Southern Copper Corp (SCCO) 2016 Q1 法說會逐字稿

Good morning and welcome to Southern Copper Corporation's first-quarter 2016 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 first-quarter 2016, 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 to Mr. Raul Jacob. You may begin.

Thank you very much, Richard.

Good morning to everyone and welcome to Southern Copper Corporation's first-quarter 2016 earnings conference call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Daniel Muniz, Executive Vice President of Southern Copper.

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

Now let me focus on the copper market, which is the core of our business. During the past quarter we have seen some easing in the macroeconomic headwinds that have affected our market over the last four years. In particular, we want to emphasize the slight recovery of commodity prices as a result of the US dollar depreciation.

Also, the Chinese economy's corporate consumption has a more positive outlook now, improving the sentiment regarding the copper market balance. As you know, China is the world's major corporate consumer with about 46% of world consumption. We believe that China's demand for copper is having reasonable support from the partial recovery of the housing market and the national grid investment program.

Looking at the supply side, production cut announcements are currently over 800,000 tons. As these cuts materialize, they will offset the additional production coming from new operations such as Las Bambas and Toromocho, or expansions including Cerro Verde and our own Buenavista project.

In addition to these production cuts, we believe that supply will be affected in the coming quarters from delays in project startups, technical programs, labor unrest, excess government taxation, and other difficulties that have been coming to our industry in the last few years. Even though the current world's economic outlook for growth has been adjusting slightly downward, we believe corporate demand is consistently improving and (technical difficulties) approvals. As a result, we anticipate market tightness for the future, giving us an optimistic view about long-term copper prices.

Let me now focus on Southern Copper production for the past quarter. Copper mine production increased by 24.8% in the first quarter of this year. That is, 221,661 tons, a new Company record. Last year we had 177,616 tons in the first quarter of the year. This was mainly the result of higher production at our Buenavista mine, which increases its production by 43,898 tons, or 67.6%. The remaining difference includes positive variances at La Caridad and Cuajone that were partially offset by a reduction at the Toquepala operation.

Regarding molybdenum, it represented 4.4% of the Company sales in the first quarter of 2016. Molybdenum production decreased by 4.9% to 5,571 tons in the first quarter of this year from 5,856 tons in the first quarter of 2015, principally due to lower production at the Toquepala mine. This was the result of lower grades and recovery. The reduction at Toquepala was 18.6 molybdenum. But all other company molybdenum operations increased their volumes partially offsetting the Toquepala lower volume.

Silver represented 4.9% of our sales in the first quarter of 2016 and it is currently our first by-product. Mine silver production increased by 25.7% in the first quarter of this year when compared to the same period of 2015. This was mainly the result of higher production at our Buenavista operation that increased 125% its silver production, and the IMMSA operations that increased their silver production by 16%.

Zinc represented 3.7% of our sales in the first quarter. Mined zinc production was 18,028 tons in the first quarter, 18.6% higher than the first quarter of 2015 production, as we solved all the problems that we had at the Charcas and Santa Eulalia mines in the last year.

Looking at our financial results, for the first quarter of 2016 we have sales for $1.3 billion that were $29.7 million lower than sales for the first quarter of 2015. That is, 2.3% less. We have significant copper sales volume increase of 26.2%. That was partially offset by lower copper prices of 19.7% lower prices. And this yield a net increase in sales value of about 1.7% for copper.

Regarding by-products, higher sales of silver of 9.3% due to higher volume of 25% was partially offset by lower prices that decreased 11% in the past quarter. We have lower sales for molybdenum of 38.8%, due to lower volume, minus 4%, and price is the main reason: 37.3% lower. Lower zinc sales of 22.2% were due to lower volume minus 5.4% on prices minus 19.1%.

Even though our copper sales volume increased by 26.2%, our total operating cost and expenses increased by only 7.3%, or $61 million when compared to the first quarter of 2015. Main cost increments were in purchased copper, depreciation, repair materials, reagants, and sales expenses. These cost increments were partially offset by lower inventory consumption, diesel and fuel costs, environmental remediation, labor and workers' participation, and other cost reductions.

Let me mention that our total operating cost and expenses decreased by $168 million, or 15.8% when we compare it to the last quarter of 2015. As we indicated when reporting the fourth quarter of 2015, we had a non recurring increase in operating cost in the fourth quarter of last year due to cost of copper from third parties and some Buenavista-related ramping up costs. Finally, some year-end adjustments increased the costs in the fourth quarter. That was a unique event that we don't expect to occur again.

Looking at our EBITDA, EBITDA for the first quarter of 2016 was $481 million. That is a 38.6% margin compared with $556.1 million, or a 43.6% margin for the first quarter of 2016.

Our operating cash cost per pound of copper, before by-product credits, was $1.41 per pound in the first quarter of 2016 compared with $1.74 per pound in the fourth quarter of last year. This is a $0.33 increase. This 19% decrease in operating cash cost is a result of lower unit costs from our production, lower unit treatment and refining charges, and administrative expenses.

Southern Copper's operating cash costs, including the benefit of by-product credits, was $0.98 per pound in the first quarter of 2016. This cash cost was $0.30 lower than the cash cost of $1.28 for the fourth quarter of 2015. That is a 23.5% reduction.

Regarding by-products, we had a total credit of $203 million, or $0.425 per pound in the first quarter of this year. This figure is compared with the credit of $196 million, or $0.453 per pound in the fourth quarter of 2015. Total credits have increased for molybdenum and zinc, and decreased for gold, sulfuric acid, and silver. Net income attributable to SCC shareholders in the first quarter of 2016 was $185.1 million, that is 14.9% of net sales, or diluted earnings of $0.24 per share.

Looking at our expansion of capital projects, capital investments were $223.3 million for the first quarter of 2016; t hat is 10.2% lower than the first quarter of 2015 00 and represented 120.6% of net income. In 2016, we continue the development of our investment program to increase corporate production capacity by 90% from our 2013 production level of 617,000 tons to 1.2 million tons.

Focusing on our Mexican projects, of $3.5 billion of the Buenavista project program, the Company has already invested $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 increase production by 200,000 tons to produce 460,000 tons of copper in 2016 and 500,000 tons of copper in 2017 at the Buenavista operation.

We also expect to increase our molybdenum production in Buenavista by 42% to roughly 4,900 tons per year. The Buenavista program is being completed under budget.

Regarding the mine equipment, to date we have received 61 400-ton capacity trucks, 7 shovels and 8 drills required for the mine expansion, with an investment of $510.9 million. All of these assets are currently in operation.

The new copper and molybdenum concentrator has an annual production capacity of 188,000 tons of copper and 2,600 pounds of molybdenum. The project will also produce 2.3 million ounces of silver and 21,000 ounces of gold per year. The new concentrator is completing its ramping-up phase with its six mills already in operation. In September of 2015, we obtained the first copper concentrate lot, and the plan is now running at 93% of capacity. Due to the promising initial results, it is expected to gradually increase production until the plan reaches full capacity by this quarter. The project has a 99% progress.

The crushing and conveying and spreading system for leachable ore, what we call the Quebalix IV project, is a project that has a main objective to reduce processing time, as well as mining and hauling cost. It will also increase production by improving SX-EW copper recovery, as the crushing and conveyor capacity hauls 18 million tons per year. And it is expected to be completed by the second quarter of this year, 2016.

As of March of 2016, the project has a 94% progress with an investment of $226 million out of the approved capital budget of $340 million. The remaining projects to complete the $3.5 million budget program, including important investments in infrastructure, power lines and substations, water supply, tailings, dam, mine equipment, shops and internal roads.

Looking at the Peruvian projects, we have the Toquepala expansion project which is in Tacna -- region Tacna in Peru. This project includes a new state-of-the-art concentrator, which will increase annual production capacity by 100,000 tons of copper to 230,000 tons of copper production by 2018. And we also increased molybdenum production by 3,100 tons at an estimated capital cost of $1.2 billion. Through March of this year we have invested $405.7 million in the project. The project is expected to be completed by the first quarter of 2018.

The Toquepala high-pressure grinding rolls, or HPGR, system has a main objective to insure that the current concentrator in Toquepala 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 better ore crushing. The budget for this project is $40 million and we have invested $7.1 million as of March 31 of this year. The project is expected to be completed by the fourth quarter of 2017.

The Cuajone heavy mineral management optimizing project in the Moquegua region improved. It's a project that consists of installing a primary crusher at the Cuajone mine pit with a conveyor system for moving the ore to the concentrator. The project aims to optimize the hauling process by replacing rail haulage, thereby reducing operating and maintenance costs, as well as the environmental impact of the Cuajone mine.

The crusher will have a processing capacity of 43.8 million tons per year. The main components, including the crusher and the overlying belt, has been acquired, and we have to start the preparation with the land and civil works. As of March of this year, we have invested $85 million in this project out of the approved capital budget of $165.5 million. This project is expected to be completed by the first quarter of next year.

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 plan, and all our financial needs in order to determine the appropriate quarterly dividend. Accordingly, at the close to the market on April 21, the Board of Directors authorized a cash dividend of $0.05 per share of common stock, payable May 24 to shareholders of record at the close of business on May 10 of this year.

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.

(Operator Instructions)

Our first question comes from Karel Luketic from Bank of America Merrill Lynch.

I have two questions. The first one is on CapEx. We saw first-quarter CapEx running below budget, and we just wanted to confirm what the guidance for CapEx in 2016 and 2017 onwards is, please? And if that includes or not Tia Maria.

And my second question is on the production guidance, if you could provide the latest update for copper production 2016-2017, et cetera, on what that will be. Those are my questions. Thank you.

Okay. Thank you very much for your questions, Karel. At this point we just finished the first quarter of the year, so we don't think that our capital budget has to be adjusted at this point. If we see a reduction in the trend of expenditures, or that what you mentioned, holds for the second quarter, we will make an adjustment. But at this point we will like to maintain the budget as it is.

Regarding the production, our current view, we indicated in the first call of the year, in January, that our goal for the year is 903,000 tons of copper for 2016. You have seen our first-quarter numbers are slightly better than just what we mentioned. So, we may at this point estimate slightly increasing our production to about 910,000 tons for 2016; for next year, 2017, 944,000 tons; for 2018, 1,057,000 tons; 2019 pretty much the same; and 2020, 1.2 million tons. This includes the effect of Tia Maria, particularly in 2019 and 2020.

Okay. That's perfect. Thank you very much.

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

Thank you very much, Raul. The costs in the quarter performed very well. So, I just wanted to explore what are your views going forward as you get to full capacity at the new concentrator in Buenavista? And then as the Toquepala comes on line, where do you see the $1.41 trending?

And, also, the new energy supply agreement in Peru, could you elaborate a little bit more on what can we expect from that new contract coming in?

And then if you can talk a little bit about why the Company continues to purchase copper in the quarter, a little bit of an increase year on year. So you can comment on that, that would be great. Thank you.

I couldn't get your last concern, Carlos. Could you repeat it, please?

Purchased copper -- the purchase of copper concentrate.

Okay. On cash cost, we indicated at the beginning of the year that our guidance for 2016 before credits was $1.50 for the year. We're doing a little bit better than that. This quarter, we had, as you would point out, $1.41.

For the rest of the year we expect the cash cost to be where it is or very little depending on the prices mainly. We will increase our production slightly through the second quarter and the third quarter to finally reach full capacity in our new concentrator. That certainly will bring in some much lower cost units to our pipeline of production.

However, we always have some other contingencies that may affect this. So for now let's say we are about $1.41, $1.40 before credits. After credits, we will have some good news in the second part of the year when we initiate the ramping up of our new molybdenum plant in Buenavista. That is something that we're expecting for the third quarter of this year, and that should increase our credits.

Besides this, as you have seen, we're looking at better prices for silver, for gold to a silver pass over $18 per ounce. That will certainly help us, as I mentioned. Silver is now our second by-product after copper. And molybdenum is getting a little bit better from what we have seen in the last couple of quarters.

Looking at your concern about the power, we have a good opportunity to improving our target for power in Peru, and we are taking that advantage. That should improve our cost position for the Toquepala project. It is something that we are still working on, but we are very close to a final agreement. Finally, on the purchase -- yes?

Is it possible to quantify or give us a range of the potential impact of this new energy supply agreement in your cost?

Just for the plant will be a cost reduction in power of about 20%, but just for the plant, or the new plant.

The new plant in Toquepala?

The new plant in Toquepala. The effect of that is a slight improvement in our energy cost. Besides that, on your point about purchased concentrates, this is something that we do more on an operational basis. Sometimes you have some excess concentrates that you sell at certain part of the year. And if commercial conditions are appropriate, you acquire copper from third parties.

This is not specifically driven by the business, but the operations. As such, we have been acquiring copper concentrates for our Peruvian units as well as the Mexican units in the past. Now I don't think that we'll be acquiring copper concentrates for the Mexican units. But in the case of the Peru operations, sometimes it is better to acquire copper concentrates from a nearby copper producer such as Cerro Verde, for instance, than to importing the copper concentrate that we own in Mexico.

Thanks. Fair enough. Thank you.

(Operator Instructions)

Our next question comes from Matthew Korn from Barclays Capital. Please go ahead.

Hi. Good day, everyone. Let me ask a little bit on Tia Maria. Has anything changed there? I know you have been conducting your outreach program, and the government has been recommending the round tables. But can anything move forward, really, until after the election runoff?

And then, secondly, following up on that, should we think about any substantial differences that you can perceive in the two Peruvian candidates regarding the relations at the mining industry? Because I believe that Mr. Kaczynski is a former mining minister himself. I just wondered. It would seem that would be beneficial. But your views on that would be helpful. Thanks.

Okay. Let me address first your concern about Tia Maria. We didn't have much new to report on this, and that's why we didn't mention it in our report. I would say it's basically the situation is pretty much the same. We are still working with both the communities and the government in order to get the permit moving forward. There is not much to report in that.

Regarding the two candidates on the runoff, at this point we believe that we can work very well with whoever is selected. We have a policy of collaborating with the government authorities and to provide as much of our own view on how the industry could be improved. And I think that in that regard we can work very well with any one of the two candidates.

Great. Thank you.

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

First question, you mentioned about the strong demand in China recently. Do you have any views on why copper prices have not rebounded as much as other commodities that are related to the housing industry, like steel and iron ore?

And a second question would be, with the recent recovery in copper prices to the level of $2.30 per pound, have we started to see any of the guys that were shutting down capacity when prices were lower thinking on getting back to the market?

First, let me say that we don't see a strong copper demand in China. We just see more support for demand. We believe that the copper market -- I mean the physical copper market -- is not as bad as the prices may indicate. We last year sold 70,000 tons of refined copper very quickly, no problems, very good terms. This year we have 160,000 tons of copper concentrate that adds to these 70,000 tons I mentioned. Again, very good terms.

A significant portion of these concentrates are going to Chinese's smelters. So, we believe that the physical market is not as bad as people think to believe. And the reason for that, I believe -- this is my personal view -- is that you hear the news of the new projects and you don't hear the bad news. Nobody wants to talk about them while cutting production or not getting the plants that you expected, or in order to do a ramping up as you were thinking about. So, in that sense we believe that the market will certainly show much more support for this year and next year.

Okay. And regarding the capacity shutdowns or capacity restarts, did you see any news on that front?

No, not at this point.

Okay. Last question -- on the scrap market, can you comment a little bit on how you see that, how you see prices on the scrap market, as well?

Scrap market, it's pretty much quite reduced nowadays. At these copper prices, not much activity in scrap. Most likely the producers of the scrap are keeping it to themself for better time to sell them. That's basically what we think. And that's why you see much more refined copper demand coming from the major consumers of copper.

Perfect. Thank you very much.

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

Thank you for the question. I was checking that your working capital has been increasing on sales of copper remain below production. I think this is the third quarter in a row. So, just wondering what can we except for the second half of the year regarding working capital and sales?

Okay. Let me first mention that working capital usually increase for the Company in the first quarter of the year due to certain payments that we do at the Peruvian operations, such as workers participation or income tax.

Secondly, I think that the increase in the working capital has an explanation that I will summarize now. Our invoicing increased by the new operation of Buenavista, new sales of concentrates. Concentrates have longer terms than refined copper. So, accounts receivable increase by about $110 million when you compare this past quarter with the first quarter of 2015.

Inventories also increased due to the higher operation activity that the Company had. That includes also some increase in our leachable inventories for processing of the new SX-EW III plant in Buenavista.

Through 2015, we have had significant accounts payable due to the project final payments for the Buenavista project. We have decreased that quite a bit by about $150 million in the last quarter of 2015 and the first quarter of this year. And that also increase the working capital of the Company. And the reference is just other activities related to tax credits and some other prepayments that we have to do for our projects.

So, mainly I would say that this is increasing in working capital that you have seen. It's related. And the drainage of that in our cash generation from operations is resulting from the new project activities and the current construction of the other projects that are still in the construction part of their life cycle.

Okay. And do you think it's going to normalize at this level in the second quarter, or what can you expect?

I think that we should have a better trend in cash from operations in the second quarter and on. We will have a more stable Buenavista operation, requiring less working capital because you already put it in the fourth and first quarter of the year. And we will see the impact in accounts payable of the new Toquepala concentrator. So we should be generating more cash from operations in this quarter and the rest of the year.

Thank you very much.

Thank you. Our next question on the line comes from Guillermo Estrada from GBM. Please go ahead.

Good morning, everyone. Just two quick questions for me. The first is regarding the IMMSA mines at Santa Eulalia and Charcas. Currently what is that situation? And what should we expect in terms of production for the next couple of years?

And just a follow-up question, are there any updates on the moly and silver production guidance for the year 2017? Thank you very much.

Let me focus first on Charcas and Santa Eulalia. In the case of Charcas, we had some operating problems in 2015 that has been already solved. And in the case of Santa Eulalia, we got a flood that we spend some resources in fixing this problem. We believe that it's solved already. There is some difficulties due to an underground river. It goes very close to the Santa Eulalia mine.

Looking at our zinc production for [2017] we indicated that we're expecting 84,600 tons of zinc; for 2017, 90,000 tons of zinc; for 2018, 107,000 tons of zinc.

Thank you. Our next question comes from Ricardo Miranda from LarrainVial. Please go ahead.

Hi. Thanks for taking my questions. The first one is regarding MSCI possible change in Southern Copper as a money market index. I would like to know what are your sense in that matter?

The second is what about the Pilares, what are the advances there?

Third, as price recovers towards the end of this year -- I'm speaking about copper price and by-products -- do you expect that you will continue with the stock buyback plan? Thank you very much.

Okay, let me start by your first concern, MSCI. We hope that MSCI maintain the Peruvian, the Lima stock exchange as an emerging market. If they don't do that, they have to -- they have mentioned that they will pass Southern Copper as a US company. Since most of our operations are in Mexico and Peru, we believe that our Company's perceived more than a US risk, Latin American mining risk. So, we will certainly like this to be the case, that we remain as we have been so far. But if it happens, we don't think that it will have a strong effect on the Company share price.

I am sorry, your second question was? -- on the Pilares. Our Board has approved a budget for doing in-depth study on the best way to go ahead with this project. Mr. Gonzalez will make a comment.

Yes. We are going to use only some drilling to find and check all the results of that. But right now (inaudible) to spend it until we can get more income to develop that project. But right now we are only going to drill for verified reserves and that's all.

On the share buyback, we have stop it, and we will maintain that for a while.

Our next question online comes from Tony Rizzuto from Cowen and Company. Please go ahead.

Thank you for taking my questions. The first one is a follow-up. You made some comments that were rather constructive on China, and yet we see the physical premium being pretty sluggish over there. So just some further color on that, why the disconnect.

And then, secondly, you indicated that you believe supply will be affected in future quarters, and I was wondering if you could elaborate, be a little bit more specific about which mines or operations that you see in particular as having some of those issues. Thank you.

Let me start by the second question that you have. We are seeing several announcements of cuts in production in our collection. These are over 800,000 tons already. (inaudible) cuts have to be materialized. And they are mainly in high-cost operations worldwide.

I think that you if you look at what happened in the US, you have the announcements of either shutdowns or production reductions in several mines. Let me mention some of them. We have Mineral Park, Wolverine, [marentesu], Miami, et cetera.

And same thing happens in some other operations worldwide. The most important effect has been the African operations where they have been combined with some state higher taxation or some other actions from the African state. So, those are currently affecting the supply-demand balance, reducing supply and accommodating some space for the new projects production that we are seeing worldwide.

An important thing to mention here is that we don't have new greenfield projects being approved at this price levels, and that is creating certainly a deficit in the future for our industry. And I think that's where the good fundamentals for copper are holding.

Regarding the Chinese terms, I see your point, but we believe that demand is improving in tier one and tier two cities with much more housing demand. That will give some better support for acquisitions or copper purchases from China. And also the national grid plan that been growing at a good pace in the last few quarters. So, those two reasons make us to believe that the market will have some support in China.

Thank you. We have a question from Carlos de Alba. Please go ahead.

Thank you very much. Just a couple of housekeeping items, Raul. We saw the depreciation charge in the quarter did not increase despite the fact that the CapEx has been going up. And also the tax rate, which has been quite volatile recently, remained the effective tax rate, that is still remaining in the quarter around 34%. So, just wanted to understand how do you see that effective tax rate going forward.

Depreciation -- basically, it takes a while, once you finish spending the money, it takes a little bit longer to start depreciating the assets. And the reason for that is that you have to do final payments to your vendors of equipment, et cetera.

Usually, when we do this we catch up with whatever depreciation we have to do. And we try to anticipate it, but so far this is what we're charging now. We may have an increase on this as we move on with the end of the Buenavista projects and we initiate the capitalization of other projects that we are currently doing.

Regarding the tax rate, we are expecting it to be at this level. It may be slightly adjusted upward as we go ahead with the Buenavista project and when we start paying dividends from the Mexican operations. But at this point it reflects our view on the year.

This is an important thing to mention. At this point the effective tax rate of the Company, percent what we are expecting for 2016, we see a difference, we will adjust the rate in the corresponding quarter.

All right. Thank you very much.

I see we have no further questions at this time.

Okay. Thank you very much. With this we are concluding our conference call for Southern Copper first-quarter 2016 results. We certainly appreciate your participation, and hope to have you back with us when we report the second quarter of 2016. Thank you very much, and have a nice day today.

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