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Executives

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

Unknown Speaker -

Raul Jacob - Head of IR

Analysts

Dan Stewart

Rene Kleyweg - UBS Investment Bank

Jamie Nicholson - Credit Suisse

Felipe Hirai - BofA Merrill Lynch

Alexander Hacking - Citigroup Inc

Rodrigo Barros - Deutsche Bank AG

Carlos de Alba - Morgan Stanley

Leonardo Correa - Barclays Capital

Unknown Analyst -

Southern Copper (SCCO) Q2 2011 Earnings Call August 2, 2011 11:00 AM ET

Operator

Good morning, and welcome to the Southern Copper Corporation's Second Quarter 2011 Results Conference Call. With us this morning, we have Southern Copper Corporation's Mr. Raul Jacob, Manager of Financial Planning and Investor Relations, who will discuss the results of the company for the second quarter and answer any questions that you might have.

The information discussed on today's call may include forward-looking statements regarding the company's results and prospects which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions to not place undue reliance on these forward-looking statements.

Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise. All results are expressed in full U.S. GAAP.

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

Raul Jacob

Thank you very much, Beverly, and good morning, everyone and welcome to Southern Copper's Second Quarter Earnings Conference Call. Participating in today's conference are Mr. Oscar González Rocha, Southern Copper's CEO, and myself.

On today's conference call, we will begin with an update of our view on the metal markets. We will then talk about Southern Copper's key results related to production, sales, operating costs, financial results and capital spending program. After that, we will open the session for questions.

Focusing on metal markets and prices, we think that metal markets has been affected by different macroeconomic events that are delaying the recovery of metal demand. The most important of them are the following: the U.S. macroeconomic problems reflected in the current debate to increase the U.S. debt ceiling, since the U.S. economy's about 25% of the total world economy, any of its macro problems creates concerns in the rest of the world; the European debt crisis, Europe now represents 28% of the world economy, which affects the confidence of investors in the euro and the economic stability of this region; the Chinese and other emerging economies and inflationary programs, which makes and reviews their respective growth; the Japanese production disruption. The third largest economy in the world has also affected confidence in the economic recovery.

We believe that these worldwide macro concerns will influence the market's confidence and demand for metals during the next 12 months. On the positive side, we think the Japanese recovery is underway, and this will help the world economy and metal demand in the second half of this year.

Regarding copper, our main product which represented 77% of SCC sales in the second quarter of the year, we maintain our positive outlook for this metal's fundamentals during 2011. On the demand side, CRU estimated a 3.4% growth during the second quarter of this year. This demand growth was not matched by new supplies. New copper production grew by 1.4%, less than half of the required growth to balance the market. As a consequence, CRU estimated a market deficit of 200,000 tons for the second quarter and a similar figure for the occurring one.

For the rest of 2011, we believe that market fundamentals for copper will improve. We expect to have higher Asian demand coming from Japan and China. In the case of Japan, which represents 5% of total copper demand, this will come from the recovery of its industrial capacity. For China, nowadays 39% of copper demand, the end of a de-stocking [ph] period should increase Chinese physical demand in the next few months.

Regarding molybdenum, our main byproduct, in the second quarter of 2011, this metal represented 8% of company sales. We are currently seeing a soft recovery in global molybdenum production that has slightly reduced the average market price from $17.18 per pound in the first quarter of 2011 to $16.50, a 4% decrease in the second quarter. We think that this is a short-term event, and we still expect a relatively balanced market for this metal.

Regarding our copper production. The company copper mine production in the second quarter of 2011 increased by 28.8% to 146,241 tons compared to 113,537 tons in the second quarter of 2010. This increase was mainly the result of 45,587 tons of copper production at our Buenavista mine, formerly known as Cananea, that operated at full capacity in the second quarter. The higher production of Buenavista was partially offset by expected lower production of our Peruvian and La Caridad operations.

Comparing the past quarter with the first quarter of 2011, we had an increase in production of 22,048 tons or 17.8%. For the second half of 2011, we expect an increasing ore grade in the Cuajone mine, which would partially offset its lower production in the first half of this year, which was basically due to the expected lower ore grades of the Cuajone operations. Rod, cathodes and anode production increased by 62.7%, 27.1% and 14.8%, respectively, in the second quarter of 2011 compared to the same period of 2010. Rod production increased due to higher demand, allowing the company to gain copper premiums on top of the spot price.

Speaking about our Buenavista operation that has been in a ramping up process and has a very aggressive expansion plans. As part of the new era in development of these operations, on June 6, 2011, the Confederation of Mexican Workers, or CTM, was granted the collective bargaining agreement for the Buenavista union. The company expects to work together with its employees, and this worker union developed the Buenavista property to its full potential. After a review of required additional repairs of Buenavista, we're changing the estimated total repair cost from $114 million to $174 million. Of them, we already spent $135.3 million.

Additional $38.7 million are related to major mechanical and electrical maintenance we performed through the rest of 2011. Approximately $27 million of the remaining expenses that I mentioned, $38.7 million, will be charged to operating cost, and the balance will be capitalized.

Today, our workforce of approximately 4,800 workers is operating the mine and plants, as well as developing the aggressive growth program the company has designed for this union. This program is expected to increase Buneavista's production capacity from 180,000 tons of copper per year to over 450,000 tons per year, contributing to the well-being of the town of Cananea and the Sonora state through salaries, taxes and social programs.

Regarding molybdenum production. The second quarter of this year, molybdenum production increased by 5.3% to 4,502 tons compared to 4,274 tons in the first quarter of 2011. This was due to the recovery of the Toquepala mine ore grade and recovery of metal in the production. When compared to the second quarter of 2010 production, molybdenum production decreased by 18.3% or 1,009 tons due to lower ore grades and recoveries at the Peruvian operations, particularly the Cuajone mine. Please keep in mind that 2011 was a molybdenum production record year.

Focusing on Southern Copper financial performance, the second quarter of 2011 sales were $1.8 billion, 54% higher than the $1.2 billion we had in the second quarter of 2010. This increase was mainly the result of higher metal prices as well as higher copper sales volume, which increased 30.2%. When compared to the first quarter of this year, with the exception of zinc, all metal sales volumes increased. Copper volumes increased by 16%; molybdenum and silver volumes by 7%; gold, a minor byproduct for Southern Copper by 43%; lead by 6%; and zinc volume sold decreased by 3%.

Regarding copper hedging, contracts are hedging approximately 32% of the remaining 2011 copper production at an average price of $4.08 per pound. Zero-cost collars are hedging approximately 30% of the remaining 2011 copper production with an average floor price of $3.02 per pound and an average copper price of $4.84 per pound. The remaining 38% of copper production is unhedged, and prices will fluctuate with the market copper price. With these hedges, the company is benefiting from the current copper prices, up to 68% of its total copper sales, while obtaining insurance for the remainder of its production at an average of $4.08 per pound. For 2012, the company hedged approximately 13% of the first quarter copper production through zero-cost collars, with an average floor price of $3.50 per pound and at average cap price of $5.18 per pound.

Our total operating costs and expenses have decreased by 4% or $36.5 million when compared to the first quarter of 2011. The most significant cost reduction was $204 million in purchased copper concentrates and was replaced by our own copper concentrates production mainly from Buenavista. We don't expect to require significant amounts of third party's copper concentrate in the near future. Besides this significant cost reduction, we had some cost increases due to the higher production of Buenavista and cost inflation. The main cost increments were in fuel, in power, labor and workers participation. Other costs and inventories variances account for the remaining difference.

As a result of the previously mentioned sales on operating cost, EBITDA for the second quarter of 2011 was $1.1 billion. This figure was 78.8% higher than the $603 million of EBITDA that we had in the second quarter of 2010.

Southern Copper operating cash costs, including the benefit of byproduct credits, were $0.367 per pound in the third quarter of 2011. This cash cost compares to $0.243 of cash cost for the first quarter of this year.

The company's second quarter operating cash cost per pound of copper produced before byproduct credits was $1.67 per pound, the same cost as in the first quarter of 2011. The positive production increase from our Buenavista operation absorbed the cost inflation coming from higher energy and labor costs, as well as exchange rate appreciation.

Regarding byproduct, we had a total credit of $409 million or $1.31 per pound in the second quarter of 2011. This figure compares with the credit of $379.5 million or $1.42 per pound in the first quarter of 2011. We have $30.1 million or 8% increased byproduct revenues in the second quarter. However, when we divide the higher byproduct sales by the even higher copper production that we have of 313.1 million pounds of copper produced by our operations in the second quarter, this 18% increase in copper production results, at the end, in a reduction in the per pound credit of $0.11 per pound of copper.

As a result of the better market prices and higher copper volume from Buenavista, net income attributable to Southern Copper shareholders in the second quarter of this year was $658 million or diluted earnings per share of $0.78. This figure compares with net earnings for the second quarter of 2010 of $313.4 million or diluted earnings per share of $0.37, a 105% increase.

Focusing on the company expansion and capital projects. The company's capital expenditures in the second quarter of 2011 were $110.7 million. The Mexican projects, the crushing, conveying and spreading system for the SXEW production project at Buenavista is moving forward. Construction of the crusher building and earthwork for conveyor platforms is advancing as scheduled. Overland conveyor and spreader installations will begin in August.

Starting the SXEW III plant at the Buenavista mine, detailed engineering and acquisition of major equipment continues as planned. The company has selected an engineering procurement construction and management, or EPCM contractor. This SXEW facility will produce 88,000 tons of copper per year and expected to start up in the second quarter of 2013.

The 2,000 tons per year molybdenum circuit for the concentrator -- for the current concentrator of Buenavista, it's in the equipment purchasing stage, under an EPCM contract. The new concentrator with a milling capacity of 100,000 tons per day is in process as scheduled. The EPCM contract has been signed and flow sheets have been established. The company has received several supplier proposals for the main equipment, which are being evaluated. As indicated before, the new concentrator would have an estimated annual capacity of 188,000 tons of copper and 2,600 tons of molybdenum. The required infrastructure for this project, including power, water, roads, shops, laboratories, townsites, et cetera, have been established in the master plan and is being developed as to scale.

The Pilares mine site, close to the La Caridad mine, is being evaluated. As of June 30, 2011, 16,500 meters of drilling have been taking place. Access roads were developed, and metallurgical testing and preliminary mine plannings have begun.

Regarding the Peruvian project. Through June 30, 2011, we have spent $128.2 million on the Toquepala expansion mainly on mine equipment. Inclusion in the project of the use of high-pressure grinding rolls and wet screening at the tertiary crushing stage is expected to reduce operating costs. The scope of the project is currently under review, as we are evaluating an increasing milling capacity of 60,000 tons per day from the 40,000 tons per day originally planned. As a result of this review, environmental impact assessment is expected to be presented during the third quarter of 2011, and the project completion is scheduled in the second half of 2013.

Through June 30 of this year, we have also spent $45.7 million in Cuajone expansion projects. The purchase of mines and the auxiliary equipment to support the work to optimize the Cuajone mines is in process. As part of the expansion plans, the project contemplates a variable cut-off grade methodology, which will begin increasing copper and molybdenum production in the second half of 2011.

With respect to the Tia Maria project, the company plans to be readdress the project with the new government and is confident that good investment conditions, stability, social inclusion and growth will prevail in Peru.

The Tantahuatay project is located in Cajamarca in the northern Peru. In 2010, we began development of this project to exploit its gold cap.

The Tantahuatay project contains estimated resources of 27.1 million tons of mineralized material with an average silver content of 13 grams per ton, and 0.89 grams of gold per ton of mineral. We expect to start dore gold production by the third quarter of 2011. The project is expected to have an annual production of 90,000 tons -- ounces of gold, I'm sorry, 90,000 ounces of gold and 425,000 ounces of silver for 5 years. The company has a 44.2% participation in this project and the remaining balance is owned by Compañía de Minas Buenaventura and others.

The company capital expenses during the first half of 2011 were $183.6 million. For the current year, we are now estimating capital expenses of approximately $700 million. Approved capital budget of $1.7 billion for 2011 had suffered a delay due to the suspension of the Tia Maria project, the mentioned change in the scope of the Toquepala mine expansion. Regarding the Mexican investments, we have already committed $477 million, a portion of which will be spent in 2011.

As you know, on July 22 of the last year, the company received a nonbinding proposal from its parent company, Americas Mining Corporation, offering to effect an all stock business combination of Southern Copper and AMC, the parent company of Asarco. As proposed, all stockholders of Southern Copper will receive 1.237 common shares of AMC in exchange for each share of SCC. As part of this process, the stock of AMC will be registered and list in the New York, Mexico and Lima Stock Exchanges. Once completed, SCC or Southern Copper shares will be delisted from the exchanges.

On August 10 of last year, the company formed a special committee of independent directors to evaluate AMC's proposal. The special committee has engaged independent legal, financial and mining advisers to assist in this transaction in helping the evaluation of the proposals. There is no specific deadline for this process. Currently, the independent directors' special committee is still evaluating the AMC proposal.

On July of this year, July 28, the Board of Directors authorized an increase in the share repurchase program from $500 million to $1 billion. The Board also confirmed the company acquisition of 4.6 million shares of its common shares at the cost of $148 million in June of 2011. The average price paid per share was $32.32. The company undertook the sanction to protect the share price considering the relatively low valuation of Southern Copper stock due to the worsening share price and market volatility.

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 July 28, 2011, the Board of Directors authorized a dividend of $0.62 per share. This dividend would be paid on August 31, this year, to shareholders of record at the close of business on August 17, 2011.

Well, with this in mind, ladies and gentlemen, thank you very much for joining us. And we will like to open up the phone for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of the Leonardo Correa of Barclays Capital.

Leonardo Correa - Barclays Capital

My first question is related to the outlook for the mining industry in Peru. I just wanted to know how the taxation conversations with the government have been evolving. And also what are your views on the potential changes in the taxation of the country? My second question is relating to strike activity of the entire copper industry. We've been seeing recurring strikes around in the world impacting the major mines. Could you please disclose how the relationship with your workers has been evolving, and what type of steps are you taking to mitigate these risks? And also if you could more specifically give us color on the relationship at Buenavista, that would also be excellent. Those are my 2 questions.

Raul Jacob

Regarding talks with the Peruvian government, basically, we think that the government will establish taxation that will maintain the cost competitiveness of the mining industry in Peru. At this point, we have not much to report on this matter. The mining society of Peru have started talks with the government, and we're expecting a positive result on that matter. Regarding labor relations, in general terms, we have currently one of the best work environments for our labor force in all of our operations. For the Peruvian operations, we have the 3-year labor contracts actually one is a 6-year contract, but it's in the middle of the period now. And the other one was signed last year, it's a 3-year labor contract. Regarding the Mexican operations, we have not much to report other than what we mentioned about the Buenavista union being formed and operated by CTM, which is a union different than the one that we have for the La Caridad operations. We think that this is a healthy measure for our company to have different unions that are reasonable and respectful of all the agreements that we have in general terms. And your third question, could you remind me what was it, please?

Leonardo Correa - Barclays Capital

Those are basically the issues. You addressed both issues. One was regarding the potential tax outcomes in Peru, the other one was regarding the labor and strikes around the world, how have you been protecting the company from these issues.

Operator

Your next question comes from the line Carlos de Alba of Morgan Stanley.

Carlos de Alba - Morgan Stanley

I just wanted to see if you can give us an update on your volume guidance for copper and molybdenum this year and next year? And the level of confidence that you have in the implementation of the growth projects that you have mentioned. And second, if you can also comment on the cost guidance or the cost outlook that you have for your operations in terms of pounds per copper before the benefit of byproduct credit, given all the cost pressures and inflation that we are seeing around the mining industry. That would be my 2 questions.

Raul Jacob

Okay, let me focus on the production guidance and cost, and then I'll ask Mr. González to comment on the project. Regarding the guidance for 2011, we mentioned before there was 630,000 tons of copper. Of those, about 5.7% then will be copper from third parties. Considering the current production trend and adjusted plans, we're maintaining our annual production guidance but increasing a little bit the total share for third parties' copper from the mentioned 5.7% to 7.7% as a result of lower-than-expected Cuajone production due to ore grade. This is something that will be -- we'll start to correct as we move on into the third and fourth quarter of this year. So we're keeping our guidance, and we are expecting some more tonnage coming from the Cuajone operation. As you will know, Buenavista is now operating at full capacity. Regarding the molybdenum production, we're expecting to have a molybdenum volume of 17,500 tons in 2011. For the next years, what we're expecting is, as we're getting to the development of the projects, we're expecting to increase our production accordingly to the projects' start up. I'll make a comment on that later on. Regarding cash cost before byproduct credits, basically we have a higher cost inflation that somehow eliminated some of the savings that we achieved through the Buenavista operation. Overall, we reduced our total cost by $36 million, as we reported, but we had a little bit of cost inflation. Let me mention the main cost increments were: in fuel, we had $12.1 million of higher cost when compared to the prior quarters, so the first quarter of 2011; in power, we had $20 million of additional cost; labor $6.3 million; workers participation, it's $6.6 million; and other cost and inventory variances account for the remaining difference. Could you comment on the projects, Mr. González, please?

Oscar González Rocha

Yes, about Mexican operation or Mexican projects, we have in Buenavista, mainly the mine and new concentrator of 100,000 tons, Raul mentioned at the beginning. That is used in the studies of basic engineering. And we are thinking that we'll be ready by the first quarter of 2015. The SXEW plants #3 and #4 are going to be together for 88,000 tons, like was mentioned. And that will be ready by 2013, the first semester of 2013. The conveying for that, that is the conveyor system, will be ready maybe by the middle of 2012 in order to start the inventory in the areas that we are going to leach in order to be prepared for the production when the plants will be ready. The molybdenum plant, for 2,000 tons of moly, will be ready in the fourth quarter of 2012, is under engineering too. And about La Caridad, the other mine, the shut-off [ph] mine in Mexico, Pilares, will be maybe ready until the first or second semester of 2013. And we will have about 10,000 tons of molybdenum and 155,000 of copper that we will produce from Pilares and La Caridad together. All other projects, I think, will be ready to between 2012 and 2013. For the totally impairment of $3.7 billion that this is already approved, and that we are expecting that. We talked about Peruvian projects, Toquepala mine expansion. We already present the environmental impact study to the government in the month of July. We are expecting that they will provide that and give all the observations in order to answer that and be able to start the construction of the expansion that we already defined, that will be 60,000 tons additionally of the 50,000 tons of milling capacity that we have, and that will give us 100,000 tons of copper, fine copper. We are expecting that, that will be ready for the first semester of 2013. We are about more than 65%, 2/3 of the engineering for that mine and ready for the starting construction, like I mentioned, when we get the approval of the environmental study. And we will have the public hearing with the communities. About Cuajone, we are in a good grade variable study, and we are going to -- we are going with a company in the States, the engineering, in order to see if it's feasible to -- we are thinking that we can go to 105,000 tons or to 120,000 tons from the 85,000 that we are milling today. In order that we'll be ready by the first semester of 2014. Tia Maria, like was mentioned, we have readdressed that to the government. We are expecting that maybe at the end of this month, in the second part of this month we will talk with the Minister of Mines in order to see how we are going to proceed. We present all the observations that was presented to us to them, and we hope that we can do the same environmental impact study. And if not, we will need to present a new one using, like was mentioned, the water from the sea with the desalinization plants. And the plant -- SXEW plant is closer. We will not have any problem with the environmental issues that were mentioned by the community in the first part of this project that we cannot proceed like we expected. All the rest is just maintenance and replacement of equipment, and we have about $2.6 billion impairment for all these projects that were mentioned. I hope that, that will answer your question, Carlos.

Carlos de Alba - Morgan Stanley

Just how realistic is it that Tia Maria can be -- can come back on schedule given that -- my understanding is that it wasn't necessarily the government who opposed the project, it was the community. An environmental study was what presented, and it addressed most of the environmental issues the UN commission have highlighted. So how realistic is it that the community will now accept Tia Maria, when it didn't before?

Oscar González Rocha

Well, we are very optimistic and we think that we answer all the questions that the community, the universities and the organismo of the ONU was presented to host by the Minister of Mines. Then we hope that the government, the new government will help us. And together, we can convince the community in order to start the projects as soon as it's possible, maybe before the end of this year.

Operator

Your next question comes from the line of Felipe Hirai of Bank of America Merrill Lynch.

Felipe Hirai - BofA Merrill Lynch

Could you please confirm what's your production guidance for 2012 if you assume that you don't have any production coming from the new projects? Just wanted to ask maybe what could be the impact from the higher or the recovering grades from Cuajone.

Raul Jacob

We consider our current guidance of 630,000 tons for 2011. And the recovery of the Cuajone operation for 2012, we're expecting production of -- in the range of 660,000 tons of copper for 2012.

Felipe Hirai - BofA Merrill Lynch

And that would not include any acquisition of concentrates from third parties, Raul?

Raul Jacob

There is some included in that, about 20,000 tons. So our own production will be 640,000. That you have to consider not only the recovery in the Cuajone ore grades that will increase or recuperate production at that operation, but also that we will have a full year full capacity Cananea production. We are rescheduling the startup of the Toquepala expansion as was mentioned by Mr. González to the first half of 2013. That changed a little bit our production profile for 2012. Let me add to what I just said that we are expecting to increase our production for 2013 to 850,000 tons of copper, that will include the start up of the Cuajone -- the Toquepala expansion, as well as a portion of the Tia Maria production. And after that, in 2014 and '15, we will be over 1 million tons of production.

Felipe Hirai - BofA Merrill Lynch

My second question is related to your cost. So could you just explain to us what kind of cost inflation do you expect to have over the next few quarters? Or do you expect to see any kind of cost reduction because of -- if you have any like reduction in the acquisition of concentrates?

Raul Jacob

Well, as we replace our own -- third party copper concentrates by our own concentrates, that certainly reduce our operating cost. However, we're seeing some cost pressures coming from fuel, power and labor costs mainly. In the case of fuel, obviously this is something that has eased a little bit considering recent trends on fuel prices. Regarding power. That also -- it's being influenced by lower fuel costs. On labor and local purchases, what we are seeing in both Mexico and Peru, it's some local currency appreciation and that certainly increased our dollar cost. However, we believe that as we put in more production of our own, that we'll have a marginally lower cost of our own average cost. That will certainly improve the cost profile for the next year and for the rest of 2011. However, it's a -- there are forces that are pressuring for higher costs, and these are the ones that are tending to reduce operating costs. So only we expect to have a cost in the range of where we are or a little bit lower than this for the rest of the year.

Felipe Hirai - BofA Merrill Lynch

Okay, Raul. If I may ask one final question. How should we think about the shareholders return for the next few quarters, as you now have your -- you increased your buyback program, but you're also paying dividends? And you're also going to increase your investments for the next few years. So how can we think of this balance of paying dividends, doing buybacks and investing?

Raul Jacob

Well, regarding the buybacks, the company decided to increase the buyback program considering that we were having a different, a special circumstance in the market. On dividends, as you know, this is a matter that is reviewed and resolved at each quarter at the board meeting. The company has shown practice of sending any free cash flow to shareholder. And obviously, we are going to increase our CapEx in the next few quarters. We'll certainly have to review our cash position, and that is something that will be discussed at the board level.

Operator

Your next question comes from the line of Rodrigo Barros of Deutsche Bank.

Rodrigo Barros - Deutsche Bank AG

A couple of questions. First one on the share buyback increase that you announced from $500,000 to $1 billion. I wonder, how can I say -- in terms of rise speed, I mean the stocks are definitely selling off in terms of concerns on the U.S. So I wonder if you could tell anything more about how fast you want to implement this? And then my second question would be on Tia Maria, again. We definitely see -- at least, we're hearing that the government wants to be more, I would put this between quotes, "more friendly with the mining companies." At least that's the feedback we're getting. I wonder, in terms of redoing the environmental assess, redoing some engineering calculations, how long do you think it would take to redo the calculations? I think that's it's a new program, you're talking about one year delay, less than that or more like 2 years delay?

Raul Jacob

Would you like to comment on that, Mr. González?

Oscar González Rocha

Yes, about the Tia Maria, like I mentioned, we think that we can get the project approved with the environmental impact study that we have already presented or with a new one by the end of this year. And the construction preview that we expect in order to produce will be close to 18 months. That means that for the first semester of 2013, we'll be in position of producing the 120,000 tons that the plant can produce. Then that is our thinking, and we hope that we can accomplish. And we don't foresee any minor problem within that we are already working with the community. Meanwhile, the new government take his position. And like I mentioned at the end of this month in order that we will be ready for talk about these and that they are all ready with all the implementation of the offices for the Minister of Mines, we will talk with them and see how that will be addressed by them and by us with the community in order that we can start the construction. Like I mentioned, we are ready for starting the construction. We have part of the equipment of the mine that right now we are using in Toquepala and Cuajone since some months ago, but that is easy to take back to Tia Maria.

Raul Jacob

Yes, Rodrigo, regarding your first question on the share buyback program. Basically, by its nature, we want to -- the intention of this is to support a reasonable price for our shares given the implications of the strategy that the company wants to pursue this. We can't comment any additional more details on that.

Rodrigo Barros - Deutsche Bank AG

Okay. If may, just one more question. I think we have discussed in the past that the hedging stretches of the company, to a larger extent, was to guarantee cash flow for the ongoing operations for the CapEx. Do you think that now that it's clear that CapEx would be much lower than expected in the year, you don't have to do additional hedging in the year? And following on the question, do you also think that when investment programs really starts to occur that you have to work with higher hedging ratio than, let's say, 35% that you have right now?

Raul Jacob

I think that the same principle applies here, Rodrigo. I'm sorry, we can't comment on the company's strategy regarding hedging. As you know, the main principle here is to defend our revenues. This is always short term, and we are applying this to the study as we feel it's necessary.

Operator

Your next question comes from the line of Jamie Nicholson of Crédit Suisse.

Jamie Nicholson - Credit Suisse

I have 2 questions. The first one relates to your outlook for CapEx. You mentioned $700 million this year is your budget, and I know that your projects in Peru are still uncertain on the timing. But can you give us a sense of what you plan to spend -- at least what you know you'll be spending in Mexico over the next several years, 2012 through '15, and also how you plan to finance that if you feel your cash generation is strong enough to finance your 3- to 5-year CapEx budget internally, or if you expect to raise financing for that? That's my first question.

Raul Jacob

Regarding CapEx, as we indicated, we are reducing our budget for this year to $700 million. It is more like a forecast. The budget is still what it is. But that basically pushes to 2012 and on some more capital expenditures in the total capital program for the next few years, the next 4 years and 2011, 5 years, it's $5.5 billion. So let me summarize what we're forecasting at this point. Our total CapEx program for the years 2011 through 2015 is $5.5 billion. And currently, our forecast is as follows: for 2011, $700 million; for 2012, $2.2 billion; for 2013, $1.3 billion; for 2014, $800 million; and for 2015, $500 million. And these figures include maintenance CapEx in the range of about $200 million per year.

Jamie Nicholson - Credit Suisse

That's very helpful. And that $2.2 billion expected next year, is that something you feel you can finance with your cash and internally generated cash flow? Or is there expectations to fund that with additional debt?

Raul Jacob

Well, at this point we're expecting to finance those expenditures with our cash position, as well as the current flow generation that the company will do in 2012.

Jamie Nicholson - Credit Suisse

Okay, great. And then my second question relates to the big increase in your working capital in the second quarter. And I understand that some of that was due to tax payments and work or profit sharing. But I also noticed there was an increase in inventories, as well as it looks like a revision of your inventory figures from the prior periods upwards. Is that -- can you elaborate a little bit on what, related to your increase in inventories and accounts receivable, was that just more related to your growth in production? Or do you expect that to stabilize at these levels? Any other comments on kind of your accounts receivable and inventories would be helpful.

Raul Jacob

Certainly, Jamie. Well, as you well pointed out, our working capital increase in the second quarter of this year. It was -- there was a draw in cash flow of $543.3 million due to working capital variances. And those break down as follows: we had an accounts receivable increase of $132 million; inventories grew by $68.4 million. Those 2 were directly related to the increase in production from Buenavista, basically. And I think that this is basically the initial inventory and supply that you need to have in order to operate at an appropriate level. So for the next few quarters, we don't expect this to happen again. We believe that we have a reasonable inventory level. And well, we have besides this, the most important variance in working capital was something that is usually happening at the second quarter of the year. We had an increase in payments related to taxes and profit sharing. Those 2 payments are usually due at the beginning of the second quarter of the year. We did that particularly in the profit sharing, which is paid once a year. We did that in the second quarter and that represented a significant reduction in cash flow. Now on this matter, we will have a positive cash flow figure for these 2 variables, since this is an annual payment, for the rest of the year. So for the third and fourth quarter, considering current prices and the production outlook that we mentioned, we should have a little bit of a positive variance in working capital regarding taxes and profit sharing. As I mentioned, they are paid once a year in the second quarter.

Operator

Your next question comes from the line of Alex Hacking of Citibank.

Alexander Hacking - Citigroup Inc

I have a couple of follow-up questions. First one, both relate to CapEx actually. The first question is the $2.2 billion that you're considering to spend next year. How much are you assuming from Tia Maria in that number? And then a second question is regarding inflation in CapEx and how comfortable you are with the budgets? In the last few months, we've seen projects that we're conceived only 2 or 3 years ago with budgets up 30% to 40% [indiscernible] and so on. When was the last time you reviewed the budgets for your projects, your $5.5 billion to $6 billion? And how comfortable are you with those CapEx estimates?

Raul Jacob

Okay, for the Tia Maria budget for 2012, we're estimating a little bit north of $400 million. On cost inflation on capital goods, we're certainly seeing some of that as we have some pressure to develop the projects. I don't know if -- Mr. González, would you like to comment on that?

Oscar González Rocha

Really, in Tia Maria, within that, will be maybe, as you mentioned, around $400 million or a little over then $400 million because we need to remind you that we already compromised. And we already spent close to $400 million in that project. And it is $1 billion, then the $400 million in 2012 will give us a remaining of $200 million for the 2013 beginning of the year, like we mentioned that is when we will have ready in the first semester the production for Tia Maria, no? I think that, that will give us the total amount of $1 billion. And within that, that is the cost that we have by sure because we already have finished in the engineering at 98%, and then we are ready for consortium and this spending really and the delivery of the equipment that are already in some places where we fabricate our storage for us, no? I don't know if that answers the question or what.

Alexander Hacking - Citigroup Inc

Yes. If I could just follow up, I guess, when were the budgets for the projects last reviewed? And are you planning to review the budgets anytime coming up? I guess, I'm asking how likely is it that we find out that the CapEx budget is going to need to be raised.

Oscar González Rocha

Well, at least for Tia Maria, we don't foresee, like I mentioned, any problem in any variance. In the Toquepala, we have approved by the board is $600 million. Maybe we'll be a little higher according with some changes that we did in the location of the plant in order that improve the capacity from 40,000 to 60,000 more milling capacity. But I don't think that we'll be more than $150 million more in order to go from 600 to 750. The case of Cuajone, continued with Peruvian projects, we don't have a figure yet because we only get approval by the board $300 million and within that is going to be more than that, as soon as we finish the basic engineering and the fission to go to 120,000 milling capacity instead of 105,000 that we see at the beginning for the 300 million, no? Beside the Mexican projects, I think that the only one that is spending to find out the exact amount of investment is the new concentrator of 100,000 tons of milling capacity that is under the basic engineering, and we don't have a still an exact figure. But the SXEW plant, the moly plant, are -- with the amount that was mentioned by Raul, we don't have any doubt that we'll be that amount of investment for that project in the Buenavista unit, no?

Raul Jacob

Let me add that for several of our projects, we did put purchase orders a couple of years ago. In the case of Buenavista, some of the equipment was already purchased in 2006 and '07. So we basically fixed somehow the capital cost of those projects. To some extent that's indicated by Mr. González, the Buenavista new concentrator is the one that has no specific commitments from our suppliers. So on that one, we may have some cost inflation on the capital goods.

Operator

Your next question comes from the line of Rene Kleyweg of UBS.

Rene Kleyweg - UBS Investment Bank

I think most things have been touched on. I jumped on the call a little bit late, so apologies for that if this was ready covered in the introduction. But could you just give us any -- could you quantify the amount of third-party concentrates that you treated in the second quarter, or that were sold in the second quarter? And also in terms of hedging, the previous disclosure that you provided has been removed from the release. Could you give us an update on where you are with hedging?

Raul Jacob

On hedging, basically, we're maintaining the same position that we indicated on the past quarter. About 32% of our remaining 2011 production, it's hedged at a $4.08 per pound, 30% it's with zero-cost collar that goes from $3.02 per pound up to $4.84 per pound, so about 68% of the company's sales are covered with some -- are basically enduring the result, the current market prices, and the rest, 32%, is protected at $4.08 per pound. And regarding the third parties' copper concentrates, we basically increased that figure from about 30,000 tons in the last quarter to 48,000 tons, which is our current estimate for the rest of the year. So we are increasing about 18,000 tons our third parties' copper concentrate for 2011, in total.

Rene Kleyweg - UBS Investment Bank

But in terms of what was included in cost for the second quarter, do you have an indication of the impact of treating third parties, what kind of volumes are involved in terms of second quarter sales?

Raul Jacob

About 12,000 tons, Rene.

Operator

Your next question comes from the line of Jim Dewry [ph] of AIG.

Unknown Analyst -

I was also late getting on the call. Did you update on the status of the discussions with Americas Mining about the merger?

Raul Jacob

Yes. Well, just what we reported is that the special committee is still reviewing this matter. We think that we should have some news during the third quarter, but that's basically where we are now.

Operator

[Operator Instructions] Your next question comes from the line of Santiago Perez Javier [ph] of TBM.

Unknown Analyst -

My question was also regarding the AMG transaction. If you could give us any more details on that. I don't know where you're standing, but I think it was already answered.

Raul Jacob

Yes, we already answered that, Santiago.

Operator

Your next question comes from the line of Dan Richmond [ph], private investor.

Unknown Speaker

My question relates to the Buenavista labor contract. Can you disclose or will you in the 10-Q the significant terms, the lengths, whether there's any built-in wage increases and whether there's a no strike clause as in your Peru contracts?

Raul Jacob

Well, the Mexican labor contracts are different than the Peruvian ones. But in this case, basically in Mexico, mandated by law, you need to discuss salaries each 2 years. And we're considering and we're including in our labor contracts some productivity incentives. And we expect them to work nice as they have worked for our La Caridad operations in Mexico as well. So we are basically very positive regarding these labor contract. Also, it's important that we have now an established union to deal with because that will certainly help the company relations, the labor force of Buenavista.

Operator

Your next question comes from the line of Dan Stewart of Raymond James.

Dan Stewart

I'm just trying to relate, as quickly as possible. I missed with the regard to your buyback, how many shares you have purchased at this point and what's your average cost was.

Raul Jacob

Let me focus on that. We purchased 4.6 million shares at a total cost of $148 million. That's an average price of $32.32 per share.

Operator

[Operator Instructions] There no further questions at this time.

Raul Jacob

Well, we finished our conference call for the second quarter and first half of 2011 results. We thank you very much, all of you, for participating in the call. And we expect to have you in the next quarter, or when we have news on the company. Thank you very much for today.

Operator

This concludes today's conference call. You may now disconnect.

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