Southern Copper Corp (SCCO) 2015 Q4 法說會逐字稿

Good morning, and welcome to the Southern Copper Corporation's fourth-quarter 2015 result 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 fourth quarter 2015, as well as answer any questions that you might have.

The information discussed on today's call may include forward-looking statements regarding the Company's results and prospects which are subject to risks and uncertainties. Actual results may differ materially, and the Company cautions to not place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise. All results are expressed in full US GAAP.

Now I will pass the call on to Mr. Raul Jacob.

Thank you very much, Richard, and good morning to everyone, and welcome to Southern Copper's fourth-quarter 2015 earnings conference call. Before we begin with our agenda, let me make some comments about Southern Copper's performance in 2015, and what we're expecting for this year.

In 2015, we produced 742,993 tons of copper, a new production record. This allowed the Company to increase its 2015 copper sales volume by 12.3%. In addition, our copper units has -- have a very low cost per pound, improving the Company's overall cash cost and competitiveness.

For 2016, our current plan indicates our copper production increase to 903,300 tons or a 21.6% positive variance, and again a new Company record. For the years 2015 and 2016, this two year period, Southern Copper will increase its copper production by over 225,000 tons.

Also for 2016, we will have more byproduct production of zinc and silver. Zinc production will increase by 41% and silver production by 21%. On top of this, Southern Copper has a very strong balance sheet position, with a relaxed payment schedule with its investment grade debt.

We have no significant principal payments due until 2035. So during this low price environment, we're making our Company much more cost competitive, while maintaining a very solid financial condition. Consequently, Southern Copper is very well-positioned to take advantage of the current market conditions.

In today's call, we will begin with an update on our view of the copper market. We will then review Southern Copper's key results related to production, sales, operating costs, financial results, expansion projects, and capital expenditure program. After that, we will open the session for questions.

Let me now focus on the copper market, the core of our business. We maintain our long-term confidence in the positive fundamentals of the copper market. During last year, demand was affected by macroeconomic headwinds such as the Fed interest rate increase, the US dollar appreciation, et cetera. And also concerns about the Chinese economy's copper consumption and the market balance overall.

As you know, China is the world's major copper consumer, with about 46% of world consumption. We believe China's demand for copper will increase about 3.5% in 2016, driven by the partial recovery of the Chinese housing market, and the national grid investment program.

Regarding the developed economies, that is the US, Europe and Japan, with about 30% of worldwide refined copper demand, we expect their demand for copper to be positive, reflecting the economic growth of these economies. We expect copper demand from these countries and regions to increase by about 1.5% in 2016. In summary, regarding demand, even though we're facing at present some macroeconomic headwinds, and a slowdown of the aggressive Chinese growth, we are optimistic about the future.

Looking at the supply picture, we know production cut announcements for in 2015 for about 600,000 tons. For 2016, we expect these cuts to materialize, and some more additional production cuts be implemented if this price environment persists. In addition to these production cuts, we believe that supply will be affected in the coming quarters from delay in project start-ups, technical problems, labor and risk, excess government taxation and other difficulties.

In Southern Copper, we don't see a physical market under pressure. Inventories have [trend] consistently down after the second quarter of 2015. At the peak of 2015 in April, the sum of the inventories at the London Metal Exchange, the COMEX market in the US, and the Shanghai warehouses was [612,000 tons 561]. As of December 31 of last year, the sum was 478,262 tons, lower by 22% from the 2015 peak.

Current copper inventories at the warehouses are approximately equal to eight days of worldwide annual refined copper consumption. We have sold our 66,400 tons of additional 2015 copper production on good terms. For 2016, we have already signed contracts to sell most of our 160,300 tons of additional and new production of copper.

Finally, I want to stress that current copper prices are not sufficient to promote the necessary supply growth to meet future market needs. Thus, we believe current market circumstances are improving the strong long-term fundamentals of our industry.

Let me now focus on Southern Copper production and our plans for 2016. Copper production of SCC in the fourth quarter increased by 12.4% to 206,400 tons, from the 183,612 tons that we had in the fourth quarter of 2014. This 22,788 tons increase was the result of 23,150 tons of additional production at our Buenavista unit, that is a 34.4% increase in production at Buenavista.

The remaining difference includes positive variances at La Caridad, Cuajone -- and Cuajone that were partially offset by a reduction at the Toquepala operation. As reported at the beginning of the call, for 2016, we expect to have a new copper production record of 903,300 tons of copper, an increase of 160,300 tons or 21.6% production (inaudible).

Regarding molybdenum, [it represented] last year, in the last quarter 3.8% of our sales -- of our total sales. Molybdenum production increased 5% to 5,993 tons in the fourth quarter of last year, from 5,710 tons in the fourth quarter of 2014, mainly due to higher production at our La Caridad and Peruvian units due to better ore grades and recoveries. These better numbers were partially offset by the lower molybdenum production at the Buenavista unit. For 2016, we expect to produce 21,800 tons of molybdenum.

Silver production, in 2015 in the fourth quarter we had -- silver was 5% of our sales, and it's currently our main byproduct. Mined silver production increased by 4.7% in the fourth quarter of last year from -- comparing that to the fourth quarter of 2014, mainly as a result of higher production at our Buenavista operation, which increases its silver production by 66.8%.

That higher production offset the lower production that we had at La Caridad, Cuajone and [IMMSA]. For 2016, we expect to produce 16 million ounces of silver, about 21% higher than the 13.3 million ounces of 2015 production, due to higher [IMMSA] production coming from our operations of [Charcas], and particularly Santa Eulalia.

Zinc production represented, and zinc represented 3.9% of our sales in the fourth quarter of 2015. Zinc production increased 2.8% to 16,434 tons in the fourth quarter of 2015, from 15,980 tons in the fourth quarter of 2014. This was the result of higher production at our IMMSA facilities. Refined zinc production was 29,089 tons in the fourth quarter of 2015, 7.8% higher than the production of the fourth quarter of 2014.

We expect to produce 86,900 tons of zinc in 2016, from the 61,905 tons that we produced last year. This 40.5% increase in zinc production would mainly come from the recovery of the Santa Eulalia mine, whose production was affected by a flood in 2015, and from higher Charcas mine production.

Looking at our financial results, for the fourth quarter of 2015 sales were $1.25 billion. That is $216.6 million lower than sales for the fourth quarter of 2014 or 14.7% less. Copper sales volume increased by 15.7%, while value decreased by a similar percentage, 15.7% in [net of refining] of lower copper prices of minus 26%.

Regarding our main byproducts, even though we increased the volumes sold of all of them, we had lower dollar sales of $63.3 million lower than what we expect. For molybdenum, we increased volumes sold by 4.3%, but sales were lower by 48.8% due to lower prices. For zinc, volumes increased by 4.9%, but sales decreased by 22.6% due to lower prices. Silver volumes increased by 4.4%, however, silver sales decreased by 5.6% due to lower prices.

Looking at our operating costs, our total operating cost and expenses increased by $121.5 million, or 12.8% when compared to the fourth quarter of 2014. In the last quarter of 2015, we had a cost increase coming from the additional 28,218 tons of copper sold, a [15.7]% increase in volume. We estimate that this additional volume had a cost of sale impact of $87.5 million.

On top of the additional costs of more copper units, we had higher purchased copper from third-parties for $85.1 million, lower capitalized leachable material, higher depreciation, charges related to the ramping of Buenavista -- of the Buenavista new concentrator for $26.3 million, and some end of the year and timing adjustment of operating materials for about $20 million. These cost increments were partially offset by lower worker participation, lower inventory consumption, lower environmental remediation, diesel and fuel cost, repair materials and labor.

So in summary, in the fourth quarter of last year, we had approximately $131.6 million of additional nonrecurring costs that effected the Company results. However, let me emphasize, what I said at the beginning of the call, the additional copper units that we are getting from our investment program are reducing our unit costs. For 2016, we expect these additional 160,300 tons of copper to come from our expansion program at a much lower cost than the current one -- than the current units that we had in 2015.

Our EBITDA for the fourth quarter was $330.1 million. That is a 26.3% margin, compared with $[664] million, a 45.1% margin for the fourth quarter of 2014. Considering the 2016 additional production of 160,300 tons of copper, and assuming a copper average price for the year of $2.25 per pound, we expect an EBITDA of $2.2 billion, that is a 41% margin for 2016.

Operating cash costs per pound of copper before byproduct credits was $1.74 per pound in the fourth quarter of 2015. That compares with $1.58 per pound in the third quarter of the same year, a $0.16 increase. This 9.8% increase in operating cash costs is mostly the result of the already explained one-time charges to operating costs we had in the fourth quarter of 2015, plus higher per pound treatment and net refining charges.

Southern Copper's operating cash costs including the benefit of byproduct credits was $1.28 per pound in the fourth quarter of 2015. This cash cost was $0.22 higher than the cash cost of $1.06 for the third quarter of 2015.

Regarding byproducts, even though all byproduct volume sales increased, as I mentioned when looking at the sales of the Company, lower prices affected the total value of them. As a consequence, we had a total credit of $196 million or $0.453 per pound in the fourth quarter of 2015. These figures compare with the credit, slightly higher of $200 million or $0.51 per pound in the third quarter of 2015.

For 2016, we expect Southern Copper's cash costs to be $1.50 per pound before byproduct credits. This is $0.16 lower than last year's cost. After byproduct credits, we expect the Company's cash cost to be approximately $1.05 per pound.

Net income attributable to Southern Copper's shareholders in the fourth quarter of last year was $60.8 million. That is 4.8% of sales, or diluted earnings per share of $0.08 per share. Looking at our expansion and capital projects, we have capital investments in 2015 including the $100.4 million for El Pilar acquisition of $1.25 billion. That is 18.3% lower than our 2014 CapEx, and represented 169.7% of net income.

The Buenavista expansion program is largely complete. For 2016, the Board of Directors approved a capital investment program of $1.577 [billion] to make the final payments of the Buenavista project, for the construction of a new concentrator in Toquepala and the Tia Maria project.

The new Toquepala concentrator will have an annual production capacity of 100,000 tons of copper, and 3,100 tons of molybdenum. With these projects we are continuing our investment program to increase our copper production capacity by 90% from our 2013 production level of 617,000 tons. That is, we're heading towards 1.1 million tons in the near future.

Focusing on our Mexican projects, and particularly in the Buenavista project, of the $3.5 billion of this investment program, the Company has invested already $3 billion. Excluding the [Quebalix] project and some infrastructure facilities, all the other facilities of this program are currently operating, and we are expecting to produce 460,000 tons of copper in 2016, and 500,000 tons in 2017. The Buenavista is being finished under budget, and we're not foreseeing execution risk.

Regarding the mine expansion, to date we have received 61 400 ton capacity trucks, seven shovels and eight drills required for the expansion, this with an investment of $510.9 million. All of these assets are currently in operation. The new copper molybdenum concentrator that has an annual production capacity of 188,000 tons of copper and 2,600 tons of molybdenum, it's as I said, it's already in operation, and we're expecting this project to increase our silver production by 2.3 million ounces.

Some of that is shown in our forecast for 2016, and 21,000 ounces of gold per year. The new concentrator is in its ramping up phase, with the six mills already in operation, and some of them having some stoppages, but operating at full speed when we solve any minor adjustments to the equipment.

In September of this year, of that year, we obtained the first copper concentrate lot, and the plant is now running at over 90% of capacity. Due to promising initial result, this is expected to gradually increase production until the plant reaches full capacity by the second quarter of this year. The project has a 99% progress, with an investment of $1.162 billion out of the approved capital budget of $1.384 billion.

The SX-EW III plant, in July, the Mexican authorities approved the initiation of activities in the Tinajas 1 leaching pad. This will allow the Company to achieve the designed annual production capacity of low cost 120,000 tons of copper cathodes by the first quarter of 2016. As of September 30, 2015, we have invested $526.4 million in this project.

Crushing, conveying and spreading system for leachable ore, what we call the Quebalix IV. This project's main objective is to reduce processing time, as well as mining and hauling costs. It will also increase production by improving the SX-EW copper recovery.

It has crushing and conveying capacity of 80 million tons per year, and is expected to be completed by the second quarter of 2016. As of December 31 of last year, the project has an 87% progress, with an investment of $209 million out of the approved capital budget of $340 million. The remaining projects to complete [of the] $3.5 billion budget program include important investments in infrastructure, which is power line substations, water supply, tailings dam, mine equipment, shops, internal roads, et cetera.

Looking at the Peruvian projects, particularly the Toquepala projects. Through December 31, 2015, we have invested $392 million in Toquepala projects. On April 14, 2015, the construction permit for the Toquepala expansion project was approved, allowing us to continue its development. We had previously received the approval of the Environmental Impact Assessment, confirming that our project complies with the highest environmental standards of the Peruvian authorities, which corroborates our position as a sustainable Company.

Once in operation, the Toquepala expansion will increase annual production capacity by a100,000 tons of copper to 235,000 tons of copper by the year 2018, and will also increase molybdenum production by 3,100 tons at an estimated capital cost of $1.2 billion. This investment is estimated to generate 2,200 jobs during the construction phase, and 300 additional jobs once finished, which will add to the current workforce of 1,500 permanent employees at Toquepala.

As I said the project is expected to be completed in 2018 by the first quarter of that year. I would also like to mention that in the last Board meeting, the Board approved moving forward with the construction of the new concentrator at Toquepala. That is part of the monies that will be spent in this project through 2016 and on.

Looking at the High Pressure Grinding Roll or HPGR project in Toquepala. The main objective of this project is to ensure that the concentrator will operate at its maximum capacity of 60,000 tons per day, even with an increase of the ore material hardness index. Additionally, recoveries will be improved with a better ore crushing.

During the fourth quarter of last year, we initiated the project engineering and the procurement process. Meanwhile, we will start the planning process of dismantling of certain structures to provide adequate plant space. The budget for this project is $40 million, and we have invested already $5.5 million as of December 31 of last year. It is expected to be completed in the fourth quarter of 2017.

Looking at the Cuajone projects. The In Pit Crushing and Conveyor project consists of installing a primary crusher at the Cuajone mine pit, with a conveyor system for moving the ore to the concentrators. The project aims to optimize the hauling process by replacing rail haulage, thereby reducing operating and maintenance costs, as well as their environmental impact of the Cuajone mine. The crusher will have a processing capacity of 43.8 million tons per year.

We are completing the detailed engineering, and the main components including the crusher and the overland belt has been acquired, and we have started the preparation of the land and civil works. As of December 31, 2015, we have invested $80.1 million in this project, out of the approved capital budget of $165.5 million. The project is expected to be completed by the first quarter of 2017.

Tia Maria. While we have received approval of Tia Maria's Environmental Impact Assessment, the issuance of the project's construction permit has been delayed by the Peruvian authorities, due to certain pressures from anti-mining groups. The Peruvian government has recommended a dialogue round table for the resolution of these differences. The Company has established a multi-phase and counter plan to explain the merits of the Tia Maria project.

A national media campaign was launched in May of last year, and after it the Company has conducted a door-to-door campaign in the neighboring district of Cocachacra. This campaign had the purpose of explaining the relevant -- to the relevant environmental topics of the project that concerned the local community, as the anti-mining groups have wrongfully confused the community with respect to the project's water source and consumption, as well as to the alleged emissions into the atmosphere.

Tia Maria when completed, will represent an investment of approximately $1.4 billion to produce 120 tons of copper cathodes per year. This project will use a state-of-the-art SX-EW technology with highest [environment] international and environmental standards. SX-EW facilities are the most environmentally friendly in the industry due to their technical process, and consequently, no emissions into the atmosphere are released.

The project will only use sea water, which will be transported more than 25-kilometers to an elevation of 1,000 meters above sea level, constructing a desalination plant at the cost of $95 million. In this manner, the Company warranties that the Tambo river water resources, and the water resources from the wells of the areas will be used solely for farming and human consumption, as it has been done until today.

We expect the project to generate 3,500 jobs during the construction phase. When in operation, Tia Maria will directly employ 600 workers, and indirectly another 2,000 workers.

Through its expected 20 year life, the project-related services will create significant business opportunities in their [Arequipa] region. Tia Maria has complied with all existing requirements and regulations, and therefore the Company trusts that they will soon receive from government authorities the construction licenses and permits required in order to begin construction of this project.

Regarding dividends, as you know it is the Company policy to review at each Board meeting cash resources, expected cash flow generation from operations, capital investment plans, and long-term financial needs in order to determine the appropriate quarterly dividend. Accordingly, at the close of market on January 28, the Board of Directors authorized a cash dividend of $0.03 per share of common stock payable on March 1 to shareholders of record at the close of business on February 16.

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

Thank you.

(Operator Instructions)

Our first question comes from Mr. Wilfredo Ortiz from Deutsche Bank. Please go ahead.

Yes, good day, everyone. Could you please elaborate a little bit on the CapEx profile expected over the next few years? I know you mentioned 2016. And then, how much of that is from Tia Maria, considering that we're still pending the construction permit, ie, for us to have a sense that if this is delayed, how it's going to trickle down in the following years?

And as far as your copper production profile, if you can elaborate a little bit on that?

And as far as your share buyback, obviously last year was a big year in share buybacks. What are your thoughts for that into 2016? Thank you.

Okay. Thank you for your questions, Wilfredo.

Okay, let me focus first on CapEx. Overall, our current forecast for capital expenditures -- well, I mentioned already $1.577 billion for this year. For 2017, we are budgeting $[1.680 billion]; for 2018, $[1.240 billion]; for 2019, $780 million; 2020, $360 million. And then, it remains at that level because that's basically maintenance CapEx -- what I said, the last number for 2020.

For Tia Maria, we're considering currently a budget that -- it's about $100 million for the year, considering that we expect to initiate activities in this project at some point in 2016. We are expecting the government to issue the construction permit, hopefully this year, for the project, and that's what we have allocated of capital.

And the production profile for the future years is as follows. For copper, well, I mentioned already 903,300 tons for this year. For 2017, it should go up by to 943,500; 2018, 1.060 million tons; 2019, 1.040 million tons; 2020, 1.154 million tons.

On the buyback, yes, the last question, as you have seen, we had some important activity on the buyback, which is a way to return money to our shareholders indirectly. And obviously, we're concerned that, at this price environment, we have to take care of the existing cash that the Company has available, as well as the one that we're going to generate, particularly on the -- considering the aggressive investment program that we're undertaking.

For this year, we are expecting to reduce the buybacks. And it depends on how the market evolves, both in copper prices, as well as the share price that we may consider some purchases. But at this point, we're about to complete the program that was approved by the Board a couple of years ago, and that's basically it. We are not moving forward after that program for a while.

Thank you. Our next question on line comes from Ana Zinser from Credit Suisse. Please go ahead.

Okay. Raul, good morning, and thank you for the call.

My first question is regarding cost. You mentioned that the increase in this year's cost was mainly due to non-recurring costs. So, if you could elaborate a bit more on -- at what level should we expect this in 2016 and going forward?

And my second question is regarding El Pilar. I don't know if you have a bit more color on the potential synergies this project would have with Buenavista? Thank you.

Okay. Thank you very much, Ana.

Let me focus on your first question on cost. Well, basically, as I said, we had the non-recurring costs that were charged. And if you see by the nature of them, we had about $131 million of non-recurring costs.

Basically these were -- well, the $85.1 million in copper from third parties, that was copper that we had acquired to maintain our smelter in Mexico and Peru, both the smelters operating at full capacity. We don't think that having the extra production that we're expecting this year from concentrate -- from the new concentrator of Buenavista -- we don't think that we will need to buy -- purchase third-parties copper through 2016.

The other point was the Buenavista ramping-up cost, that we have to do some charges to costs on the initiation of Buenavista for about $26.3 million. Those charges are the initial [fills] for equipment that are not necessarily capitalized. And that explains a portion of that, and some other maintenance and other works that are related to the ramping-up process of the facility. And then we had some year-end adjustments of about $20 million for operating expenses.

That's basically it, and we don't think that these additional expenses that we had in the fourth quarter will materialize again in 2016. We believe that our cost per pound, as well as our total costs, will be very competitive through the year. And that's our expectation, and the initial results that we're looking at are indicating that we're in the right path in that regard.

On the question of El Pilar -- the way that we have evaluated El Pilar is as a stand-alone investment. It was -- and as such, it gave a very interesting result for the Company, in terms of expected return that we want to have from this project.

Now, having said that, there are some opportunities. We're looking at them. One possibility is that we, instead of building a plant -- an SX-EW plant at El Pilar -- we consider using certain facilities that we have in our own operations in -- close in Caridad and Buenavista. We have the advantage of being long in sulfuric acid, that allow us to use this acid for producing the SX-EW pregnant liquid solution at El Pilar at a very competitive cost.

And another possibility is that we may use a pipeline system to send the water with low pH, and return the PLS, the pregnant liquid solution, to be processed in our facilities. But these are things that we're looking at, at this point, plus confirming that the mineral reserves that we know at the project now are rightly determined. That's some other activity that we're undertaking now regarding El Pilar.

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

Yes, good morning, Raul. Just a quick question on the environmental remediation charges that continue to appear related to the Buenavista spill: How do you see those in 2016? And if you have any forecast by quarter, that would be appreciated.

And then lastly, is it fair to say that the share buyback program that was approved of around $3 billion -- only about $250 million are left to be implemented? Thank you.

Okay. On the environmental remediation cost, we believe that we -- what we incurred in the fourth quarter was the last payment on this matter, Carlos. We are not expecting any more charges to result regarding the Sonora River remediation program.

On the share buyback -- well, let me first mention that we initiated a share buyback in 2008. And through the years, we have received different approvals and expansions to say it so -- in the program that we initiated in 2008. Between 2008 and 2014, about $2 billion were spent in share buybacks.

The last program that was approved at the beginning of 2015 was for another $1 billion. We had some leftovers of the prior program. So, what we have now to be spent is about $100 million at this point. But as I said, we are going to moderate on this regard significantly, due to cash flow concerns.

Thank you. Our next question online comes from Karel Luketic from Bank of America. Please go ahead.

Hi, good afternoon, Raul. Thank you for the questions. Actually I wanted to clarify a couple of points, if I may?

Mainly on the production and CapEx guidance -- Raul, can you clarify how much of that includes Tia Maria? I know you provided the number for 2016. You mentioned out of the CapEx, $100 million is Tia Maria.

And just to have an idea of production, when are you considering the startup in this number? I think it's 2018. And the CapEx number without Tia Maria, if that's possible?

Yes. Okay. So, you know we have spent already some of the budget in Tia Maria; we have about $356 million that are already in equipment. That's equipment, engineering, and some other expenses related to the project.

So, from the $1.4 billion that we have to spend, it's not that much; it's less. It's $1.4 billion less $356 million.

As I said, we are expecting for this year, 2016, about $100 million in expenses. Then for 2017, it's $275 million; for 2018, $400 million; and 2019, $238.7 million.

Thank you. Our next question online comes from Mr. Matthew Korn from Barclays. Please go ahead.

Hello, everyone. Thanks for taking my questions.

So I'm looking at a December presentation; you offered a CapEx expectation for 2016 of $2.3 billion, and now you're looking at $1.6 billion. It appears as though Toquepala is getting delayed by around a quarter to early 2018. The high pressure grinding roll is shifting back to the end of 2017, versus the beginning. Is the change in the CapEx budget essentially a function of pushing back on these projects, combined with a reduction of expected spend in Tia Maria, or is there anything else moving?

No, it's more a concern on moving forward with the project. For the Buenavista project, as I mentioned, we're pretty much finished the operational part of the projects. And we're focusing now in infrastructure, and one project which is very important for this, which is the Quebalix IV.

On the Toquepala project, we have a forecast -- we have reviewed our forecast based on what can be actually do, or done, through these coming years on the project. That was why we rescheduled a little bit to 2018 the start-up of the project. Previously, it was in the fourth quarter of 2017.

Basically it's -- we're concerned about the Company, even though we believe we have enough cash to undertake the projects. We have to be very careful in this kind of price environment regarding the cash flow and how to use it. So, a little bit of that concern, plus some more realistic figures on the team that is working on the Toquepala project, gave us a reason for rescheduling the project.

Thank you. Our next question online comes from Marcos Assumpcao from Itau BBA. Please go ahead.

Hi. Good morning, everyone.

First question is regarding volumes. If you could break down a little bit the additional 160,000 tons volumes -- how much is coming from the SX-EW, and how much is coming from the new concentrator? Thank you.

Yes. We're expecting from the new SX-EW III plant, 104,000 tons of copper for this year. For the whole -- and the concentrator will bring in -- the two concentrators will have 308,000 tons together.

As you know, one of the concentrators had a capacity -- the number one concentrator, or the old one, has a capacity of 125,000 tons. The difference comes from the new concentrator. So, it's [308,000 tons] less 125,000 tons -- 183,000 tons of the contained copper coming from the new concentrator.

Actually, we're pleased to see that the new Buenavista concentrator operations are running very smoothly. We were not expecting to have six mills operating at a very high level at this point in time. Five of them are at full capacity. The sixth one -- it's ramping up, but very strongly. We have had already several days in December where we operated at the design capacity of the new concentrator, which is 100,000 tons of milling mineral per day.

So, in that regard, we believe that this ramping up is very successful. We are certainly doing some adjustments as we move on through this quarter, and expect to have the facility running at full speed by the beginning of the second quarter. We will report more on this when we report the first quarter's results. But we're -- as I said, we're very pleased how this equipment is operating.

On the SX-EW III, it is also operating with a very competitive cost per pound, as well as processing capacity. In this case, we are improving the contained grade of copper in what is called the pregnant liquid solution, which is the main input of the plant for copper production.

We have been operating last year with about 1.1 grams of copper per liter. And our expectation is that through 2016, we will average 1.5 grams per liter. That will allow us to improve, and to produce much more copper than what we did last year in this facility.

Thank you. Our next question online comes from Sasha Bukacheva from BMO Capital Markets. Please go ahead.

Thank you. Victor, if we could just spend a little bit more time just discussing your capital allocation priorities? Like you mentioned that you are concerned about your cash flow.

So, if prices stay low, how do you think about your capital program? Are you going to try and push ahead of the rate, and potentially increase your leverage, or how much flexibility do you have to further slow down at Toquepala?

Hello, Sasha, this is Raul Jacob. No problem.

Well, we believe that we have enough funds for moving forward with this capital program. We don't think that the copper market -- I mean, I said so -- we see our copper market in good terms. We don't see a market that has excess supply or demand -- a very weak demand.

As I mentioned at the beginning of the call, we already sold [70,000] -- a little bit more than [70,000] tons last year, with no problems, very good terms. And this year, we already have contracts for most of our new production. So, we don't believe that we're seeing a surprise. We're working our plan, as I mentioned, with copper price of $2.25 per pound, and we believe that we will see a recovery in the next few months on the copper market.

Now, but do you have any thoughts in terms of -- do you have a plan B in place, in case you don't see the recovery? How easy would it be for you to access the debt markets? Like is that something you spend a lot of time thinking about, or is that something that you don't really think is a concern at this point?

We have some flexibility in our CapEx, if we need to control our cash expenditures. We don't think tapping the debt market at this point. We believe that we did the right thing going to the market in April last year, when we obtained very favorable terms for a 30-year, $1.5 billion [emission], as well as a $500 million, 10-year [emission].

Thank you. Our next question comes from Lucas Pipes from FBR Capital Markets. Please go ahead.

Hey, good day, everybody. I have a follow-up question to the one that was just asked.

In terms of cash flow, it came up a few times on the call. And I wondered if you could maybe give us a bridge from your EBITDA guidance of $2.2 billion, to a free cash flow number for the full year, assuming $2.25 copper prices?

Okay. Let me first say that we don't want to -- hold on a second, please.

Okay. Let me first say that in our balance, we have a -- we show $274.5 million in cash and cash equivalents. But actually what we have available is that number, plus $600 million in short-term Treasury investments that we have -- excuse me -- then we have about $900 million in cash. Okay? So, if we generate an EBITDA of $2.2 billion this year, we are expecting to spend about [$350 million] of those $2.2 billion in interest payments.

Then we have taxes. Let's say that we pay -- $500 million in taxes, that gives us $1.3 billion available for our projects. As you know, our capital budget is higher than that. But that's where the cash that we have in hand comes into the picture, and allow us to move on with the projects as expected.

But let's say that we have some lower copper market than this, then we will adjust our capital program in order to accommodate what we can do, prioritizing the projects that we are developing for production, as we have done with Buenavista. In the case of Buenavista, of the $3.5 billion that we budget, we have spent about $3 billion. The facilities are currently operating. As I report a while ago, the SX-EW will produce at full speed this year, and the new concentrator will also do a very excellent performance, we are expecting so, in 2016.

So, those two facilities will be generating cash. And if we have to do any adjustments in our capital expenditures, which we don't plan to, but if we have to, we will certainly prioritize moving forward with the plans that we have for increasing production, and maybe delaying a little bit some other projects that are important, but not necessarily something that we have to undertake if prices are much lower than where we are now.

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

Thank you, Raul. My question is regarding your cash cost estimate -- the guidance you are giving for 2016. What exchange rate, FX rates, are you using in Mexico and in Peru for those estimates? And can you give us a breakdown by currency in Mexico and Peru, how much of your cost is related to the Mexican peso and the Peruvian sol?

Yes. Let me focus first on the exchange rates. Basically, for Mexico, we use -- for both, Mexico and Peru, we use a slightly lower than current exchange rates.

Meaning by this, in the case of Peru, nowadays we're at 3.50 -- a little bit more than PEN3.50 per $1 -- we use PEN3.42. In the case of Mexico, we use a little bit more than MXN17 per $1, and we're currently at a much higher level than that. So, that may be helpful for us, in terms of giving us some extra savings in local expenditures.

Now, focusing on local expenditures, in Mexican pesos, 39% of our total costs; in Peruvian soles, 17% of our total cost.

Thank you. Our next question online comes from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

Thank you very much. If I could ask two questions? First, concerning the Toquepala's 100,000 ton expansion, or other expansions, are they always expansions, or is there a low copper price scenario where maybe the original or older plant would be swing capacity?

I'm sorry, I couldn't understand your question well.

Are your expansions purely expansions, or could some of them be viewed as replacements where the original plant, the older plant -- some of the plants -- some of the mines have decades of history -- are some of the older mills swing capacity if copper prices drop to $1.50 or lower?

Well, we don't expect copper prices to go that low. But just if that will happen, that eventually happen, we'll be one of the lowest cash cost company in the market. And we believe that that will allow us to survive, even at a very low price scenario.

Now, focusing on your questions, no, these are expansions. We usually spend between $300 million and $450 million on maintenance CapEx. Our equipment is mostly state-of-the-art equipment, and what we're doing here is new facilities, from zero.

In the case of Buenavista, we have a concentrator that mills 85,000 tons of mineral per day. We have built a new one, an additional one, a second facility that has a capacity of 100,000 tons of milling mineral per day.

In the case of Toquepala, we're operating a facility that was built in 1960, but has had two expansions through its life. Those expansions almost double the capacity of that initial Toquepala concentrator. And besides this facility that has very competitive costs, even though it has an old start-up, we are building a new concentrator that will -- we believe will have a very good operating cost.

So, these are new things. It's not something that we're building to recuperate capacity, if I understood you well.

Thank you. Our next question online comes from Guillermo Estrada from GBM. Please go ahead.

Good morning, everyone. My first question is regarding tax expenses, as they continue to increase compared to the other quarries. If you could comment on that, and give us more color for the coming results, it would be very helpful.

And my second question is regarding molybdenum production, as we just saw a 1% year-on-year increase in 2015, despite new capacity at [Liberitz]]? What is the explanation behind this effect, and what should we expect for 2016, 2017 and 2018? Thank you very much.

Okay. Thank you for your question.

On the -- in 2015, we had, for a while, a reduction in the water supply that was for the -- the water supply for the molybdenum plant that we have in Buenavista. That explains why we had almost flat production between that year and 2014.

Now, on the tax rate, basically, as you know, we have -- in the past, we had a tax rate of about 34% as a effective tax rate. That tax rate has increased a little bit after we -- the Mexican government introduced a royalty tax or special mining tax in Mexico. That is about 7.5% of EBITDA, of the Mexican operations.

So we believe that that will increase our effective tax rate, because we are including that as part of the tax payments of the Company by about 4 points. So now we're expecting a tax rate of about 38% for this year and the next.

Thank you. Our next question comes from [Hernan Kasoluk] from [MebLife]. Please go ahead.

Hello, and thanks for the call.

My question is regarding leverage, particularly if you still feel comfortable with it, considering that on a run-rate basis, it is approaching almost 4 times net debt to EBITDA? Whether there is a threshold at which you would decide to undertake some measures to reduce it, or even to stop it from growing? For example, measures could be CapEx reduction, share buybacks -- do you have a pecking order for that? So, this is the question. Thank you.

Thank you for your question. Well, certainly, as I'd say, we are not considering any new bond issue or additional debt for the Company. We want to reduce the debt -- total debt-to-EBITDA ratio that we have. In total debt, we have about $6 billion.

Our, as I said, the EBITDA that we're expecting for this year is $2.2 billion. So, we are having an expected total debt-to-EBITDA ratio for 2016 of 2.7. We believe that this number will reduce as we move on into 2017 and on, due to the higher production that we will be achieving, and the contribution of that to our [EBITDA], et cetera.

So, we are not doing more debt at this point. We're concerned about the use of cash for the Company -- this period of significant investments for the Company.

Thank you. Our next question comes from Alex Hacking from Citi. Please go ahead.

Hi, Raul. Thanks. I just have two questions.

The first question is regarding the increase in purchase of third-party concentrates. I wonder if you could explain that a little bit, because it seems a bit confusing that you're ramping up concentrate production, but then buying more third-party concentrates at the same time in the fourth quarter?

And then the second question, I guess, comes back to this issue of capital allocation, the balance sheet and debt. I mean, is there a copper price, or kind of a gross debt to EBITDA level at which you would postpone Toquepala, Tia Maria, just to simply focus on keeping the balance sheet in whatever targeted condition that you're looking for? Thanks.

Okay. First, let me focus on your question on the third-party copper concentrates. Generally speaking, we are balanced in terms of concentrate production and the capacity of our smelters. Let me say this again: We used to be balanced, until 2014. Now that we have the additional production from the new concentrator in Buenavista, we're long in concentrate.

So, your question, Alex, and I see your concern, is how come you are buying copper from third parties if you have -- if you are long for copper concentrate? And the answer is very simple. In 2015, we were not long because our expected production for Buenavista, slightly delayed to the fourth quarter of last year. That's why we had to acquire a little bit more copper concentrate than what we were expecting to do in the market in 2015.

Now, generally speaking, we have, as I say, a surplus of concentrate now. We don't expect to have copper purchases of concentrates for -- from third parties for our Mexican operations. However, for the Peruvian operations, and for mainly technical reasons, we may acquire now and then some copper from third parties. And this is basically an operational thing, very small.

We smelt in Peru about 1.1 million tons per year. We are buying maybe 30,000 tons. So it's a small number, if you consider the size of the smelter, and the requirement of those.

The second question, could you -- on the price. Actually, we don't -- we will see when we have that kind of environment. But at this point, we don't see a reason for being concerned on the copper prices.

As I mentioned, we're seeing an okay market. Prices are not the ones that we would like to have certainly, but prices -- but the market is -- it's in good terms. We are seeing the terms for refined copper, which is our main product, to be -- to improve between 2015 and now.

So, we see no reason for having a concern about prices. If we were to be at $1.50, we believe that that will be short-lived, because of the impact that that will have on some other companies.

We are generating free cash flow through even this low price environment. We are not considering any drastic measures in our operations, because all of them are operating at a very low cost, which is reflected in our cash cost.

Then we could delay any project if needed, Raul? I mean, that's the question.

Well, we could do so -- (multiple speakers) but I already mentioned -- well, we could do so, but it depends on -- basically, what we will do is we will be much more concerned on finishing what we're doing now. We're already finishing the Buenavista projects, and we will be focusing on the Toquepala project. In the case of Tia Maria, since we haven't started, we could postpone it if prices are drastically low. But at this point, we see no reason for that.

Thank you. Our next question comes from Tony Rizzuto from Cowen and Company.

Thank you very much. I appreciate you taking my question. And I guess it has to do with capital allocation. I was intrigued by your comment, one of your opening remarks, Raul, about being very well positioned to take advantage of opportunities, and I haven't heard any discussion about M&A. But clearly, I think everyone knows that you guys have very good flexibility in terms of organic growth.

But I'm wondering about the current time period, when so many of your competitors are under pressure, and it's likely that certain assets, high quality tier 1 assets will be shaken free. And I'm wondering, do you think you have the flexibility to perhaps pursue some of these assets that might become available, and might you consider maybe slowing down Tia Maria, possibly issuing equity in the current environment?

Your stock has held up very well, compared to your peer group. How do you look at and weigh these other opportunities that might come up in this marketplace?

Okay. If there are good assets available that have a good fit with our current operations, we'll certainly look at them. That is the responsible thing to do for us as management, and we will recommend our Board an action on that regard.

Possible actions, if that scenario appears are -- will be studied. There are different options, and that's something that we will entertain, if we have to do that. But at this point, we're focusing on our organic growth.

As you have seen, we have an aggressive growth program. And we're focusing on delivering the new copper units on time, under budget, and at a very competitive cost for the market. That's our current -- those are our current goals. Obviously, if there is a good opportunity, we will look into it, and recommend a course of action to our Board.

Thank you very much. Appreciate it.

You're welcome.

Our next question comes from [Vernal Laqual] from [BTG]. Please go ahead.

(Operator Instructions)

I think we can move on, Richard.

Okay. We have a follow-up question from Marcos Assumpcao from Itau BBA. Please go ahead.

Hi, Raul; just a quick question here. I was trying to reconcile here your EBITDA guidance -- not guidance, but EBITDA estimate for 2016. Can you tell us how much of byproduct revenue are you considering for 2016?

I can give you on the prices; I don't have the breakdown of that with me. I can give you an idea on the prices that we have used for that.

Okay.

Okay. Well, as I said, copper $2.25; molybdenum $5; zinc $0.75; silver $15; gold $1,100. If I take today's prices, we're lower -- most of these assumptions than the market today -- other than copper, of course.

Okay. And so, a lot of the -- when you compare to the fourth-quarter 2015, when EBITDA was [$330 million], so a much lower level. For sure, there is some EBITDA growth that is coming from volume and from production, as you already pointed. But in terms of EBITDA per ton, there is nearly $0.15 coming -- $0.15 per pound coming from lower costs, as you guided $1.50 versus $1.66. But there's a lot coming also from the improvement in prices, right, embedded in that number?

We use $2.25 for copper. Our view is (multiple speakers). On the byproducts, I gave you the prices already. We have higher volumes of zinc and silver. That is also helping. So it's basically that, plus some assumptions on the cost per pound of the additional units that allow us to drive to this number.

Okay. All right. Yes, but just looking at the -- (multiple speakers).

By the way, Marcos, you keep in mind, you -- I'm sure that you keep in mind that the fourth quarter was not representative of our long-term trend in cost.

Perfect. Yes, but it was like [$1.70] versus the [$1.50] that you're guiding, right?

On the fourth quarter, yes.

Okay. All right. That's clear enough. Thank you very much.

Just one last question, Raul. As there were a lot of questions regarding the free cash flow here, and eventually some constraints if commodity prices remain at low levels. When you look back for the past two years, when the Company did a very aggressive buyback of $1.7 billion, do you think that was the right decision for the Company? Or you would be in a better position today if you had a much more unleveraged balance sheet, and eventually looking for opportunities -- you could be much more flexible looking for opportunities in the market?

I think that we -- the Company has always had a very strong commitment towards shareholders. And as part of that, the buyback is a way to reward our shareholders. And I think that any cash that is available for purposes of buybacks is fine.

In this case, we are focusing, as I said, on our organic growth. If there is an opportunity in the market, we'll look at it, and see a way of addressing that if necessary.

All right. Thank you very much, Raul.

You're welcome.

We have a follow-up question from Sasha. Please go ahead.

Yes, thank you. Raul, can we just get back to the CapEx program? I'm curious if you can talk about the order of magnitude, in terms of how much CapEx you would be able to cut and defer in 2016 and 2017 in the other projects category, before it affects Toquepala time frame?

Okay. In order to finish the Toquepala expansion, we will need to -- we could cut -- but this is very drastic, okay? Maybe $150 million from the Peruvian operations capital budgets on Toquepala; another $100 million on the [Eulalia]. So, those are $250 million.

That's in 2016, right? (Multiple speakers).

And postpone Tia Maria, if necessary -- we don't want, but if necessary -- since we haven't started, we can do that -- we don't want to do it. And in the case of Buenavista or the Mexican project, we will be able to reduce our budget by about another $200 million to $250 million. So, we have some flexibility on this, that we haven't used, but it's there.

We haven't also used the flexibility that we have in our operations. We are sticking to our long-term production plans. But for instance, you can reprogram your stripping for certain activities, which is very costly, and doesn't add production to your operations. And that will help us to reduce our costs as well.

We're not doing that, because we believe that our cash cost is quite competitive. We're generating the cash that we need, plus the [$800 million] that we have in hand to be -- to go ahead with our program. So that's basically what we think.

Okay. Thank you very much.

You're welcome, Sasha.

We have a follow-up question from John. Please go ahead.

Thank you. Your cash costs are wonderfully low. There are other copper companies, with weaker finances, selling properties. Is Southern Peru willing to buy other mines that might have cash costs $0.25 or $0.50 higher? And could you explain if Grupo Mexico, which owns Asarco, is the place in the family where the higher cost mines go?

Well, that question, the last question has to be directed to the Grupo Mexico's conference call which is going to be later on today.

Basically, we see -- if there is an asset, which is interesting, that has a good fit with our operations, meaning by this that it's cost competitive, it won't change the nature of Southern Copper, and will provide either synergies or some advantage to the Company, we will look into that. That's the responsible thing to do for us. And basically, a difference in cash cost in the range that you mentioned, maybe not $0.50, but $0.25, wouldn't be a problem for us.

But we think that rather than focusing just on the cost, is the whole deal that we have to look at, and see what other circumstances that you may face. For instance, we would like to have new assets in areas where we have -- we do know that governments are friendly towards mining activities. We think that that's important, not only the geological characteristics of the asset itself, for instance. So, there are several parameters and criterias that we have to comply with, in order to recommend the purchase of a specific asset, not only the cash cost is the driver for that.

Thank you.

And our final question comes from Lucas Pipes. Please go ahead.

Hey, thank you for taking my follow-up question. So, you mentioned you have about $900 million between cash and short-term investments. And I wondered if you have a minimum number in mind that you wouldn't like to fall below on this cash and short-term investment figure?

Well, in terms of our operating needs, we can operate with about $300 million in cash. Other than that, we can use the rest for supporting our projects.

Got it. So we can think about that number as in kind of, if EBITDA is a little lower because copper prices stay weaker than expected, then kind of once that $300 million number is to be breached, is that the point where we should expect you to change your CapEx budgets and such?

Well, yes, that could be a situation. Even before that, we will act, because we don't want to be cornered before we act, and we want to anticipate situations. If we see that markets circumstances are unfavorable, we will act. But we don't see that, as I mentioned already.

Got it. Okay. Well, thank you very much and good luck.

Thank you very much, Lucas.

And at this time, I see we have no further questions.

Well, with this, we conclude our call for the fourth-quarter 2015, as well as the year 2015 results. We certainly appreciate your participation, and we hope to have you back with us when we report the first quarter of this year. Thank you very much to all of you, and have a nice day.

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