Southern Copper Corp (SCCO) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Southern Copper Corporation Fourth Quarter and Year 2017 Results Conference Call. Please note that this conference is being recorded.

With us this morning, we have Southern Copper Corporation, Mr. Raul Jacob, Vice President, Finance, Treasurer and CFO, who will discuss the results of the company for the fourth quarter and year 2017 as well as answer any questions that you might have.

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

All results are expressed in full U.S. GAAP.

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

Thank you very much, Hilda, and good morning to everyone, and welcome to Southern Copper's Fourth Quarter and Full Year 2017 Earnings Conference Call. Participating with me in today's conference call are Mr. Oscar González Rocha, Southern Copper's CEO and a board member; and Mr. Daniel Muñiz, Executive Vice President and also a board member of our corporation.

In today's call, we will begin with an update on our view on -- of the copper markets. We will -- we then will 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's focus on the copper market, the core of our business. During the last quarter, the copper price increased significantly from an average of $2.40 per pound in the fourth quarter of 2016 to $3.09. That is a 29% increase per pound in the last quarter and up to an average of $3.21 per pound in January of this year, 2018. We believe this price improvement is a result of the synchronized economic growth recovery of the major economies. As a result, the world economy is accelerating its growth to an expected 3.9% in 2018.

China, the world's largest copper consumer, with over 45% of the demand, is expected to continue its healthy growth, in line with its estimated 6.8% GDP increase in 2017. For global refined copper demand in 2018, we expect growth of about 2.1%. Let me point out that 2 percentage points of world demand growth are approximately 500,000 tons of new corporate demand.

Regarding copper supply, we expect a weak response as a result of the consistent decline in investments that several companies have had in recent years. In addition, labor unrest, excess government taxation and technical difficulties are further affecting production. As a result of these factors, we expect a supply growth of approximately 1% in 2018, yielding a copper market deficit this year, which will give strong support for copper prices.

Given the current market outlook as well as our continuous commitment to increase low-cost production, we believe Southern Copper is uniquely positioned to continue delivering enhanced performance, sustainable growth and superior value. Our best-in-class, low-cost operations, coupled with a large high-quality reserve base in investment-grade jurisdictions, continues to offer highly attractive growth opportunities. In addition, our robust capital structure provides the financial and strategic flexibility required for its execution.

Southern Copper is currently developing a new organic growth plan to increase its copper volume production to 1.5 million tons by 2025 with the development of new projects.

Let me focus now on Southern Copper's production for the past quarter. Copper mined production decreased 0.7% in -- that's less than 1%, in the fourth quarter of 2017 to 226,027 tons from 227,583 tons in the fourth quarter of 2016. This was mainly the result of a decrease in production at our Buenavista and Cuajone mines due to lower ore grade and recoveries that were partially offset by higher production at Toquepala and La Caridad.

Also, in the last quarter, we saw a recovery of our smelting and refining operations. Our smelting operations increased its processing tonnage by 24.7%, while the refining and raw facilities increased it by 10%. This positive variances allowed the company to increase copper sales volume by 5.7% in the fourth quarter of last year.

In 2017, we had a production record at our Ilo operation, Peruvian operations. The Ilo smelter processed a record of 1.2 million tons of copper concentrate, which yield an annual production record of 345,847 tons. Also, the Ilo refinery produced a record of 291,373 tons of copper cathodes.

For 2018, we expect our mined copper production to grow by 6% to 931,000 tons from the 877,000 tons that we had in 2017. The drivers of growth will be the beginning of operations of our new Toquepala concentrator and the recovery of our SX-EW Buenavista production.

For zinc, which represented 5.9% of our sales value in the fourth quarter of 2017, with an average price of $1.47 per pound in the last quarter, we had an improvement of 28.9% in sales from the fourth quarter of 2016. Zinc mined production decreased, though, by 18.9% to 13,876 tons in the fourth quarter of 2017. That compares with -- when compared to the fourth quarter of 2016. This was due to lower mineral processed at Santa Barbara operations and lower grades at the Santa Eulalia mine. Refined zinc production increased by 10.4%.

Zinc prices have increased by 37.9% in 2017. This price improvement reflects the good fundamentals of this metal due to a significant industrial consumption and expected production. Through 2017, zinc inventories have decreased over 50% in the major warehouses, improving this metal's fundamentals.

For 2018, we expect to produce 84,600 tons of zinc, an increase of 23% as a result of the recovery of our Santa Eulalia and Santa Barbara mines' production, which is underway.

Molybdenum represented 5.5% of the company sales value in the fourth quarter of 2017. Molybdenum prices averaged $8.72 per pound in the quarter, which compares to $6.58 per pound a year ago. This is a 32.5% price increase. In January of this year, prices averaged $11.54 per pound.

Molybdenum production decreased by 0.4% in the fourth quarter of 2017, principally due to lower production at the Peruvian operations that was partially offset by the recovery of Buenavista molybdenum production. The Buenavista molybdenum production more than doubled its volume to 1,078 tons of molybdenum or an increase of 124.6% of higher production.

For this year, we expect to produce 21,700 tons of molybdenum, an increase of 1.7% in production, due to additional production from Buenavista and the recovery of our Peruvian operations.

For silver, which represented 3.6% of our sales value in the fourth quarter of 2017, we had an average price of $16.66 per ounce in the quarter. This is a slightly lower price than what we had at the fourth quarter of 2016. Mined silver production decreased by 7.4% in the fourth quarter of 2017 from the fourth quarter of the year 2016. And this was mainly the result of lower production at our IMMSA operations, which were partially offset by higher production in our open pit operations of Mexico and Peru.

For 2018, we expect to produce 17.5 million ounces of silver, an increase of 10% in production.

Looking into our financial results. For the fourth quarter of 2017, total sales were $1.9 billion. That is $465 million higher than sales -- total sales that we had in the fourth quarter of 2016 or a 33.3% increase. For copper, sales volumes increased by 5.7% and value by 38.1%. This was obviously in the scenario of much better prices of copper, which increased, in average, 29.7%.

Regarding by-products, we have higher sales of molybdenum due to better prices that compensated by slightly lower volume. Zinc sales increased by 51% due to better prices and volume. And finally, we have lower sales of silver due to lower volume and prices.

Our total operating costs and expenses increased by $105.9 million or 11.4% when compared the fourth quarter of last year with the fourth quarter of 2016. The main cost increments has been in purchased copper, workers' participation, inventory consumption and diesel and fuel costs. Other factors also influenced the cost. These cost increments were partially offset by exchange rate variance, lower energy cost and higher capitalized reachable material.

Our fourth quarter 2017 adjusted EBITDA was, well, $1 billion, which is 58.9% higher than the fourth quarter of 2016 EBITDA of $629.3 million. The adjusted EBITDA margin in the fourth quarter of last year was 53.6% compared with 45% in the fourth quarter of 2016. The 2017 adjusted EBITDA was $3.3 billion versus $2.2 billion in the prior year.

Operating cash cost per pound of copper before by-product credits was $1.50 per pound in the fourth quarter this year. This is $0.041 higher than the value that we had in the third quarter of 2017. This 2.8% increase in operating cash cost is the result of higher cost per pound from production cost and treatment and refining charges. These higher costs were partially compensated by better premiums and lower administrative costs. Southern Copper's operating cash cost, including the benefit of by-product credit, was $0.887 per pound in the fourth quarter of 2017. This cash cost was $0.025 lower from the cash cost of $0.912 that we had in the third quarter of the same year.

Regarding by-products, we had a total credit of $293 million or $0.60 -- or $0.609 per pound in the fourth quarter of 2017. These amounts represent a 12.2% increase when compared to the credit of $257 million or $0.543 per pound that we had in the third quarter of 2017. Total credits have increased for molybdenum, zinc, sulfuric acid and have decreased for precious metals.

The result for the fourth quarter of 2017 was a $287.5 million net loss due to a onetime noncash income tax reform adjustment of $743.3 million as a result of the new U.S. income tax legislation enacted in the fourth quarter or at the end of 2017. This tax reform resulted in the cancellation of foreign tax credit carryforwards that were generated prior to the new legislation by taxes paid in Peru and Mexico where we operate. Not considering this onetime noncash adjustment, the company net income for the fourth quarter of 2017 would have been $455.8 million or 165.2% higher than the fourth quarter of 2016.

For 2017, net income before the impact of the onetime tax adjustment, it was $1,471.8 million or 89.5% higher than 2016 net income of $776.5 million. The tax adjustment reduced 2017 net income to $728.5 million and the net income margin to 10.9%. The improvement in 2017 net income before the tax adjustment resulted from higher sales and cost reductions achieved in electricity, tires and other cost elements.

Capital expenditures. Southern Copper's investment philosophy is not based on the outlook of copper prices but on the quality of the assets that we operate and develop. Throughout the years, our strong financial discipline has consistently allowed us to invest on a continuous basis in our great asset portfolio.

Capital investments in 2017 were $1,023.5 million and include $342.5 million for the Toquepala expansion, which is expected to initiate operations in June of 2018 and produce 40,000 tons of copper in this year. We have a portfolio of projects in Peru that has a total capital budget of $2.9 billion, of which $1.6 billion has been already invested.

Focusing a little bit more on the Toquepala expansion. This is a $1.3 billion project that includes a new state-of-the-art concentrator that will increase Toquepala's annual copper production by 100,000 tons of copper to reach 245,000 tons in 2019, a 69% production increase. As of December 31 of last year, we have invested $892.9 million in this expansion. The project has reached 87% progress and is expected to initiate production in June of 2018.

The Cuajone mineral crushing and hauling project in Moquegua in Peru is a project that consisted of replacing rail haulage at the Cuajone mine by an impede crusher with a 7-kilometer overland conveyor belt system to move ore to the concentrator. Operating savings are estimated at $23 million annually. As of December of last year, the project is already completed and in operation. The total investment was $226 million as budgeted.

For Tia Maria, we have completed the engineering, and after having complied with all environmental requirements, we have obtained the approval of the Environmental Impact Assessment. We're currently working jointly with the Peruvian government to obtain the construction license for this 120,000 tons copper project -- greenfield copper project, by the way, with a total capital budget of $1.4 billion. We expect the license to be issued in the first half of this year.

For Buenavista in Mexico, we have the Buenavista zinc concentrator project in Sonora. This project is located within the Buenavista facility and contemplates the development of a new concentrator to produce approximately 80,000 tons of zinc and 20,000 tons of additional copper per year. As of today, we have concluded the basic engineering and are working on the purchasing process for the main project components. The project investment budget is $413 million, and we expect to initiate operations in 2020. When completed this new zinc concentrator, the company will double its zinc production capacity.

The Pilares project located 6 kilometers away from La Caridad is a project that consists of an open pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate. The ore will be transported from the pit to the primary crushers of the La Caridad copper concentrator by our own mine truck fleet. This project will significantly improve the overall mineral ore grade of La Caridad because the Pilares mine has a 0.78% ore grade versus the 0.34% that has La Caridad. As of today, we continue with the mine plan preparation, including the final outline design for the road-through, which the ore will be transported to the La Caridad mill. The investment budget for Pilares is $159 million, and we expect it to start producing in 2019.

For 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 other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as announced to the market on January 25, the Board of Directors authorized a cash dividend of $0.30 per share of common stock payable on February 27 to shareholders of record at the close of business on February 13 of this year.

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

(Operator Instructions) We have our first question from Caio Ribeiro from JPMorgan.

So my first question is related to the tax impacts that we saw this quarter related to the tax reform in the U.S. with some credits being written off, which led to some noncash impacts in the P&L. I just wanted to get some color from you on what to expect going forward, if there are any additional impacts that you envision that we should see in the coming quarters, and whether there is any alteration fee or expected effective tax rate going forward resulting from this tax reform. And secondly, regarding the Michiquillay project in Peru, if you could comment as well on what are the latest developments regarding the auction of that project and whether this is an asset that you're still interested in. That would be very helpful.

Okay. Thank you very much for your questions, Caio. On the tax adjustment, we have looked through the matter and did an adjustment that includes the tax adjustment to adjust or to align our tax position with the new tax regulations in the U.S. At this point, we don't see a further adjustment regarding this tax reform. However, I'd like to mention that the SEC and the PCAOB, which are the main agencies that govern the accounting, U.S. GAAP accounting, have given the companies this year to study the matter and, if necessary, do the proper adjustments. At this point, we don't see that happening. In our case, it's very straightforward the kind of adjustment that we have to do, and we already include them in our fourth quarter. Having said that, we're looking into all the details. As you know, some part of the tax reform are not fully understandable for the companies. So we don't think that we'll have another one, but it may be the case if we see something that we didn't consider.

Yes. And if I may, Raul, I'll interject, Caio. I mean, basically, the reform is good for us. I mean, there are 2 things very good happening. One is the alternative minimum tax has been -- I mean, is not longer on the court of law, so it doesn't exist anymore, nor dividends in the United States that we receive from foreign operations. So those 2 things are very good for the company. However, as you know, we pay taxes locally where we mainly operate that is in Mexico and Peru, but I mean, just one other comment that this reform is only good for U.S. businesses. And regarding Michiquillay, I mean, we are certainly looking at it. We think it's a -- we think this is a good project. We've done some drilling. We've done some due diligence up there in the north part of Peru. And we feel it's one of the last world-class projects out there. So we are looking at it and I mean, analyzing whether we should submit a bid by the 28th of February and what would that be the -- based on the public bid rules that the government had issued. I mean, as soon as we have more information, we're happy to convey that to you.

The next question comes from Arthur Suelotto from Bradesco BBI.

My first question is regarding Tia Maria. I saw that you updated your forecast for the receipt of the construction permits. It was initially on the first quarter of 2018. Now you updated for the first half of 2018. I just wonder if you could provide us with some details regarding the colors for this postponement. And if you have some kind of deadline to start considering or start the evolution of Tia Maria and then shifting your attention to the evolution of any other projects in the pipeline. Maybe, I don't know, El Arco, Los Chancas. I mean, there are -- any of the other projects that you have on the pipeline. That will be my first question. And then the second one is with regard to the cash cost. We saw some evolution regarding cash cost after by-products. And we have in 2018 the dark circles, the Quebalix expansion and also have probably the [modernization] in the Buenavista and Cuajone operations. I just wonder if you could provide us with some guidance regarding the cash cost evolution for 2018 and then for the other upcoming years. That'll be my 2 questions.

Okay. Thank you very much for your questions, Arthur. Regarding Tia Maria, we're very positive with the project. We believe that -- and we have the data that support this. We believe that the company has made very good progress in the social work at the Islay Province, and that is certainly helping the company to consider getting the construction permit during the first part of this year. This is our current outlook on the project. And we are, as I mentioned before, working with the Peruvian authorities as well as the population of the Tambo Valley to improve the relationship that we have and to see the project moving forward. The major concerns of the population has been the use of water from the Rio Tambo, which we have explained that we are -- we will build desalination plants that will make not necessary -- no need for us to take any water from the Tambo River. And the second point is that the impact at the Charcas mine may have on the valley, which we have -- we are explaining, will be practically negligible. Regarding the other projects that you mentioned, El Arco and Los Chancas. For El Arco, we are expecting it to get into operation by 2025. That will add to our production pipeline about 245,000 tons of copper. In the case of Peru, we have another project that should be up and running by 2025, which is Los Chancas. This has a lower expected production than El Arco but is important, though. It's 180,000 tons of copper. On the cash cost, we are expecting it to adjust downward as we initiate our new operation of the -- the operation of the new Toquepala concentrator, which, as I mentioned, should be up and running by the end of the second quarter, June, that will cover the full second half of this year. Our expectation for cash cost this year is it to be at about $0.89 through the year, and we're expecting it to decrease by about $0.10 in the next 3 years. This is obviously considering all the costs of materials such as fuel, et cetera, at a level that they are today. And as we know, that most likely will not be the case. I'm not saying that they will be -- that the fuel prices or similar will be higher, it may be lower, but we don't know where they are going to be in 3 years. At this point, given the price set that we have, this is our expectation.

The next question comes from Petr Grishchenko from Barclays.

Some were already asked, but if I can touch a little bit on your credit ratings. Have you guys had a conversation with the rating agencies about potential upgrades given how much your metrics improved over the past, call it, 12 months? And I guess, as it relates to this, as you develop project -- more projects in Peru, do you believe the market could reprice the bonds and so the spreads to Peru versus Mexico?

Regarding the credit rating agencies, we're in constant contact with them. The review on both the copper market and the company is very positive, and that is certainly may bring an improvement in credit ratings in the future. But at this point, we have nothing to report on that regard.

The next question comes from Karel Luketic from Bank of America.

My first question is in terms of copper production guidance. You mentioned the number that is below what you had mentioned during the last conference call. If I'm not mistaken, the number's around 40,000 tons lower than the previous guidance. Just to understand, is that because of Tia Maria being a bit postponed in terms of the project pipeline for the coming years? And what impact this year is more importantly? And also, if you could update the ramp-up expected in terms of volumes for 2019, '20 and so on and so forth, if possible, that will be great.

Your second part was the ramp-up of production?

Of production for the coming years. And by the way, I meant Toquepala, not Tia Maria. Sorry about that.

Okay. Yes. Well, we -- the production guidance for 2018 has been adjusted to, as you mentioned, slightly lower due to lower expected production at the Toquepala new concentrator. We were considering initiating the first loads of mineral to the concentrator in the second quarter, at the beginning of the second quarter. And we have adjust that and some other much smaller production changes in our guidance for 2018. For the next years, let me give you our production guidance. Well, I'd say that this year, we're expecting 931,000 tons of copper. For 2019, we should pass 1 million tons of copper, 1,015,000 ; for 2020, 1,065,000 tons of copper; 2021, 1.2 million tons of copper. That should hold for 2022 and '23.

Okay. And that includes Tia Maria as of 2021, that's it?

That includes -- yes, that includes Tia Maria, which will kick in -- well, with small volume in 2020, about 30,000 tons and then at full speed, 120,000 tons in 2021.

Okay. And if I may, a second follow-up on that in terms of the CapEx expected for 2018, '19 and '20, also for us to be able to incorporate in our models, will be great.

Sure. Hold on a sec, please. For this year, our current budget for CapEx is $1.7 billion; for 2019, $1.8 billion; 2020, $1.9 billion; 2021, $1.7 billion; and 2022, 1 -- $2 billion. In 2021 and 2022, we will be spending some money on El Arco and Los Chancas, both in -- well, El Arco, as you know, is in Mexico, and Los Chancas is in Peru. These together are $1.5 billion in 2022 and $2.7 billion in 2023.

The next question comes from Andreas Bokkenheuser from UBS.

Just 2 quick questions from me. We all starting to see sustaining CapEx kind of climbing across the industry globally, possibly because of higher oil price, high energy costs, so on and so forth. Are you seeing a similar lift to your sustaining CapEx at this point in time? And what are you kind of expecting over the next couple of years here? That's the first question. And the second question, obviously, you've been talking about this before as well. Your purchases of third-party concentrate. You've been mentioning that, that's going to come down as you basically ramp up more asset volumes. Is that still the case? And could you give a timing on when you expect your third-party purchasers -- purchases, sorry, of the concentrate there to start declining? Those are my questions.

Thank you very much for your questions, Andreas. For sustained CapEx, we are -- well, if you expand your operations, you may expect that after a few quarters, your sustained capital expenditures should increase. That's what we're seeing and this is what we believe is more our case than seeing them being pressured by fuel prices or some other materials' higher costs. Obviously, at certain point in time, we may see those elements kicking in. But at this point, we're considering slightly increasing our maintenance CapEx due to, as I'd say, the -- having new facilities will, eventually, they will require proper maintenance in the company. One of the key characteristics of us is being a very low-cost producer, and one of the ways to achieve that is having your equipment in very good shape, which is what we do. On the question of third-party's copper. Well, as I mentioned, we broke a record in the Peruvian operations this year at the smelting and refining facility. This record was the result of certainly, the management efforts that the company did on this as well as the new environmental standards that the Peruvian government issued in 2016. And that has been very helpful as well. So last year, we had to buy more copper for the Peruvian operations because we didn't have the Toquepala expansion in production yet. For 2018, for the second part of the year, we're expecting to be long in concentrates both in Mexico and Peru. At this point, we are long in concentrates in Mexico. We're selling a portion of the new concentrator of Buenavista production to -- as concentrate copper to the market. And in the case of Peru, the first half of the year, we will be a little bit short of copper concentrates. We're considering buying some. And for the second part of the year, we should be with plenty supply of concentrates to our smelting operations and facilities. Is that...

Does that answer your question?

Yes, it does.

Our next question comes from Carlos De Alba from Morgan Stanley.

Raul, how would the balance of concentrate and smelting in Mexico move in the coming years? Would you still consider investing potentially in a new smelter in the country? Or do you think that there is maybe room to increase the capacity of the current operations so that you remain relatively balanced although you are a little bit long in concentrate already. Can you increase the capacity of the existing smelter?

Well, we are looking at several options for our smelting facilities. And some of them are considering the buildup of a new smelter or expanding the Peruvian facilities. Those are the projects that we're entertaining at this point. Regarding the current smelter, let me pass this concern to Mr. González Rocha. If you could comment if there is a possibility of expanding the Caridad smelter.

No. No, we are not thinking right now in expanding the Caridad smelter. What we have in mind is expanding the Ilo smelter and Ilo refinery on the site or building a new smelter in the port of Guaymas in Empalme for the concentrates of Buenavista del Cobre, the second concentrator that we are right now selling to Asciano.

Let me add to that, Carlos, that at this point, our current forecast of CapEx that I mentioned before does not include a new smelter or expansion of the Peruvian facilities.

Okay. Excellent. And just a clarification. In 2023, if I understood correctly, the guidance for copper is 1.2 million tons. But in the press release, it is mentioned that the company may reach 1.5 million tons. What will be the gap between the guidance that you just provided and the 1.5 million mentioned in the press release? It maybe 1 or 2 projects but that will help if you could clarify.

Yes. That will be El Arco and Los Chancas. Both are expected to initiate production by 2025. With those 2, which are set to compound 450,000 tons, we may pass the 1.5 million tons by then.

The next question comes from Novid Rassouli from Cowen and Company.

So you mentioned that you expect supply growth of 1% in 2018 yielding a copper market deficit in '18. I was wondering if you could give an estimate of maybe the size of the deficit you're expecting as well as the level of disruptions that you're building into that 1% supply growth maybe relative to last year.

Well, basically, we're expecting a deficit in the range of 150,000 tons for this year for 2018. We're expecting -- particularly on the labor side of the business, 2018 seems as a complicated year for several corporations. So that, we think, will affect the copper supply this year.

Are you expecting more disruption in '18 than what we saw in '17?

I have -- we have the idea of certain disruptions that may not be considered at this point due to labor negotiations. That may increase a little bit what we're seeing.

Okay. And then my second question. Could you comment on the scrap supply in the market now relative to the beginning of 2017? I remember kind of going into CESCO, we saw a big influx in scrap flows last year, and they kept prices from really truly rallying. I was wondering if you guys could comment on how the market is looking for scrap now relative to the beginning of '17.

Well, there has been some movement, particularly from the Chinese government to -- not allowing certain kinds of scrap getting into the Chinese market. That was started first with scrap #3, if I'm -- if I remember correctly. And then they add some other scrap qualities to this list. That is certainly helping the refined copper market where we have a significant participation with our own production, and we see this as a positive event. We believe that the Chinese are becoming very serious about control -- environmental control in their smelting and refining facilities. As you -- I'm sure that you know there has been some shutdowns at certain smelters in order to do environmental works or environmental investments. So all of this is certainly giving some more support to copper prices this year and producing the difference that I'd mentioned.

The next question comes from Renan Criscio from Credit Suisse.

Just a follow-up question on your costs. You made clear the downtrend on cash cost after the by-products. But can you provide your guidance for the cash cost before by-products? Just because you had a slight increase on a sequential basis to the $1.50 per pound? I understand that you had a -- a short strike came through that might have impacted that. But can you elaborate more if we can see the cash cost declining to the level we saw in third quarter already in the first quarter of 2018? Or how can we see that cost evolving moving forward?

Okay. For 2018, I see 2 different parts regarding cash cost. The first part of the year, let's say, up to June, will be -- our cash cost will be in line with what we have reported plus minus any variances on by-product prices or major cost elements, such as fuel. But let's say $1.50, which is what we had in the fourth quarter, may be our best estimate for the first half of this year. After that, we will initiate the production of our Toquepala concentrator. The concentrator will increase at very low-cost production our pipeline of copper. And that should have an effect on our total cash cost before by-product rate. At this point, we're expecting, as I'd say, a drop of about $0.10 in cash cost for 2019 that will come from, basically -- I'm sorry, by 2020, a drop in $0.10. And that will come most likely from the investments that we're doing. Among them, the Toquepala expansion.

The next question comes from Alex Hacking from Citi.

The first question. Have you increased this -- it seems like you've increased the scope at El Arco and Los Chancas. I think when you introduced Los Chancas -- yes, when you introduced those projects last year, they were combined 300,000 tons. Now it seems a little bit over 400,000 tons. I guess what's changed over the last 12 months to increase the scope there?

Sure, Alex. And thank you for your question. The scope in the case of Los Chancas has improved. And that allow us to give a better forecast for that project specifically.

And then on El Arco. Can you maybe discuss the community relations there and potential environmental opposition to the project? Like how difficult do you think that the permitting process will be there?

Well, we are at the exploration stage right now of the project. We have been doing some work regarding land acquisition and some other investments that we have to do in order to have everything ready for the project to develop. At this point, we have not matched a report regarding any social unrest related to the project. And we expect to have a strong community work that should make us explain in local communities that the project, it will be very positive for their development as communities as well as for Mexico as a country and the state obviously of Baja California.

And Raul, let me just add -- pardon me, Alex. I mean, in -- both of these projects have, as opposed to community rejections, so to speak, to the projects, both El Arco and Chancas, we believe, are very optimistic. And they're willing and want these projects to be developed, both of them. In El Arco, the challenge has been mainly electricity. I.e., infrastructure. And in Los Chancas, we're in -- the next stage is moving forward to Environmental Impact Assessment. But there, I mean, given what we've seen in other projects, including Moquegua, which was part of the conference call today, where there is opposition to the project in Cajamarca, these 2 projects are totally the opposite. I mean, the government and the populations there want the projects to happen. I mean, just the way I am -- of course, they're long-term projects. We have them in the pipeline in many years further down the road. As Raul just pointed out, we are still in predevelopment stages. But just, I mean, since you asked, that -- that's pretty much the way we look at it.

Okay. Thanks for the clarification, Daniel and Raul. Sorry.

Let me add to what Daniel said that Los Chancas is located in the Apurímac region, which where is also Las Bambas. Poverty has decreased to half of what it was before Las Bambas. And the locals are certainly appreciating the impact that this kind of projects have on their living standards. So I think in that regard, our view is very positive.

Okay. That's very clear and extremely helpful. And then just one more on Tia Maria, if I may. I guess what -- is there anything specific that the government is waiting for or looking for in order to grant the construction license? I mean, the environmental license in -- comes with a social license as best I understand how this works now in Peru. So I guess what's causing the delay on getting the construction license? And what's going to change or what needs to happen over the next 6 months that you believe that you will get that construction license?

At this point, Alex, I'd rather not comment on the details. We believe that we have been doing very good project, that the project is now endorsed by most of the people at the Islay province, which is the one that combines all the areas of influence of the project. And we're working with the government to get the final permit to -- for construction. So let me maintain our answer where I just mentioned.

The next question comes from Alfonso Salazar from Scotiabank.

I have a follow-up on the El Arco and Los Chancas projects. The first question I have is, if these 2 projects have already been approved by the board? The second is, if you have some CapEx estimate for the 2 projects, for each of the 2 projects, that you can share with us. And the third is, regarding the size, as Alex was saying, it seems that the projects -- the 2 projects are now higher in -- larger in size. I was checking the 10-K in El Arco, you mentioned the production of 190,000 tons in your last 10-K. And if it's correct, you mentioned now 245,000 tons of copper; and for Los Chancas, 180,000 tons. But I don't see what was the previous guidance for these projects. If you can share that with us as well, that would be useful.

In the case of Los Chancas, it was about 110,000 tons of copper production. And we -- as part of the new tariffs, which are related to the feasibility study of Los Chancas, we increased that figure to what I'd just report. In the case of El Arco, we will have -- this change that we had in these 2 -- in this project between our 10-K for last year -- for 2016 and the current view. On CapEx, which is I believe your concern, the total of CapEx on both.

Yes. Correct.

For El Arco, our current CapEx is $2.9 billion in total. And for Los Chancas, it's also $2.9 billion. In the case of Los Chancas, it has very strong by-products, particularly molybdenum, which is very interesting for us. And that allowed the project to have very good cash costs when you look at the details.

Okay. Has it been approved by the board, by the way?

Yes. It has been approved to have it in our outlook for the long term. As we move on through 2008 (sic) [2018], we expect these numbers to be much more firmer. Kind of -- going forward, a confirmation going forward for the project. But at this point, we are -- it's part of our outlook and that has been approved by the board.

And that's typically how we work, sorry, just to add on that. I mean, we conceptually approve a project and then we approve every year at the board level the budget and the, let's say, business plan or to-do and steps for that particular project. And then we review it next year and next year and like that and try to prioritize and, I mean, make the best allocation of our use of capital for that particular year. And that's how we kind of build the pipeline. I mean, just to be a little bit more clear on how our approvals work.

We have a question from John Tumazos from John Tumazos Investment.

Could you give us an update in El Pilar, the heap leach project?

Yes. This is -- this project at El Pilar, it's a project that has an estimated copper capacity -- copper production capacity of 35,000 tons. We have been looking into the details of the investment. Basically, we have improved our view on the reserve base of the project. And obviously, that may also bring in some adjustments in the capital budget for this project. At this point, we're expecting to spend in El Pilar $256 million, and it should be up and running by 2021.

Is this included in your forecast?

Yes.

So just FYI, I mean, this -- the confusion between the projects is, John, because of one is El Pilar and the other one is Pilares. They are both in Sonora. But the El Pilares is the project that we acquired from a Canadian company, which was in, let's say, Chapter 7 or the equivalent in Canada. I mean, it has a 32% rate of return and it has great expectations. It's just that, that particular one we're concluding the exploration and the engineering. But the -- yes. I mean, it's a great project.

The next question comes from Jean Bruny from BBA (sic) [BBVA].

I just -- I -- Raul and Daniel, I just have a couple of questions. Maybe can you share with us maybe the EBITDA guidance for 2018? The second one will be on labor negotiation, if we can expect something in -- for Southern Copper this year in Peru or in Mexico. And the last one will be on the strategy, the long-term strategy maybe with tax reform in the U.S., the tax impact you had in the fourth quarter. It -- can it imply some changes in term of strategy in the long term?

Well, our view on EBITDA using -- depends on -- obviously, it's contingent to the copper price that we use. But let's say that we're conservative and we assume $3 per pound. Today, as you know, it's about $3.20. Our guidance will be -- for an EBITDA of about $3.9 billion at $3 per pound, we have -- we consider a price closer to the current one, which is $3.25, our guidance will increase to $4.4 billion of EBITDA. So we are very positive on copper prices for -- through 2018. So my personal view is that we may see our EBITDA being closer to $4.4 billion than to $3.9 billion. And your second question was?

On the labor negotiation. We saw a strike in Peru in November, December of about 20 days. Just to know if you're currently renegotiating some contracts either in Mexico or in Peru.

For Peru, we have the -- we will have labor negotiations by the third and fourth quarter of this year. We believe that they will be maintained and taken on a constructive basis with no strikes, actually, that's our view. But let me say that last year, we had some labor stoppages in Peru. All of them illegal. They were declared illegal by the authorities. But we managed with our production plan, with our emergency plan for production. When we have this kind of situations, we manage to maintain our sales -- actually, to increase them and to break production record at the Ilo facilities in Peru. On labor negotiations in Mexico, we have each year some talks to either look at the perks or the salaries, and we see no -- we don't expect any difficulties in Mexico, both in Mexico and Peru. But in Peru, we will have some talks.

And the last question comes from Mr. Carlos De Alba from Morgan Stanley.

Raul, do you have any more specific guidance on how you see the evolution of the cash cost per year maybe before and after by-products? That would be helpful if you have it.

Yes. We're expecting it to decrease by about $0.10 by 2019 on before -- I mean, this is the cash cost before credits, okay? So we are about $1.50, we should be at about $1.40 by -- in average by 2019. That will remain up to 2021 when we have the kicking of the Tia Maria project with 120,000 tons of new production, very low-cost new production. With that, we're expecting a further decrease in cash cost of about $0.05. Well, having the same by-products or better by-products production in the case of zinc will improve our credits in the next few years. For this year, we're expecting credits to be in the range that we reported, about $0.65 per pound. And for 2019, slightly lower than that. And then our credits will pick up when we have the new zinc concentrator in operation that will bring in much more zinc and silver production. In molybdenum, we will improve our production due to the Toquepala second concentrator new production. And then further down in time, when we have the initiation of production of the other projects with this copper, this coal, help certainly our cash costs. So we're expecting it to be now with a decrease in cash costs of about $0.10 between 2018 and '19, and then a further -- an additional decrease in the year 2021, '22.

All right. Excellent. And then just my final question. If there is any further delays in Tia Maria and/or other CapEx projects, would the company think about increasing the payout and distribute more dividends to shareholders, given that the balance sheet is already quite strong?

Sure. Yes, Carlos. I mean, I -- as I think there is -- I mean, the way I view now, and we've talked about it many times, the way we look at dividends on the board is analyze what's the future cash flow cash generations that would be used on that. And as you remember, back -- many -- in 2011, the peak of the market, so to speak, we paid a 100% payout ratio in dividends. So yes, I mean, we believe that -- I mean, in a good balance in terms of CapEx and development projects and dividends paid, right? And at some point, we did buybacks, which you could equate to dividends. But yes, that's the way we look at it every single board, yes. And we, as you know, try to maintain a healthy track record and if things are paying the prices correct, does the profit [wins], kind of increasing always kind of like following the cycle of the commodity.

Right. Okay. And the $150 million in 2012 was because of the lawsuit that Southern Copper won against Grupo Mexico. But would you consider going back to around 90%, which is what you had in 2010 or 2011? Or that will be a real stretch?

Sure. I was referring more -- and that was a one-off. That was in litigation. I was referring more on the 2011, 2010, which as far as I remember, it was almost 100% payout.

Right. Yes.

You said 90%. Probably, you have the data in front of you. But, yes. I mean -- I guess, yes, absolutely. I mean, that's the way we look at dividends and our cash flow generation, yes.

At this moment, we show no further questions. I would like to turn the call back over to you for any final remarks.

Thank you very much, Ilda. Well, with this, we conclude our conference call for Southern Copper's fourth quarter and full year 2017 results. We certainly appreciate your participation and hope to have you back with us when we report the first quarter of 2018. Thank you very much and have a very good day.

Thank you. Ladies and gentlemen, this concludes today's conference.

Bye. Thank you.

Bye-bye.

Thank you. This concludes today's conference call. We thank you for participating. You may now disconnect.