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Southern Copper (NYSE:SCCO)

Q1 2013 Earnings Call

April 30, 2013 11:00 am ET

Executives

Raúl Jacob Ruisánchez - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Daniel Muñiz Quintanilla - Director

Analysts

André Pinheiro - Itaú Corretora de Valores S.A., Research Division

Felipe Hirai - BofA Merrill Lynch, Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Santiago Perez Perez Teuffer - Crédit Suisse AG, Research Division

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Daniel Rohr - Morningstar Inc., Research Division

Operator

Welcome to the Southern Copper Corporation First Quarter 2013 Earnings Results Conference Call. My name is Lorraine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I would now like to turn the call over to Mr. Raúl Jacob. Mr. Jacob, you may begin.

Raúl Jacob Ruisánchez

Thank you very much, Lorraine. And good morning, everyone, and welcome to Southern Copper's First quarter 2013 Earnings Conference Call. In today's conference call, we will begin with an update of our view on the metal markets, and we will then talk about Southern Copper's key results related to production, sales, operating costs, financial results, expansion projects and capital spending program. After that, we will open the session for questions.

Regarding metal markets and prices, during the first quarter of this year, metal markets continued to be driven by some negative macroeconomic events that affected consumer expectations. The most important ones for basic metals was the slowdown of China's economy and the continuing low consumption in Europe. Regarding the copper market, even though we believe this metal's fundamentals are sound, its price has been affected by concerns about Chinese growth, LME stock increases and macroeconomic worries related to the U.S. fiscal deficit and Europe's debt crisis. Of these factors, the increments in the London Metal Exchange and other warehouses' inventories are creating some concerns regarding the copper market balance. We believe this is part of the commodity cycle and a temporary event.

We expect, in the following quarters, a recovery of demand, particularly from Asia, which currently represents approximately 60% of the world demand. Regarding China, its GDP is growing at almost 8% per year. Generally speaking, due to its urbanization process, China's GDP growth produces a corporate demand growth higher than its GDP growth rate. We expect this trend to show up again in the next few quarters, as China ends its de-stocking phase.

In the United States, demand appears to be stronger as consumer confidence has increased and the economy is recovering. This has been reinforced by positive news regarding new housing starts, the recovery of the car industry and decreases in the unemployment rate. These good news have somehow offset macroeconomic concerns related to the U.S. fiscal balance. Even though the U.S. represents today only about 8% of the world demand for refined copper, the recovery of its economy is key to corporate demand since the U.S. is the most important secondary copper consumer, affecting copper demand in other economies.

On the supply side, we think that several structural factors, such as labor stoppages, technical problems and other issues, are affecting and will affect copper supply, reducing the net impact of production coming from the new projects and expansions. As a consequence of this, copper inventory should move to a more balanced market or even to one with some moderate undersupply. As an example, the recent landslide in the Bingham Canyon has shut down, for most of 2013, an operation with an annual production capacity of approximately 200,000 tons. Southern Copper believes it is positioned to take advantage of the positive future outlook of the copper market through our aggressive investment program of organic growth, aiming to increase production from current capacity of 650,000 tons to 1.2 million tons by 2017.

Regarding our copper production. Copper mine production decreased by 3,421 tons or 2.2% in the first quarter of this year compared to the same period of 2012. That was due to a lower ore grade and recovery at our Toquepala and -- mine and lower ore grade at our Buenavista mine. These lower ore grades were partially offset by higher ore grades and recoveries at our Cuajone and La Caridad mines. For 2013, we are maintaining our current guidance to produce 650,000 tons of copper. Of those, 630,000 tons will come from our mines, while 19,500 from third party's copper concentrates.

Molybdenum production increased by 4.1% in the first quarter of 2013 when compared to the first quarter of 2012 due to higher production at La Caridad. That operation increased 35% its Molybdenum production in this quarter, as a result of higher grade and recovery that was partially offset by lower production at the Peruvian mines, particularly Toquepala, mainly due to lower recoveries.

Regarding silver production, it decreased by 7.9% in the first quarter, as a result of lower production at Toquepala, in IMMSA and Cuajone. These 3 operating units were partially offset by an increase in production from Buenavista. And regarding refiner -- excuse me, regarding refined silver, it increased by 15.2% in the first quarter to 4.2 million ounces from the 3.6 million ounces that we produced in the first quarter of 2012. Zinc production increased by 3.8% in the first quarter from the first quarter of last year, mainly as a result of higher grades and recoveries, as well as full production recovery at the Santa Eulalia mine after the cooling problems of prior years were completely resolved.

Financial results. For the first quarter of 2013, sales were $1.6 billion, $183 million lower than sales of the first quarter of last year. Copper sales decreased by 4.3% in volume and by 4.6% in price. Regarding byproducts, we have better volume sales of silver, that increased by 9.5%, and molybdenum that increased by 5.8%. These partially compensated lower prices for both metals. Regarding zinc, volume decreased by 4.9% and price was about the same.

Focusing on our operating costs. Our total operating cost and expenses increased by 2.4% or $20.1 million when compared to the first quarter of 2012. The main cost increments were in copper purchases, labor, diesel and fuel. These cost increases were partially offset by lower workers' participation, mining royalties and inventory consumption. Variances in other materials, as well as depreciation and exploration charges, explain the remaining difference. The company EBITDA for the first quarter of 2013 was $861.4 million, a margin of 53.1%. This figure compares with $1,057,000,000 in the first quarter of 2012, a margin of 58.5%.

Operating cash cost per pound of copper before byproduct credits was $1.99 per pound in the first quarter of 2013 compared with $1.85 per pound in the fourth quarter of 2012. The $0.12 per pound increase in operating cash cost is a result of the already mentioned cost increments. Southern Copper's operating cash cost, including the benefit of byproduct credits, was $1.914 (sic) [$0.914] per pound in the first quarter of this year. This cash cost was 1.2% higher than the $0.903 cash cost that we had in the fourth quarter of 2012.

Regarding byproducts. We had a total credit of $346 million or $1.08 per pound in the first quarter of 2013. These figures compare with the credit of $342 million or $0.97 per pound in the fourth quarter of 2012. The higher byproduct credits come from molybdenum, 5% increase; silver, 28% increase; and gold, 22% increase, which compensates for lesser values for zinc that decreased 9% and other byproducts. With the exception of gold and silver, all byproduct prices have increased between this quarter and the fourth quarter of 2012. Net income attributable to Southern Copper shareholders in the first quarter was $495.4 million, 31% of sales, or diluted earnings per share of $0.59 per share.

Focusing on our expansion and capital projects. Capital expenditures were $316.8 million for the first quarter of 2013, 78.6% higher than the first quarter of 2012, and this figure represented 63.9% of net income for the first quarter of this year. As reported before, our current plan is aimed to increase copper production capacity by approximately 84% from 650,000 (sic) [640,000] tons to 1,000 -- I'm sorry, 1,175,000 tons by 2017.

The current status of our major capital expenditure projects is as follows. On the Buenavista projects, we continue the development of this -- of our $2.8 billion investment program at this unit, which will allow us to increase its copper production capacity by approximately 170% from 180,000 tons, which is the current capacity, to 488,000 tons of copper by 2015.

The new concentrator with molybdenum circuit project has an estimated annual production capacity of 188,000 tons of copper and a molybdenum plant with 1,850 ton capacity. The project will also produce annually 2.3 million ounces of silver and 21,000 ounces of gold. The total capital budget of the project is $1,384,000,000. And through March of this year, it has a progress of 42.7%, with a total investment of $214.8 million. The project is expected to come online in the first half of 2015.

Regarding mine equipment, as part of this investment, through March 31 of this year, we have received 2 of 8 shovels, 40 of 56 trucks and 7 of 8 drills that were previously acquired. All of these units are currently in operation. Through March of this year, we have spent $363.1 million (sic) [$387.6 million] of the total capital budget of $504.8 million for mine equipment.

The SXEW III project is moving forward. Overall progress at the first quarter is 48.5%. The total capital budget of the project is $444 million, of which we have spent $170.6 million through March 31 of this year. This project has an annual production capacity of 120,000 tons of refined copper and is expected to start operating in the first half of 2014.

The final testing of the Quebalix III project concluded in February, and the project has started operation in March of this year. The total capital budget of the project was $75.6 million. This project will allow crushing up to 15 million tons of mineral per year, including the SXEW copper production, by increasing recovery and reducing hauling cost and the time to extract copper from mineral.

The construction of the new molybdenum plant for the current Buenavista concentrator is complete. The final testing of the plant started in April, and we expect to initiate production in May of this year. The plant had a total cost of $38 million, and it is expected to have an average annual production of 2,000 tons of molybdenum.

Going to another important project in Mexico, the Angangueo project. We are seeing that this project is moving forward as scheduled to develop this underground polymetallic deposit in Michoacan, which includes a concentrator with a milling capacity of 2,000 tons per day. The production plan indicates that Angangueo will have an average annual metal content production of 10,400 tons of copper and 7,000 tons of zinc in the first 7 years of production. Through March of this year, we have invested $10.6 million (sic) [$10.8 million] in the project, and this -- it is scheduled to begin production in the first half of 2015.

We're also investing $71.6 million in social and environmental projects in our neighboring communities of Sonora and San Luis Potosi in Mexico. We believe these projects will improve the living conditions of these communities and also improve our relationship with our neighbors.

Focusing on the projects in Peru and particularly in the Toquepala projects. Through March of this year, we have spent $234.8 million on Toquepala projects. We have continued with the construction of the new in-pit crusher and conveyor belt system to replace current rail haulage. This will reduce operating costs, allowing for future savings. Regarding our concentrator expansion project. We continue working with local communities on the environmental aspect of the project.

On the Cuajone projects, through March of 2013, we have spent 108 -- $138.9 million on 2 projects to increase productivity through technological improvements in this unit: the Variable Cut-Off Ore Grade project and the high-pressure grinding rolls project or HPGR project. We expect that both of them will be at full capacity by the second half of 2013.

For 2013, we maintain our goal to spending $1.8 billion for capital expenditures at our operations. Of those, approximately $1.4 billion will be in our Mexican operations and $400 million in the Peruvian projects.

Regarding dividends, as you know, it is the company policy to review, at each board meeting, the capital investment plan, cash resources and expected future cash flow generation from operations in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on April 18, 2013, the Board of Directors authorized a cash dividend of $0.20 per share of common stock payable on May 21 of this year to shareholders of record at the close of business on May 8, 2013.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from André Pinheiro from Itaú BBA.

André Pinheiro - Itaú Corretora de Valores S.A., Research Division

I have 2 quick questions, the first on cash cost. We saw a steep increase in the first quarter. I'd like to know how should we expect cash cost to evolve going forward in the following quarters. And my second question actually would be, if you can tell us how we should expect dividend payout ratio to evolve going forward, given your intense CapEx plan.

Raúl Jacob Ruisánchez

Okay, let me focus on the first one, regarding cash cost. The $0.12 increase is something that we were expecting when we did the plan. At the time of our first conference call this year, we indicated that we were expecting this is due to cost inflation, but at the same time, we're expecting to have a bigger contribution of byproduct production, particularly from molybdenum and zinc, that will help us in controlling our cash costs. Our current goal is to maintain cash cost after byproduct credits at around $0.90, $0.91. For the next quarters, when we will have the benefit of the new molybdenum plant in Buenavista, that is completed in the investment part of the plant and we're about to start production of it, we are expecting better contribution from molybdenum from volume. Regarding prices of byproducts, obviously, we have to wait to see where the markets are. That's our current expectation. On the second question, it's basically up to the board. The company is focusing in developing the projects that we are moving forward with at this point. And as I say, when I comment on this, it's basically a review on the cash position of the company, how the board perceives will be the market in the next few quarters and what are the kind of payments that we need to do in the next few quarters. On that basis, the board discusses and approves a dividend, if that's the case.

Operator

And our next question comes from Felipe Hirai from Merrill Lynch.

Felipe Hirai - BofA Merrill Lynch, Research Division

So my first question is regarding CapEx. We have seen CapEx lagging the $1.8 billion guidance for the year in the first quarter. What do you expect this to -- what do you expect the trend to be in the next quarter? Do you expect this to revamp over the remaining of the year? And also, my second question also regarding CapEx. When we look at CapEx in Peru versus Mexico, we've seen CapEx much lower in the Peruvian projects. Do you expect this to normalize going forward? Is there any trend that we could -- we can see there, maybe CapEx a bit lower than you were expecting?

Raúl Jacob Ruisánchez

Thank you very much for your question, Felipe. Regarding the total CapEx, we are maintaining our guidance. And the reason for that, even though, if you, say, multiply it by 4, our expenses for the last -- for the first quarter, that would make the $1.8 billion. We're expecting a more aggressive capital spending in the next few quarters. The reason for that is that, in general -- generally speaking, once the budgets are approved, our personnel start operating on the approval that they have received, and usually, it has picked up in the trend in the quarters 2, 3 and 4 of the year. On the Peruvian capital expenditures, basically, we are developing the projects that I mentioned in Toquepala and Cuajone. Regarding the expansion projects, we have -- we're working with the local communities in Toquepala. We expect to have some good results to report in the next few quarters, but we're not yet there. And about Tia Maria, we're currently working with our -- with the team that is preparing the environmental impact study. Until we present this study, we can't spend any money on the project, so right now, we're basically working on the Environmental Impact Assessment for Tia Maria. So as we move on into the year and we get the approval of these projects with the concurrence of the local communities, we will start spending money. But we need to have all the permits and the concurrence of the local communities in order to go ahead with the capital expenditures on the expansion of Toquepala and the Tia Maria project.

Operator

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

John Charles Tumazos - John Tumazos Very Independent Research, LLC

John Tumazos, Very Independent Research. I was very interested in your favorable view of the copper market. Obviously, financial markets have been a little nervous and undervalued mining equities in the last few months. Should we interpret from your statement that there's a 100% likelihood you're going to make acquisitions of undervalued copper properties? And how much money do you think is an appropriate amount of money to set aside for such purposes: $500 million, $1 billion, $2 billion, $3 billion?

Raúl Jacob Ruisánchez

Okay, John, we are not considering any acquisitions at this point. The company has a positive view -- a positive long-term view on the copper market. And obviously, if there is a good opportunity in the market, we will take a look to it, but that doesn't mean that we're currently having something in that matter or any specific intention. If you see the size of our reserve base, you will understand that we're mostly focused on organic growth, to develop at full capacity the current reserve that the company has. We believe that, that will provide the significant value to our shareholders.

Operator

And our next question comes from Richard Kraut [ph] from JP Morgan.

Unknown Analyst

My question is with regards to Buenavista. Since it's going to become such a critical part of your operations, about 40% of your copper production by 2015, do you see the lower ore grades that you're getting in this quarter are going to be an issue going forward?

Raúl Jacob Ruisánchez

No. Buenavista will have a more stable ore grade and even slightly higher ore grade in the next few years. What we're seeing now it's what I call a bump in the road, nothing to worry about the ore grade in the long term. It's going to be relatively stable and slightly higher than what we're seeing now for the next, let's say, in 12 months from now or so.

Operator

And our next question comes from Santiago Perez from Crédit Suisse.

Santiago Perez Perez Teuffer - Crédit Suisse AG, Research Division

My question is regarding cost. Can you give us some color as to what effect will SCC get from the savings in energy relative to the combined cycle power plant in Mexico?

Raúl Jacob Ruisánchez

Yes, thank you very much for your question, Santiago. We're expecting to have savings in the range of $25 million from the new power plants that will feed energy to our Mexican facilities. One of them will start operations in June. These are investments made by Grupo Mexico, and we will be consumers of power in this case. And the other one is for 2014. Both, together, will help in reducing our current energy cost.

Santiago Perez Perez Teuffer - Crédit Suisse AG, Research Division

Okay. So should we assume $25 million per plant or in the aggregate amount of both?

Daniel Muñiz Quintanilla

That's per plant. That's per plant.

Operator

And our next question comes from Marcelo Aguiar from Goldman Sachs.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Some of my questions was answered already. But when I look to your CapEx figures, I mean for Angangueo, and maybe if you can discuss a little bit Toquepala. How much, I mean, are you already -- I mean, can we see further CapEx inflation on Angangueo? Or I mean, have you already, like, precontract majority of the services and machines for the project? And on the Toquepala side, if you can give you -- us a more up-to-date view on the total CapEx for this project.

Raúl Jacob Ruisánchez

Yes. In the case of Angangueo, we were -- we did an adjustment in the budget when we increased the size of the concentrator. That was in the third quarter of last year. Currently, we don't have any plans on that matter regarding Angangueo, and we expect to maintain its current budget. Obviously, there is some pressure on capital goods cost that will affect the project as well because we haven't contract 100% of the CapEx for the project. Regarding the Toquepala expansion, I think that, in this case, we are working currently with the authorities and the communities in order to get the approval of the project. Our current estimate of cost, it's about $1.2 billion for the project. However, whenever we have the final go to the project, we will prepare a detailed budget that would be approved by our board, and that will be the one that we will speak to. At this point, what we have is an estimation of $1.2 billion of total cost of the project. With this, the project still has very good economics for the company.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Okay. My last question is on the Tia Maria environmental assessment. Can you refresh our -- I mean, what is your main barrier on advancing this project? And how the -- why, I mean, the environmental assessment is taking so long, I mean, to be finalized?

Raúl Jacob Ruisánchez

Let me keep that question at this point because we are currently working with the local communities and the authorities in order to move on with the project. I prefer not to give some details on this.

Operator

And our next question comes from Daniel Rohr from Morningstar.

Daniel Rohr - Morningstar Inc., Research Division

How ought we think about potential economies of scale at Buenavista with the various expansion projects? I guess, how much do you expect the unit costs before credits to decline as we see output increase, considerably holding constant the impact of improving ore grades?

Raúl Jacob Ruisánchez

Thank you for your question, Daniel. I think that this is a project where operating cost is very, very competitive. Generally speaking, we think that since ore grade will be very stable in the next few years, we don't believe that we will have a cost increase, but the opposite economies of scale in this specific case. That should benefit our cash cost long term. At this point, we are moving forward with the investments, and we expect to wait and see the final cost. But we believe that it's going to be very positive for the company and with a positive impact on our cash cost long-term.

Daniel Rohr - Morningstar Inc., Research Division

No sense of magnitude of prospective unit cost improvements that you'd like to share today?

Raúl Jacob Ruisánchez

The total cost of the company should decrease by about $0.05 per pound, considering the current level. But that may change significantly regarding if there are changes in prices and operating materials as well.

Operator

[Operator Instructions] And at this time, I am showing no further questions.

Raúl Jacob Ruisánchez

Thank you very much, Lorraine. Well, we conclude our conference call for Southern Copper's first quarter's results. We certainly appreciate your participation and expect to have you back with us when we report the second quarter results in July. Thank you very much, and have a nice day.

Operator

And thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for your participation. You may now disconnect.

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