of the new concentrator of 100,000 tons? What is the ramp up time?

Thank you for your question, Andreas. We're expecting to have operations starting in Toquepala in the first quarter of 2016. We had a portion of that in 2015. We have pushed it a little bit further in time.

Right. But that's predicated on you getting the approvals by the -- is that a part of the second quarter of this year, is that correct?

Yes, that's correct.

Okay. Thank you very much.

Yes. As I said, we expect to have the final goal for the project in the first half of this year, by the end of the second quarter. Considering this, the timeline of the project will make us start operations in the first quarter of 2016.

And our next question comes from John Tumazos from John Tumazos.

It's John Tumazos, Very Independent Research. Congratulations on your payment of $37 per share in dividends since 2002. If we were physically having a meeting, I would jump out of my chair and be clapping my hands and admiring you so much. Even though there were five years when the dividend was below $1, the average dividend has been $3 over those many years.

Which years are the peak CapEx years? When should we expect the dividend to increase, and when the expansion program is over, what is your target dividend payout?

Well, okay. Thank you very much for your questions, John. On the CapEx side, I already mentioned our current plans.

As I said, this year, 2014, is a peak in terms of CapEx in our plans. We expect to reduce capital expenditures for 2015, 2016, and on. Regarding dividends, the Company has, as our track record indicates, has been very generous when there is free cash flow.

At the end of the day that's a question that what is going to be the difference in the future. It's a question to our board. The Board, as I said, has a policy that looks into the copper market, looks into the commitments of the Company has both in terms of capital projects as well as debt payments that we may have. And with that in mind the Board approves a dividend.

Last quarter they approved a $0.12 per share dividend that was considered by the Board to be appropriate given the significant growth profile of the Company at this point. What they are going to do in the future is something that I don't know, and we need to wait for them to review. If you want to see how the Board has behaved in the past and you are really -- I think that you already did that, that is a good indication of what may happen in the future. But as you know, what happened in the past is never a guidance of what will happen in the future.

If the production target is 80% more and the cash costs will be at least $0.10 a pound less, should we think that in 2017 when the expansion is running, the dividends should be 50% to 100% larger than before the capital program at the same copper prices?

I don't know what the Board is going to do at that time, John.

But you can recommend to the board? (laughter)

You can do many things. But in this case I can't comment on that.

Thank you.

And our next question comes from Daniela Savoia from JPMorgan. Daniela, go ahead.

I just have a quick question regarding your 2014 CapEx plan. How much of the $2.3 billion do you expect to issue in that, and then in order to fund the CapEx, then how much cash on hand do you expected to spend?

Thank you for your question, Daniela. We don't expect to issue any debt at this point. We already did that at the end of 2012 we issued $1.5 billion.

If you see a recurrent cash position, we have enough funds to support our growth program with cash as well as cash from operations. And that's what we expect to do through 2014. You see now our cash position as well as cash from operations.

Perfect. Thank you.

You're welcome.

And our next question comes from [Arba Castro from Coba Hob]. Go right ahead.

Go morning, Raul. I have two questions. The first about Tia Maria is how much of the $1.12 billion have been invested in 2013?

Secondly, about the flood in Buenavista? [Have any] rain this year? And third question is about the percentage of interest that becomes capitalized interest per year? Thank you.

Okay. On the Tia Maria project we invest about $45 million in 2013, mainly paying some equipment that was acquired already, and it's ready for the project. But not this new expenditures were not considered. Could you say your second question again, please?

Of course. The [copper operation] about the possibility of floods in Buenavista for this year, too?

What? Well, we don't expect any. No. It was -- what happened in a way it was a consequence of what happened in Buenavista prior to that. During the strike years we couldn't perform certain maintenance at the Buenavista facility. We are already doing that. So we don't expect any problems related with floods at the operation.

Okay. Thank you. And what about the percentage of the interest that are paid per year, how much of that interest, this annual interest become capitalized [in term]?

Well, it varies from year to year and it's a continuing of the advancement that we do on the projects. So what you're seeing is basically that credits our actual interest payment, and there is quite a detail on that in our 10-K.

Okay. Thank you.

Thank you. Well, with this we will conclude our conference call for Southern Copper fourth quarter results. We certainly appreciate your participation and expect to have you back with us when we report the first quarter of 2014. 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.