Southern Copper's (SCCO) CEO Oscar Rocha on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Southern Copper (SCCO)

Southern Copper (NYSE:SCCO)

Q2 2014 Earnings Call

July 30, 2014 12:00 pm ET

Executives

Victor Pedraglio -

Oscar Gonzalez Rocha - Chief Executive Officer, President, Executive Director, Member of Corporate Governance & Disclosure Committee and Member of Compensation Committee

Analysts

Carlos de Alba - Morgan Stanley, Research Division

Thiago K. Lofiego - BofA Merrill Lynch, Research Division

Santiago Perez Teuffer - Crédit Suisse AG, Research Division

Leonardo Correa - Banco BTG Pactual S.A., Research Division

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Wilfredo Ortiz - Deutsche Bank AG, Research Division

Alexander Hacking - Citigroup Inc, Research Division

Aleksandra Bukacheva - BMO Capital Markets Canada

Alfonso Salazar - Scotiabank Global Banking and Markets, Research Division

Rodrigo Carreon Garcilazo - GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

Operator

Good morning, and welcome to the Southern Copper Corporation's Second Quarter 2014 Results Conference Call. With us this morning, we have Southern Copper Corp., Mr. Victor Pedraglio, Financial Planning Manager, who will discuss the result of the company for the second quarter of 2014, 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 Corp. Undertakes no obligation to publicly update any forward-looking statements 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. Victor Pedraglio, please go ahead.

Victor Pedraglio

Thank you very much, Bequitha [ph], and good morning, everyone, and welcome to Southern Copper Corporations's Second Quarter 2014 Earnings Conference Call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO; and Mr. Daniel Muñiz, Grupo Mexico's CFO.

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

Regarding the copper market, during the second quarter of 2014, we have seen relative softness in copper prices, which have decreased by about 4%, when compared to the first quarter of the year. Simultaneously, however, we have seen -- we have been seeing the copper markets future fundamentals improving positively.

As of July 23, 2014, inventories at the 3 major warehouses, that is, LME, COMEX -- Shanghai, have decreased by 221,000 tons or 46% from the position at the beginning of 2014.

As we have indicated in the past, we believe copper demand is improving -- it's improving due in large part to the synchronized economic recovery of the U.S., Europe and Japan, which together, represents about 54% of the world GDP and consume directly above 31% of the world's refined copper production.

Regarding the world's main copper consumer, China, we believe that recent Chinese strategic reserve purchases, as well as an expected copper demand rebound of this country for the second half of this year, will support global copper demand growth in 2014.

On the supply side, we think that several structural factors such as scrap scarcity, delays in project startup, technical problems, labor unrest and other difficulties will continue to affect supply for new projects and existing operations, as well as scrap production. As a consequence of these factors, we think there is now a small probability of a surplus market for 2014.

Regarding our copper production. Copper represented 75% of our sales in second quarter of 2014. Our mine production increased by 17,872 tons or 12.1% in the second quarter compared with the second quarter of 2013, due to higher production at all our open pit operations.

Regarding molybdenum, it represented 12% of our sales in the second quarter of 2014. Molybdenum production increased by 1,329 tons or 30% in the second quarter of 2014 from the second quarter of 2013, mainly as a result of the new Buenavista molybdenum plant, which increased -- which adds 807 tons and better production at all our operations, particularly Toquepala, plus 29% and Cuajone, plus 21%.

Regarding silver, this represented 4.8% of our sales in the second quarter of 2014. Comparing the second quarter 2014 silver mine production with the same period of the previous year, there is a decrease of 5% as a result of lower production at IMMSA. It's been 30% less and La Caridad, 2% less which were partially offset by higher production at Buenavista, plus 39%, Cuajone, plus 33% and Toquepala, plus 13%.

With regards to zinc production, it represented 3.5% of our sales in the second quarter of 2014. Production decreased 39% in the second quarter of 2014 from the second quarter of 2013, mainly as a result of local production, at Charcas and Santa Eulalia mines.

Now we'll go to financial results. For the second quarter of 2014, sales were $1.49 billion, that is $77.2 million higher than sales of the second quarter of 2013, 5.5% increase. Copper sales volume increased by 6.9% and value increased by 2.2% in a scenario of lower prices. Prices went down by 4.9%.

Regarding by-products, we have higher sales of molybdenum, plus 94.6%, due to an increase in volume and price. And higher sales of zinc, plus 2.8%, due to higher prices which were compensated for a reduction on volume -- which compensated for a reduction of volume. In the case of silver, sales decreased by 27.7%.

Operating cost. Our total operating cost and expenses increased by $46.4 million or 5.5% when compared to the second quarter of 2013. The main cost increments were in spare parts, tires, reagents and explosives, $31.5 million. Depreciation, $22.6 million; diesel and fuel, $21.3 million; exploration, $10.5 million; sales expenses, $8.4 million; water, $6.5 million; operations, contractors, $6 million; translation difference, $2.6 million; mining royalties, energy and other factors. These cost increments were offset by lower inventory consumption that accounted for $24.3 million; purchased copper, $24.1 million; leachable material, $8.6 million; labor cost, workers' participation and selling, general and administrative.

EBITDA for the second quarter of 2014 was $707.6 million. That's a 47.6% margin compared with $776.8 million for the 8% margin for the second quarter of 2013.

Operating cash cost per pound of copper. Before by-product credits was $1.98 per pound in the second quarter of 2014, compared with $1.87 per pound in the first quarter of this year, an $0.11 increase. This 5.9% increase in operating cash cost is a result of the already mentioned cost increments. So the copper's operating cash costs, including the benefit of by-product credit was $0.92 per pound in the second quarter of 2014.

Regarding by-products. We have total credit of $374 million or $1.06 per pound in the second quarter of 2014. This figure compares with a credit of $297 million or $0.85 per pound in the first quarter of 2014. Total credits have increased for molybdenum, 50.7%; gold, 41%; silver, 24.9%; and sulfuric acid, 3.9%. Having decreased only for lead, minus 3.5%; and zinc, minus 1.9%.

Net income attributable to SCC shareholders in the second quarter of 2014 was $337.3 million, that is 22.7% of sales, or diluted earnings per share of $0.40.

Regarding expansion of the capital projects. Capital expenditures were $375.6 million for the second quarter of the year, that is 16% higher than the first quarter and represented 111.4% of net income. We continue moving forward with our capital expansion program, which could increase copper production capacity by approximately 87% from 630,000 tons last year to 1,175,000 tons by 2015.

Regarding Mexican projects. In Buenavista, we continue developing our $3.4 billion investment program at this unit, which is expected to increase its copper production capacity by approximately 175%, as well as the molybdenum production by 4,600 tons per year. The new copper molybdenum concentrator has another production capacity of 188,000 tons of copper and 2,600 tons of molybdenum. The project will additionally produce 2.3 million ounces of silver and 21,000 ounces of gold per year. The project has an 80.7% progress with an investment of $772.2 million, out of the approved capital budget of $1,383.6 million.

And it's expected to be completed in the first half of 2015. While major equipment is on-site and over 70% has been installed.

To date, we have received: 61, 400-tons capacity trucks, 7 shovels and 8 drills required for the Buenavista mining expansion; with an investment of $510.8 million.

The first copper cathodes of our -- at our SXEW 3 plant was produced in June. The first of 3 Solvent Extraction trains started operations, as well as 50% of our Electro Winning Plant. Full capacity is expected to be reached by the end of the third quarter of 2014, with a daily production of 330 tons of copper cathodes, that is 120,000 tons per year. The capital budget for this project is $444 million, of which 99% has been invested.

The Quebalix IV, our crushing, conveying and spreading system for leachable ore will increase production by improving SXEW copper recovery, reducing processing time and hauling costs. It has a crushing and conveying capacity of 80 million tons per year and is expected to be completed in the fourth quarter of 2015. The project has a 37.6% progress, with an investment of $70.2 million out of the approved capital budget of $340 million. After a bidding process, the Mobile Stacking Conveyor and the Overland Conveyor contracts are under execution.

The remaining projects to complete the $3.4 billion budgeted program, include investment in infrastructure, such as power lines and substations, water supply, tailings dam, mining equipment shops, internal roads among other.

Regarding Peruvian projects. In Toquepala, through June 30, 2014, we have spent a total of $309.8 million on Toquepala projects. On July 1, 2014, we received the comments from governmental authorities and other stakeholders related to the Environmental Impact Assessment study of the Toquepala concentrator expansion. We expect to answer these questions during the third quarter of this year and receive the EIA approval by year end and continue developing this project. The Toquepala concentrator expansion will increase annual production capacity by 100,000 tons of copper and 3,100 tons of molybdenum.

Regarding Cuajone projects. Through June 30, 2014, we have spent $38.3 million of a budget of $45 million on the HPGR project. That's a High Pressure Grinding Rolls Project, which will produce a more finely crushed material. This project continues in the ramping up stage and we expect to reach full capacity during the third quarter of 2014. The project will generate cost savings, improve copper recovery and reduce power consumption in the crushing process.

Through June 2014, the implementation of the HPGR project and the variable cut-off ore grade project, implemented in 2013, has produced incremental production of approximately 13,000 tons of copper. When fully operational, we expect an annual incremental in copper production of 22,000 tons.

The project to improve slope stability at the south area of the Cuajone mine, will remove approximately 148 million tons of waste material over a 3-year period. This project will improve mine design without reducing current production levels. The mine equipment acquired includes: 1 shovel, 5 400-tons capacity trucks, 1 drilled and auxiliary equipment which will be reallocated to our mine operations once the project is finished.

Besides preparing the mine for the future, this investment will avoid a reduction in average ore grade. At June 30, 2014, we have spent $62 million of a total budget of $65.1 million.

Regarding the Tia Maria project, we have responded to the comments raised by the governmental authorities and stakeholders and are waiting for the final approval of our Environmental Impact Assessment study during the third quarter of this year. Once received, we will be able to move forward with this important project.

This project will represent an investment of approximately $1.4 billion and will produce 120,000 tons of copper cathodes using state-of-the-art technology and would be compliant with the highest international environmental and sustainable development standards. The project is currently expected to generate 3,500 jobs during the construction phase. When in operation, Tia Maria would directly employ 600 workers and indirectly, another 2,000. Through its expected 20 years of life, the project related services would create significant business opportunities in the Arequipa region.

In addition, the company intends to implement social responsibility programs in the Arequipa region, similar to those established in the communities near its other operations in Peru.

Regarding dividends, as you know, it is the company policy to review at each board meeting cash resources and expected future cash flows generation from operations. The capital investment plan and the other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on July 24, 2014, the Board of Directors authorized a cash dividend of $0.12 per share of common stock, payable on August 28, 2014 to shareholders of record at the close of business on August 15, 2014.

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

Question-and-Answer Session

Operator

[Operator Instructions]

And our first question comes from comes Carlos de Alba.

Carlos de Alba - Morgan Stanley, Research Division

First question is regarding the cost, the cash cost of copper before by-products. We have seen some volatility in recent quarters, and they increased about 6% quarter-on-quarter. Could you comment, perhaps, Victor or Don Oscar, on how you see this trend going forward? Clearly, that remains very low, but it does affect the cash flow generation and margins of the company. And the second question is, if you can comment a little bit more on the status of the Tia Maria project. I remember that company was expecting to receive final approval during the summer. So if you can give us an update of what is happening exactly? Where are the priorities at, right now? And provided that you receive approval, final approval in the coming months, what else will be pending, before you can start production -- construction, and when that will be.

Victor Pedraglio

Thank you very much, Carlos. Regarding cash cost, well, as this has been mentioned, it has such incremented due to higher prices on -- well on its main components. Now if looking forward with the -- due to the fact that the new SXEW 3 in Buenavista will start full production shortly. And that adds a low-cost copper. That -- we expect that it will improve the -- well its -- where our cash cost before by-products.

Carlos de Alba - Morgan Stanley, Research Division

Do you have any level -- where cost could be after their ramp up?

Victor Pedraglio

Well, what we will expect is that the affect of the new SXEW III production will mean that our cash cost before by-products will go down. I mean, if this is the lower trend will be reassumed.

Oscar Gonzalez Rocha

And about Tia Maria, we are expecting to receive a -- either at the end of this week, by Friday the approval, official approval, because it gives a speech to the nation, because of the Independence Day of Peru, the President already mentioned something about Tia Maria. But we don't have the official paper. And we are expecting that either Friday or next Monday, we will have the official approval. Then what is going to happen after that, we are going to try to get the construction license, that is another procedure that we need to comply. And for that, we are already starting the possibility to have water for construction, because that is requisite in order to get the approval of the construction license. And soon as we get that, we will ask for proposals in order to do the starting of the escalation of the pit, in order to get all the waste material out. For that, we are trying to get a contractor, because we are not going to have the equipment -- mining equipment delivery on time, so do it by ourselves at the beginning. And at the same time, we have started requesting the purchase orders for the main equipment, that is including the SXEW plant. We already have 8 proposals, and that we are waiting to study that and decided what is going to be the best one. And that will be lump sum proposal in order that includes the engineering, the supply and the construction, supervising, in order to do all the plan at similar to the one that we sold to Buenavista, Cananea plants that is already in operations. That is what we have for start and were requesting because we already have the equipment for the conveyor system going from the mine to the SXEW plants. Where we need to get the purchase order of the new crusher, because we transfer that crusher to the expansion of Toquepala.

Carlos de Alba - Morgan Stanley, Research Division

Okay. And if indeed, the company gets the permit late this week or early next week, when can -- I'm assuming that everything else goes well, when can the company start construction of the project and when would it be ready?

Victor Pedraglio

I think that we can start by the end of the year, or beginning of mid-year. And that is going to take between 20 to 24 months, all depending on the delivery of the mine ore equipments. That means that we are going to be ready for production definitely by the beginning of 2017.

Operator

Thank you. And then our next question is going to come from Thiago Lofiego.

Thiago K. Lofiego - BofA Merrill Lynch, Research Division

I have 2 questions. First on the CapEx numbers for 2014 and '15. If you look at the first-half numbers, you spent $660 million versus your official budget for the year at $2.4 billion. So just wanted to ask, if you could give us some more color on, how the evolution of the CapEx should be from here on? Should we expect a lower spending this year versus your official budget? And then, additional CapEx for next year. So how should we see that evolving, and if you could just outline the numbers for 2014 and '15. And then, the second question is on cost, regarding the Buenavista projects. Could you give us more color on what's the average cost for the new facilities, and how should you -- should they contribute to dilute costs going forward? So what's the cost advantage of these new facilities as they ramp up?

Victor Pedraglio

Thanks a lot, Thiago. Your first question, regarding CapEx. Well, at this point, we are rescheduling approximately $200 million of our 2014 capital budget and increasing with the Tia Maria budget to $1.4 billion. For the remaining years, our CapEx expenses will be as follows: for this year, $2.1 billion; for 2015, $1.5 billion; for 2016, $950 million; for 2017, $950 million; and for 2018, $350 million. So in essence, yes, we are doing some rescheduling of our CapEx from 2014 to 2015. If they -- well, having said that, if we consider the -- while we have already spent, plus what we have already committed, we reach around 60% of our guidelines. Now regarding cost, the reason why Buenavista, SXEW 3, and the new concentrator will improve our cash cost before by-product is because this -- both projects will input, will at low-cost per production, leaching operation is a low cost. And also, the expansion of a concentrator adds more material, which has a lower cost because they were -- well, I mean, we need a brownfield expansion. There are some costs, which you don't need to incur again. Because they are already embedded in Buenavista's operations.

Oscar Gonzalez Rocha

Yes. Let me add about the Buenavista SXEW plant. If we are going to produce 120,000 tons by the end of this year or beginning of next year, at around $0.40 cost, then definitely, we are going to improve our cash cost for the rest of the company. Because it's a -- about 20% more production at low cost, now, that is the reason that we expected, that will be lower of the $0.92 that we have right now.

Operator

And then our next question is going to come from Santiago Perez Teuffer.

Santiago Perez Teuffer - Crédit Suisse AG, Research Division

My first question is related to the zinc. Could you please elaborate on what happened in the Charcas and Santa Eulalia, and what do you expect for zinc of this year and the next one please.

Victor Pedraglio

Okay, Santiago. Thanks a lot for your question. What has happened is that in Charcas, an accident which happened by the end of the first quarter is affected production temporarily. Well, that has already been solved. And then, there has been a flood in Santa Eulalia. And Santa Eulalia expects to be recovered by the fourth quarter. Now with those affects, we will -- we expect for this year to produce 82,000 tons of zinc from our mines. That is a change from our prior forecast of 95,200 tons.

Santiago Perez Teuffer - Crédit Suisse AG, Research Division

Perfect. Victor. And then secondly, can you give us some light on, how much CapEx has been spent in Tia Maria or in relation with Tia Maria?

Victor Pedraglio

Yes. Well, relation with Tia Maria, it has already been invested, around $345 million.

Operator

Thank you. And then our next question is going to come from Leonardo Correa.

Leonardo Correa - Banco BTG Pactual S.A., Research Division

My first question is regarding the tax rate. Looking at the numbers I mean, if the tax rate came out at around 40% in the quarter. I understand that the Mexican royalties have been inflating the tax numbers a little bit. But just wanted to get a sense from you on the trend going forward, if we should see these levels as sustainable or we should revert back to something around 35%, 36% of an effective tax rate, that's my first question. And the second one, if you can please just refresh on the copper production target for 2014 and '15, please? And finally, if I may, just a very quick detail here. I think looking back at the first quarter conference call, I wasn't sure, exactly, if you were talking about Toquepala, the brownfield expansion of 110,000 tons. Now you're moving back to the target of 100,000 tons. So I'm just wanted to clarify, if I had maybe misunderstood back then, or it actually has reduced the production target for Toquepala at around 100,000 tons.

Victor Pedraglio

Well, thanks, very much for your question, Leonardo. First, regarding tax rates. You're right, so it's around 40%. And we would expect it to be maintained. Then on our production guideline, let me get the numbers. Because we have changed it slightly where -- well, I mean, our guideline for 2014 and 2015 remains at 672,000 tons for this year and 840,000 tons for next year. But due to the fact that we are now considering the ramping up of Tia Maria and Toquepala expansion would be late 2016. I mean, on the last quarter, then we have lowered our production guidelines for that year. In -- for 2016, we are expecting now a production guideline of 995,000 tons.

Oscar Gonzalez Rocha

And about Toquepala production. It's supposed to be 100,000 tons, mainly in the first quarter. We mentioned 110,000 tons, but it was a mistake because since the beginning, our production was 100,000 tons for Toquepala. Expansion, 120,000 tons for Tia Maria new project.

Operator

Thank you. And then our next question is going to come from Marcelo Aguiar.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

2 questions. First, on the cost that you guys expect to have at Tia Maria and Toquepala. Can you elaborate a little bit, what level of cash cost before by-products would you expect on those operations, when it's fully operational by 2017? And the second question will be more local to the longer term CapEx. I mean, you mentioned about $350 million in 2018. Does that level of investment is that the -- what you see as a normalized in this level of investment already, includes CapEx for to avoid depletion? Or you don't expect any CapEx on that front for several decades?

Victor Pedraglio

Okay. Thanks, Marcelo. Well first, regarding cash cost. Well, we don't disclose cash cost by operations. But let me mention that the -- in the case of Tia Maria and Toquepala expansion, the figure is going to be very similar to what we have explained a few moments ago regarding Buenavista. This is because Tia Maria is a leaching of -- it's the operation -- copper oxide leaching operation. It's low cost, I mean, the cost is below $1 a pound. So that adds an important low cost production to the equation. And then, in the case of Toquepala expansion, in a similar manner to what is going to happen in Buenavista expansion, you get an added production and you have already incurred, in some costs, it's because -- it's a brownfield operation, which you don't need to incur again. So the additional production from either Toquepala's expansion and Buenavista expansion, comes at a lower cost than coolant [ph] production at both sites.

Operator

Thank you. Our next question is going to come from Wilfredo Ortiz.

Wilfredo Ortiz - Deutsche Bank AG, Research Division

Just wanted to get a little bit more clarity, as far as Tia Maria is increasing the CapEx budget. What is really triggering that? And then, as far as all the other projects, is there a room for the CapEx to creep up, or do you feel fairly comfortable with the kind of levels? And then secondly, as far as the Buenavista concentrator expansion for next year, how should we see the progression of the quarterly production for the company as a whole, as the ramp up is in the first half, but essentially, how should we see that production on a quarterly basis for 2015 with your target levels?

Oscar Gonzalez Rocha

About the Tia Maria. The reason is that the price that we have or the cost that we have for the project, and that was for the year 2010, 2011 close to $1 billion. The reason that we are estimating $1.4 billion for this time in 2014 is because all -- we think that all the equipments are getting higher prices and because the construction companies are quoting with higher prices too, mainly here in Peru. And that is the reason that we are estimating $1.4 billion. We hope that we can get it for less. But right now, the feasibility is solely that we revise from the beginning is given all that $1.4 billion.

Wilfredo Ortiz - Deutsche Bank AG, Research Division

And then is there a level of contingency better than this $1.4 billion, if so, how much is that level?

Oscar Gonzalez Rocha

Yes. We have about $70 million contingency. We hope that we will not use it. But that is what we gave in the story.

Victor Pedraglio

And in payroll, regarding your question on Buenavista, well, what we expect is to have the ramping up by the end of the first half of next year, which will mean that by the second half, then after, we should start getting the expected production.

Wilfredo Ortiz - Deutsche Bank AG, Research Division

But the ramp would be gradual or would it be fairly quick? How should we look, kind of envision the quarter-to-quarter progression in the second half?

Victor Pedraglio

Well, usually, they are at a gradual to ramp-up. So it should take around, it's the most of the second quarter of next year, or maybe even the first month of the third quarter of next year.

Operator

Thank you. And then our next question is going to come from Alex Hacking.

Alexander Hacking - Citigroup Inc, Research Division

My question is on the Toquepala expansion. The feedback that you received, was there anything in the -- that was sort of material or problematic? I know in the past, that some of the local communities there have been asking for use of desalinated water and things like that. So I guess, overall, are you comfortable with the EIA process on Toquepala and how it's proceeding.

Oscar Gonzalez Rocha

Well, yes. We already have some agreements with Candarave area and the [indiscernible] and we had already answering the observations or questions that the Minister of Mines transferred to us at the beginning of this month. And we expected to finish that by the 20 of September, because they gave us 60 working days for answering that. And we hope that we can do it in shorter time. Soon we have that, we're going to be in the same timing that Tia Maria, in order to get the working license and will be faster, the start-off because it's a expansion inside the -- our own lands, and we don't have any problems with water for the construction license. Then, we expect that may be at the beginning of next year, we kind of start construction. At the same time that Tia Maria for the expansion of Toquepala.

Alexander Hacking - Citigroup Inc, Research Division

Okay. And given that Tia Maria, probably, starting up sometime like the beginning of '17, the $1.2 million tons target, I mean, I think in the beginning of the call, you talked about that being a capacity for 2015. But I think that was a mistake. That 1.2 million tons target, like 2018 seems like a realistic timeframe for that, right? If it's the 2 Peruvian projects are ramping up during 2017.

Victor Pedraglio

What we are considering for Tia Maria and also for Toquepala expansion is ramping up on the last quarter of 2016. That's why we have diminished our production guideline for that year. But we are still considering that for 2015. We would be, with both projects at full production.

Alexander Hacking - Citigroup Inc, Research Division

And sorry -- in what year maybe in full production?

Oscar Gonzalez Rocha

Those are in the '17.

Victor Pedraglio

No, sorry -- it's for 2017, I mean, for the last quarter of 2016, we will have both projects on the ramping up stages. And then, in 2017, we would have the full benefit of both of them, Tia Maria and Toquepala expansion.

Operator

Thank you. And then our next question is going to come from Sasha Bukacheva.

Aleksandra Bukacheva - BMO Capital Markets Canada

Victor, and everyone, thank you so much for provide this update. I had a question, since you are now completing using contractors for pre-strip at Tia Maria, is that a part of your $1.4 billion CapEx or might that be a cost in addition to that?

Victor Pedraglio

Okay. No, that's included on the CapEx. And yes, we are exploring the -- well, most likely, the way the project will flow is that we would use -- we will not build our own desalination plant. But we would contract the services for the desalinated water on-site.

Aleksandra Bukacheva - BMO Capital Markets Canada

Okay. And then, what's the rough amount that you've assigned to it for to complete the pre-strip, as well as install the ore -- utilize their diesel plant, how much of that is in the $1.4 billion?

Victor Pedraglio

Well, I'm sorry -- but, no, we don't disclose the detailed information. But, well, I assure that it's included on the $1.4 billion.

Aleksandra Bukacheva - BMO Capital Markets Canada

Okay, and then on a high level to the extent that you can provide, what's the breakdown between the mine equipment versus the plant equipment in that 1.4 billion number?

Victor Pedraglio

I think it was around $400 million for the mine equipment and the desalination plant, the first quarter we have 2 years ago, was about $70 million.

Aleksandra Bukacheva - BMO Capital Markets Canada

Okay, and so...

Oscar Gonzalez Rocha

We answered with your question?

Aleksandra Bukacheva - BMO Capital Markets Canada

Yes. So then, I would you say -- would you then say like $6,800 million is for the plant, because there is another $70 million contingency in there.

Yes, yes. Sorry. So what's the -- so then I'm just looking, so I'm taking $1.4 billion, I'm taking out $400 million for the mining equipment and then $70 million for the diesel plant and then $70 million contingency. So I would, for the SXEW circuit construction, I would assign about $600 million to $800 million?

Victor Pedraglio

Yes, it sounds reasonable. Yes.

Aleksandra Bukacheva - BMO Capital Markets Canada

Okay.

Oscar Gonzalez Rocha

Yes. And we're talking about $1,400 million, and we're talking about 120,000 tons of production then, really, we are having a cost per ton of 120,000, no?

Aleksandra Bukacheva - BMO Capital Markets Canada

Yes, great. Okay. And then, just to move around here. When do you expect Cuajone pushback to be completed, the current waste removal program?

Victor Pedraglio

Okay, that waste removal in Cuajone is, well, is in process. Now that's an ongoing process which, we went, well, at least for this year, you're talking about the improvement of the slope?

Aleksandra Bukacheva - BMO Capital Markets Canada

The slope utility. Yes, yes, yes, exactly.

Victor Pedraglio

Yes, that's -- while that's -- now ongoing process for the whole of this year. It should be finished by the first quarter of next year.

Aleksandra Bukacheva - BMO Capital Markets Canada

Okay. Thank you very much. And just on the production guidance. Because there were few numbers going around. So the guidance for this year is still 670,000 tons?

Victor Pedraglio

Yes. For this year, it's 672,000 tons. For next year, it's 840,000 tons and then for 2016, due to -- to this delay on Tia Maria and Toquepala expansion, we have lowered from our previous guideline and the new guidance is 995,000 tons.

Aleksandra Bukacheva - BMO Capital Markets Canada

Okay. And then for 2017, we're still at $1.2 million?

Victor Pedraglio

Yes. From 2017 and 2018, we are at $1,175,000.

Operator

Thank you. And then our next question is going to come from Alfonso Salazar.

Alfonso Salazar - Scotiabank Global Banking and Markets, Research Division

I just have 1 clarification on the Tia Maria CapEx, please. Is this $345 million that you already spent included in the $1.4 billion or is it apart?

Victor Pedraglio

No. It is included on the $1.4 billion. so it means, $1.4 billion is the cost of the whole project, of which we have already invested $350 million -- sorry, $345 million.

Alfonso Salazar - Scotiabank Global Banking and Markets, Research Division

Okay. And then, I see that you have signed 2 energy contracts in Peru. And I think this is starting in 2017, one is the -- an assured contract ends. So I don't know if you can talk about, what you expect in terms of cost reductions in energy after that.

Victor Pedraglio

Yes, well, as you are aware, our current power purchase agreement has the price of energy with a major component of coal. That -- that is going to change with the new power purchase contract, which have been signed. And they will go into effect in April 2017. At that time, we will have a significant reduction on our power cost, which -- that will be...

Oscar Gonzalez Rocha

40%

Victor Pedraglio

Yes, which should be around 35% to 40%. That's what we expect.

Operator

And then our last question is going to come from Rodrigo Garcilazo.

Rodrigo Carreon Garcilazo - GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

I got a couple of questions. The first one is regarding energy in Peru. Are you actively looking for new contracts to support the expansions, say currently, or are you -- are even considering to develop a new project there in Peru? And the second question it's a -- as you know, Humala announced several measures to boost the economy in the past days. Anything in particular in this program to facilitate your expansions in any front?

Victor Pedraglio

Well, thanks a lot, Rodrigo. First, regarding energy, the 2 power purchase agreements we have just signed are -- well, each one of them is for 120 megawatts, they add up to 240 megawatts, and that's our -- the expected energy requirement for our cooling operations. Once we get approval for our expansion projects, which in essence, Tia Maria will require around 72, 75 of the megawatts and Toquepala expansion well a little less. Once we get approval for them, then we would actually, actively seek for, for the -- for ensuring that additional energy, not bad. But currently, the 2 power purchase agreements we have already signed are for 240 megawatts, which is what we expect will be required by our current operations from 2017 onwards.

Oscar Gonzalez Rocha

But we already have the compromise from Kallpa to supply at the same price that the first 120 megawatts for the third project that will be on their way. That means, Tia Maria definitely, I think, will be the best, the first one, and the 75 or 72 megawatts are going to be at the same price that the contract, as we already signed with Kallpa for the 120 megawatts. And that is about 40% lower than the prices that we are getting right now from Enersur.

Oscar Gonzalez Rocha

And regarding your second question, Rodrigo. These measures to reactivate the proven economy, which has been passed by -- is to avoid to Congress -- well, we have to take a good look at them, and see if we could take advantage of some of them for our projects. The first advantage would be -- would see is these intention of streamlining the Environmental Impact Assessment studies approval process, that which is, obviously, something is -- very good for us.

Operator

Thank you. And then we have a question from Santiago Perez Teuffer.

Santiago Perez Teuffer - Crédit Suisse AG, Research Division

I want to follow-up on the desalination process. If I heard correctly, you're not going to release yourself. So I wanted to ask this, how much OpEx will lead at Tia Maria, around how much OpEx? And also, I mean, is this service already exists? Or would your provider need to develop it, while you develop the project?

Victor Pedraglio

Okay. Regarding Tia Maria, the desalination plant. Well, we're exploring the possibility, as you say, of having somebody else build the desalination plant and supply us the water at Tia Maria. That reduces the CapEx for the project, and then, increases marginally the operational costs. It should increase the cost around, well, a $0.05 or $0.08 more per pound. No, but that's something which we look after, right now.

Santiago Perez Teuffer - Crédit Suisse AG, Research Division

Perfect. Then does anyone else, already, lease this service or would this we're -- will this service need to be developed, as you develop a project or this already exist?

Victor Pedraglio

No, not yet. I mean, there is not a -- a desalination plant, which we could use right now, in the area.

Operator

Thank you. Then we have a question from Carlos de Alba.

Carlos de Alba - Morgan Stanley, Research Division

I mean, about verification on the desalination plant. But can you comment just why the decision of not building your own plant? I mean, what changed? It's only about say $70 million to $100 million in CapEx. Why did you change your mind?

Oscar Gonzalez Rocha

No, no. We are not changing our mind. We are going to get the proposals for operation and supply to mirror for some price, and if that price is good, we will take it. But at the same time, they are going to supply because for supplying the plant and will be operated by us, if any of the 2 alternatives, we will choose the best.

Carlos de Alba - Morgan Stanley, Research Division

And so...

Victor Pedraglio

Yes, no. It will just -- it is just to finish a issue on that. We have not decided, either to build or is to get what -- we are exploring, both alternative and as Mr. Gonzalez just said, is that we will choose, whatever is best for the project.

Carlos de Alba - Morgan Stanley, Research Division

All right. And then, so it's fair to assume that the CapEx of the desalination plant is not included then in the $1.4 billion estimate?

Oscar Gonzalez Rocha

Is included. It's included. The last time, we will choose to get the approval of supply by major cost and that will be in the OpEx, then we will reduce the $70 million from the CapEx of $1.4 billion.

Operator

Thank you. And then we have a question coming from Roderigo.

Rodrigo Carreon Garcilazo - GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

I got one more question regarding energy. I wonder, if there has been any change in your projections for energy demand in Mexico, coming from the Buenavista expansion?

Oscar Gonzalez Rocha

That is going to be supplied by our area plants that are build in La Caridad.

Victor Pedraglio

Yes, right now, we have one of the plants, which has generated 240 megawatts for our operations. And then, the second plant has already been completed. It will have an output of 265 megawatts, and it's on the final commission stage.

Rodrigo Carreon Garcilazo - GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

That was to say 500 megawatts will be sufficient to cover all of your operations in Mexico?

Oscar Gonzalez Rocha

Yes, yes. That is correct. They will cover our current and expansion in Mexico.

Rodrigo Carreon Garcilazo - GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

Okay. And I believe that the second plant, as you mentioned, it's a already finished and started commissioning right now. But the energy that will be sold, will be used for the Buenavista concentrator, right? So what will happen in the next 6 months that you already have the plant, already built, already commissioning, but the concentrator will be ready only by next year. What will happen in the next 6 months without plant and that energy?

Victor Pedraglio

Yes. Well, any excess energy production from those plants on top of what we need will be sold to the Federal Mexican Energy Commission.

Rodrigo Carreon Garcilazo - GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

And you have all the -- like the permits to sell already that energy? Because I remember that in the first plant, there was like some permit missing that doesn't allow you to actually sell the energy. Are we set with all that? Or I think it was just like an inspection.

Victor Pedraglio

Yes. I understand that, that still an ongoing process. But we can sell to the energy or to, let's say, still there are other projects.

Operator

Thank you. And Victor, we have no additional questions at this time.

Victor Pedraglio

Okay. Thanks, thanks a lot, Bequitha [ph]. Well, with this, we conclude our conference call for SCC second quarter 2014 results. We certainly appreciate your participation and hope to have you back with us when we report the third quarter 2014 results. Thank you very much and have a nice day.

Operator

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

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