Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Raul Jacob - CFO of Peruvian Operations and Investor Relations

Oscar González Rocha – Chief Executive Officer

Daniel Muniz – Grupo Mexico's Chief Financial Officer

Analysts

Santiago Perez Javier – TBM

Andre Pinheiro – Itau BBA

Rene Kleyweg – UBS

Jamie Nicholson – Credit Suisse

Steve Myers - Citizens Trust

John Tumazos - John Tumazos Very Independent Research

Christopher Buck – Barclays Capital

Dan Richmond – Private Investor

Southern Copper Corporation (SCCO) Q4 2011 Earnings Conference Call February 10, 2012 11:00 AM ET

Operator

Good morning and welcome to the Southern Copper Corporation’s Fourth Quarter 2011 Results Conference Call. With us this morning, we have Southern Copper Corporation's Mr. Raul Jacob, CFO of the Peruvian Operations and Investor Relations, of Southern Copper will discuss the results of the company for the fourth quarter and the year 2011 as well as answer any questions that you might have.

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

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

Raul Jacob

Thank you very much Curt, and good morning to everyone and welcome to Southern Copper's fourth quarter’s 2011 earnings conference call. Participating in today’s conference call is also Mr. Oscar González Rocha, Southern Copper’s CEO and Mr. Daniel Muniz, Grupo Mexico's CFO.

In 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 expansion projects and capital spending program. After that, we will open the session for questions.

Let’s focus on the metal market and prices during the fourth quarter, metal markets continue to be affected by the negative macroeconomic events such as the European recession and the debt crisis. Copper as you know is our main product with 77% of total sales in the fourth quarter of last year. Even though we believe copper demand is negatively influenced by the indicated macro outlook, fundamentals for this metal improved in the recent months due to the European destocking a rebound in Chinese consumption and a structural underperformance of supply.

Several sources as well as our own commercial intelligence estimate that the copper destocking process finished in both Europe and Asia as I said, and the recent growth in Chinese copper imports to about one million tons for the past quarter half of it in December shows the recovery of visible consumption in this country.

Demand from emerging economies is also growing at a good pace offsetting weaker consumption from the European and American markets. According to CRU, total demand growth is estimated at 2.2% for 2012. If we consider global copper demand at about 19.6 million metric tons, this represents approximately 430,000 tons of additional copper tonnage required in 2012.

On the supply side, production has underperformed badly in 2011 and particularly in the last quarter of the year due to labor and risk, power shortages, adverse weather conditions and ore grade declines. We consider that these events are likely to continue in 2012 maintaining tightness in the copper market. Currently, CRU estimates supply growth of 2.2% for 2012. It also estimates a market deficit of approximately 400,000 tons for the year.

Focusing on silver, which is our main by-product in the fourth quarter, it was our main by-product it represented 7% of our sales and it’s currently our – as I told our main by-product. Silver prices average 31.81 per ounce in the fourth quarter of last year, 18% less and it’s priced in the third quarter of 2011. We believe that silver prices will have a strong support in 2012 due to its industrial uses as well as being perceived as a value shelter in times of economic uncertainties.

In the case of molybdenum its sales also represented 7% of the total company sales in the fourth quarter of 2011. Even though we saw a 5% molybdenum demand recovery in 2011, we are still in a surplus market in this metal. As a consequence, the average market price decreased from $14.44 per ton in the third quarter of 2011 to $13.20 per pound in the fourth quarter and an 8.6% decrease in price. At current price levels, we are seeing some production cuts particularly from high cost Asian producers. We expect that in 2011 that this will help to balance the market and decrease the current market surplus thereby improving market prices in the near future.

And focusing now our production started by our main product which is copper, our copper mine production in the year 2011 increased by 22.8% compared to a year ago. This increase was mainly the result of higher production at our Buenavista mine, which is currently operating at 100% of its installed capacity. Refined copper and rod production in 2011 increased significantly too compared to 2010 allowing the company to earn copper premiums over the spot prices. Total copper production for 2011 were 638,000 tons, 688, 810 tons. Of those, 8% about 61,000 tons were from third-party copper concentrate.

In 2011, we completed all the repairs to the Buenavista property at a total cost of $212 million, that’s allowing for the restoration of full production at this operation. Of the total repair cost, $81.1 million were charge to operating cost and of those $81 million $45.2 million were charged in 2011. For 2012, we are expecting production of copper of about 640,000 tons of which about 5% will be from third-party copper concentrates.

Looking into molybdenum, molybdenum production decreased by 9.5% in 2011 due to lower production at the Cuajone mine as a result of changes in grade and recoveries. This lower production was partially offset by higher contribution of our Caridad and Toquepala mines. For 2011, our guidance for molybdenum production is about 17,200 tons for the year.

Regarding silver, silver mine production slightly increased in 2011 as a result of 1.5 million ounces of higher production at the Buenavista mine. This better or higher production from Buenavista was offset by lower production from the other mines. In 2011, we sold 14.2 million ounces of silver and we expect to sell a similar amount in 2012.

Going into our financial results and before we review the details on our financial performance let me say that 2011 was a remarkable year for Southern Copper. A reflection of this is a record levels achieved by the company in sales, EBITDA and net income.

2011 sales were a record as I just said of $6.8 billion or 32.4% higher than the $5.1 billion that we had in 2010. This increase was mainly the result of higher copper sales volumes from Buenavista production, higher copper, silver and zinc prices for the year 2011. For the fourth quarter of the year, sales were $1.7 billion 11.4% higher than the $1.5 billion that we had in the fourth quarter of 2010. This increase was mainly the result of higher copper sales volumes from Buenavista which more than offset the effect of lower prices for copper and molybdenum in this quarter.

When comparing fourth quarter 2011 sales volume to the prior quarter, copper sales volumes increased by 4%, molybdenum by 4.8%, silver by 5.8%. Zinc by 12.8% and sulphuric acid sales by 18.7%.

Our total operating cost and expenses have decreased for the third consecutive quarter improving the company’s profitability. For the fourth quarter of 2011, we had a cost reduction of 2% or $16.5 million when compared to the third quarter of the period.

Basically, higher leachable material capitalization and lower worker participation allow us to offset higher inventory consumption and cost inflation and fuel repair materials and contract per service.

Our EBITDA in 2011 was also a record of $3.9 billion compared to $2.9 billion in 2010, an increase of $1 billion or 36.4% higher, with a margin of 57.3% in 2011 that compares to 55.6% in 2010. EBITDA for the fourth quarter was 965 million, 5.4% higher than the $916 million that we had in the fourth quarter of 2010.

Operating cash cost per pound of copper before by-product credits was $1.66 per pound in the 2011 and this was compared with $1.52 per pound in 2010. Operating cash per pound in 2011, net of by-products was $0.41 making Southern Copper one of the lowest cost producers in the industry.

:Looking at the fourth quarter, Southern Copper’s operating cash cost including the benefits of by-product credits was $0.52 per pound. This cash cost was 4.1 cents higher than the 48.4 cents of cash cost that we had in the third quarter of 2011. Operating cash cost per pound of copper before by-product credits was $1.64 per pound in the fourth quarter of last year.

This compares to $1.65 per pound in the third quarter of 2011, the $0.01 per pound decrease in operating cost before any credits is the result of the production increase from our Buenavista provision that managed to absorb cost inflation coming from higher repair materials and contractors.

Regarding by-products, we had a total credit of $382.7 million or $1.11 per pound in the fourth quarter of last year. These figures compare with the credit of $300 million - $392 million or $1.17 per pound in the third quarter of 2011. As previously mentioned, most of our by-product sales volumes increased in the fourth quarter of 2011 when compared to the third and consequently, the $0.06 reduction in credits as we had in the last quarter were the result of lower by-product prices.

Net income for the year 2011 was an all-time high of $2.3 billion, 50% higher than the $1.6 billion that we had in 2010. Net income for the fourth quarter was $527 million, 9.1% higher than the $492 million that we had in the fourth quarter of 2010.

Diluted earnings per share were $0.64 per share in the fourth quarter of 2011. This figure compares with diluted earnings per share of $0.58, a 10% increase. For the year 2011, earnings per share were $2.76, 51% higher than the dollar and $0.83 of earnings per share obtained for the year 2010.

Going, discussing our expansion on capital projects, in the year 2011, capital expenditures were a record of $612.9 million, which represents 26.2% of our net income. Capital expenditures in the fourth quarter were $275.9 million compared to $127.6 million in the same period of 2010.

Regarding the Buenavista expansion, after obtaining the necessary environmental permits, construction has started at the SXEW III plant of the Buenavista mine. Some of the equipment are really purchased for the Tia Maria project will be used for this SXEW III plant. This will allow us to increase the annual SXEW III plant capacity from 88,000 tons to 120,000 tons. The new plant should begin operating in the second half of 2013, and the project has to be adjusted to $444 million.

Associated with the SXEW III plant we are also building a facility at Buenavista. This investment consist of a system that improves the SXEW copper production by increasing recovery and reducing the required current to extract copper from minerals.

Overall progress is 88% and this facility is expected to begin operating in the second quarter of this year has the total budget cost of $70 million of which $48.7 million has been sent through December of last year.

2000 ton per year new Buenavista molybdenum circuit is an equipment purchased in a stage under a ETCN contract. Environmental permit will be obtained shortly and we expect to begin construction in the next quarter with production beginning in the second quarter of 2013. The total cost of $38.2 million.

The new Buenavista concentrator with a milling capacity of 100,000 per day is in process. Basic and engineering are moving forward as per schedule. Environmental permits have been obtained and we are looking our supplier’s proposals for the main equipment.

Purchase orders for crushers, primary and secondary mills and motors has been in place. The new concentrator will have an estimated annual production of 188,000 tons of copper and 2600 tons of molybdenum, which is expected to begin operation by 2015.

The total budget of this project is $1.4 billion. Required infrastructure from these projects including power, water, water, roads, shops, laboratories, town sites, etcetera, are included in the master plan. A preliminary study has been completed for this project as well.

Regarding the Pilares project, on October 27 the Board of Directors approved the development of the second stage of the Pilares mine with a budget of $136.3 million. In 2008 we acquired 100% of ownership of Pilares with the intention of operating it at an open pit facility. Current mineral resources are estimated at $43.4 million tons with 0.789% of copper sulphide content and 0.077% copper oxide.

We expect to increase copper production by 40,000 tons per year by sending minerals from the Pilares site to our La Caridad concentrator. Pilares should begin operations by the first quarter of 2013. Also in October the Board of Directors approved an expenditure of $131 million for the development of the Angangueo mine.

This mine is located in Michoacan, Mexico and the target deposit with an annual production potential of 36,000 tons of copper, 4.5 million ounces of silver and 41,000 tons of zinc. The project is scheduled for completion in the second half of 2014.

Regarding the Toquepala expansion, we have begun the expansion to increase our the current milling capacity to 120,000 tons which should increase annual production of copper by 100,000 tons and the molybdenum production by 3100 tons of additional molybdenum production.

Through December 31 of last year, we had to spend 33% of the $600 million approved and project completion is scheduled for the first quarter of 2014.

In the case of the Cuajone operations, a purchase phase of this expansion plans that we have for this mine increasing the milling capacity and a change to a variable cut-off grade methodology. The project completion of this stage is scheduled for the third quarter of 2012 and this is expected to add 22,000 of copper production per year.

Through December 31 of last year, the company has spent 27% of the $300 million budget at this project.

Regarding the Tia Maria project, we have initiated a bidding process to prepare a new environmental impact assessment study for the project that will address recent guidance related to the study as well as the concerns expressed by the neighboring communities. We are confident that this initiative will allow us to gain approval for the developing of the 120000 ton annual production in copper price. Assuming the new EIA studies approved during 2012 where we are scheduling the project gets up to 2015.

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 January 27, of this year, the Board of Directors authorized a cash dividend of $0.19 per share of common stock and a stock dividend of 0.0107 shares of common stock per share of common stock. The stock dividend will be paid with shares of common stock held in SEC’s treasury. Please keep in mind, that shares held in treasury on the record date will not be entitled to either the cash or stock dividend. SEC deletes that the dividends will provide to stockholders are returned on their investment while the company maintains strong cash position. The cash and stock dividends are payable on February 28, 2012 to shareholders of record at the close of business on February 16 2012.

The mechanics regarding the announced stock dividend will be consistent with market practice for stock dividends and the treatment of fraction of shares. In consultation with SEC’s transfer paying agent, BTC and its participant including among others the Peruvian government. The investor relations department of SEC is available to address further questions on this matter.

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

Question-and-Answer-Session

Operator

(Operator instructions) Your first question comes from the line of Santiago Perez Javier from TBM your line is open.

Santiago Perez Javier – TBM

Hi good morning Raul. Thanks for taking my questions and congratulations on your results. And several sources have been mentioning that Southern Copper is getting with a community and authorities in order to discuss the Tia Maria project in the next 15 days. What outcome should we expect of these meeting and also could you give us more color on the project, will it be like concentrate of will it complain any purchasing facilities? Thank you.

Oscar González Rocha

Sure, how are you? On the first question was on the Tia Maria project I couldn’t help you well.

Santiago Perez Javier – TBM

Yes regarding the Tia Maria project there has been several papers mentioning the Southern Copper will meet authorities on the following 15 days in order to discuss it with local communities. Is there anything we could expect from this meeting?

Oscar González Rocha

Well, basically the company has been in talks with the governmental authorities in order to understand their concerns and we do know we are under concerns of the local communities and we plan to address these questions and these concerns through our new environmental impact assessment that the company is preparing.

Regarding the project which was your second question, this is a project that will produce concentrate that will deal approximately the production mentioned I will repeat just for reminding it 36,000 tons of copper, 4.5 million ounces of silver and 41,000 tons of zinc. This is a poly metallic deposit and it’s located in Mexico.

Operator

Your next question comes from the line of Andre Pinheiro from Itau BBA. Your line is open.

Andre Pinheiro – Itau BBA

Good morning Raul and everyone. Well, I just have two quick questions the first being that I’d like to know if you could provide a little bit of guidance on the company’s copper hedging strategy for 2012 and secondly if you can tell us what you are expecting in terms of ore grade level impacts on production this year. That would be great. Thank you very much.

Raul Jacob

Okay, let me focus on the last part our productions for the year it will be approximately 610,000 tons of copper from our own operations on top of that the company will process about 30000 tons of copper from third-parties so the total production for 2012 from copper is 640,000 tons. Basically, in terms of ore grade the company is seeing a regular deal with no important variances working from recovery from production in our current plans. I mentioned already that we have an initiative to improve the production at the Cuajone operations. Regarding the hedging, would you like to address that Daniel?

Daniel Muniz

Thank you, first of all to remind you all that we’ve hedged for the first quarter 2012, 7000 monthly per metric ton at the year ago quarters and that we did that long time ago it was 350, the put and 580 in the core. That gives us a 3.14% of our estimated production hedged. We haven’t addressed that in the Board and that do you know our hedging policy depends on what are the capital needs and what are the capital requirements, how are we looking at stocks and the copper fundamentals and we’ve done it on a quarter-over-quarter basis with a deliberation at our Board Meeting. So at this point, I mean we’ve already hedged for the first quarter 2012 as I said and nothing else have been hedged to address at this moment.

Andre Pinheiro – Itau BBA

Okay, great. Thank you, Daniel, thank you Raul.

Operator

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

Rene Kleyweg – UBS

Good morning gentlemen and thanks for the presentation. I just wanted to follow up on the comments in terms of the dividend outlook. Given the CapEx program is now up to $1.5 billion. Could you give us I presume the intention is still not to use the balance to pay dividends. So if we look at how 2012 will unfold in terms of CapEx intensity can you confirm the first half of this year is a bit lighter in terms of CapEx intensity there for the dividend yield or the different payments could be higher in the first half of the year or we’d be managing the cash balance for an even dividend distribution through the year?

Daniel Muniz

We are basically hitting those. This is the first that we given out cash and stock dividend. As you know, I mean we have acquired an important amount of buyback in the past. So I mean the Board as you know in the quarter will meet. We will deliver what if it the dividend should be based from now and the CapEx requirements will going forward. And the idea here was to capitalize on the probable buybacks and taking cash for this CapEx programs. I mean, of course we haven’t been able to spend effectively we wanted in the past that we think this year we could. And that’s part of the equation out for dividend.

Whether next quarter is going to be stock and cash? We still don’t know. We have to talk about that at the Board Meeting.

Rene Kleyweg – UBS

But if I look at the stock, the stock at this time is taking you back up to 8.50. Is there a possibility that you will continue to pay stock dividends beyond that? Or is that dependent on the stock that you buyback in the market or is there any…

Daniel Muniz

I think again it will depend on how we are at pushing the gap in projects and expenditures. As you know sometimes there is a lot of purchases we do before and you allocate commitments and you give anticipated payments for lead time improvements et cetera that’s how we are going to the second quarter or the end of the first quarter Board Meeting analyze that. But at this point to be honest the management doesn’t have any particular view of that and that will be discussed at the next Board Meeting.

Rene Kleyweg – UBS

Thank you and if I may just a quick, we’ve touched on Tia Maria, is there any update that you can provide in terms of timetable on programs at Toquepala an how things are expected to unfold during the rest of this year. I believe you’ve got about $200 million of CapEx on the expansion of the cost driven capacity at Toquepala EMR toward this year. Whether that assume in terms of your ability to start moving forward on CapEx spend at Toquepala in terms of which quarter you got implied spending exactly?

Raul Jacob

Well for the full – for the full year, Rene, we are expecting to spend close to $75 million regarding relating directly to the Toquepala expansion. Beside those, we have the different some more expenses that will increase the expenses specifically the Toquepala operation, but that’s strictly related to expansion and this is a project that relates to an improvement in cost. We have $75 million. I wonder if Mr. González Rocha will like to make a comment on this.

González Rocha

The only thing that we are going to spend in the expansion after we get the approval of the environmental impact study that we think that would take at least maybe three months more in the second half of the year, with 200% in the project expansion at around $60 million and in the operation CapEx we’ve planned to spend in the order of $150 million. That will be for Toquepala. Totally for Southern Copper in the Peru area, we have a CapEx of $470 million.

Rene Kleyweg – UBS

Thank you gentlemen.

Operator

Your next question comes from the line of Jamie Nicholson from Credit Suisse. Your line is open.

Jamie Nicholson – Credit Suisse

Hi, thanks for the call. I just want to clarify what you were saying about funding your CapEx plan. Did I hear correctly that you are planning to fund that out of cash flow or do you have any plans to perhaps tap the debt markets for funding this year?

Raul Jacob

Well at this point we are going to use our cash position as well as cash generated by the operation in order to fund our project. As we move along with the project and they will start operating we will probably consider going back to the debt markets for issuing more funds to develop other stages of our capital plans.

Jamie Nicholson – Credit Suisse

Okay great. Thanks, and then just to clarify, the short-term investments, the $522 million on your balance sheet, that’s fairly liquid if I remember correctly, is that something you could sell to also fund your CapEx plan?

Raul Jacob

Basically, that’s correct, Jamie. They are short-term investments considering US GAAP rules, we have at certain point in time we have prepared by them as short-term investments and not cash positions. It’s mainly treasury investments or part of funds that are available for investing in our projects. It is sort of cash flow.

Jamie Nicholson – Credit Suisse

Okay great. Thank you very much for the call.

Operator

Your next question comes from the line of Steve Myers from Citizens Trust.

Steve Myers - Citizens Trust

Hello, gentlemen, thank you for taking my questions. Did you mentioned that present copper content reserves is 0.7896?

Raul Jacob

Well that was for over a specific – for the deposit of Pilares. That’s one deposit that the company acquired in 2008 and we are developing it to exploit that as pit mine that would supply its supply minerals concentrator of La Caridad.

Steve Myers - Citizens Trust

Overall, what is Southern Copper’s ore grade please? And as the trend is in what place?

Raul Jacob

Well just hold on a second. I’ll tell you right away. Okay, you’ve seen what we believe our long-term prices for copper?

Steve Myers - Citizens Trust

Yes.

Raul Jacob

Currently the copper average is about 0.5% in our reserve base. The average for the open pit mine it’s 0.46%. This includes for Cuajone 0.59%, for Toquepala, 0.56% for Buenavista, 0.56% for Caridad which has a very high molybdenum content is 0.26%, the average of those, the weighted average is 0.47 and in terms of ore grade it’s also 0.5%.

Steve Myers - Citizens Trust

Okay, a question please the trend, you say that on average is 0.5%, okay. Say five years ago what was the average ore grade? Well I’m getting at is just the overall trend over the last five years there.

Raul Jacob

It has decreased a little bit from five years ago and the reason for that is that we are also considering a higher price of copper for our long term trend. So that makes that certain parts of the mine that in the past were not profitable, now its par. And that’s one of the sources for having the reserve base that we have. So I don’t have the number right here but if I get it through the call I’ll mention it. It was close to 0.6% my recollection of this is correct. I’ll tell you in a few minutes.

Steve Myers - Citizens Trust

Okay. Thank you so much.

Operator

Your next question comes from the line of Daniel Rohr from Morningstar your line is open.

Daniel Rohr – Morningstar

Hi, thank you for taking my call. I’m sure that many investors appreciate the attractive cash dividend you guys have paid but what was the purpose of the in kind stock dividend in the quarter?

Raul Jacob

Well, basically it’s a matter of being prudent. We at the end of the day during a volatile market and the company has an aggressive portfolio of projects to develop. So cash management for us is important. We have been very prudent on this day one and we have the stock position in our hands and we wanted to provide our shareholders with value that will come through the shares rather than a cash out from the company that will be required to our …

Daniel Rohr – Morningstar

Yeah, I certainly understand the cash preservation logic behind, what’s the purpose of any in kind stock dividend at all? I mean there no economic content, are you just cutting the same pie into smaller pieces?

Raul Jacob

Well, the reason for that is to provide our shareholders with shares that we’ll acquire at much lower price than what market currently is.

Daniel Rohr – Morningstar

All right.

Daniel Muniz

But below the cash preservation that you are pointing out.

Daniel Rohr – Morningstar

Okay, all right. I apologize I had to jump in late. So if you addressed this question I’m sorry, but I didn’t see your cash cost numbers for the fourth quarter in the release, I didn’t see the full year numbers, could you share those numbers before and after by-products if you have authority?

Raul Jacob

Yes, hold on a second. Okay, in the fourth quarter, cash cost including the benefit of by-products was 52.5 cents per pound. Before subtracting the – was $1.64 per pound.

Daniel Rohr – Morningstar

Okay, so it looks like it’s before credits it’s come down a little bit from second quarter and third quarter, is that fairly attributable to the full ramp up of Buenavista or is there some other benefit you guys are realizing?

Raul Jacob

Yes, mainly the Buenavista operation increased, I mentioned at the beginning of the conference that the company has managed to reduce its operating cost of sales, in the second quarter. Each quarter has been lower cost compared to prior ones in absolute dollar terms. But we have basically some cost inflation coming from higher fuel, repair materials and contractors that were more than absorbed by the higher production of Buenavista.

Daniel Rohr – Morningstar

Right, thank you very much for the additional color.

Operator

Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Your line is open.

John Tumazos - John Tumazos Very Independent Research

Thank you for taking my call for your various explanations. The mine output, rose by a 109,000 tons in 2011. Buenavista’s capacity is larger, I believe $288,000 or so. Did other mines experience declines, or did Buenavista run at a little capacity utilization in the first half of 2011?

Raul Jacob

It’s the second option, Buenavista was producing under capacity in their first quarter of 2011, in the second quarter was a full capacity quarter from their own. We had a lower contribution from our Cuajone operation. Cuajone was about 25000 tons less through 2011, you compare that to 2010.

And then you have a little bit less production in Toquepala and Caridad, that’s basically the source of the difference that you indicated was mainly difference between the contribution of Buenavista less slightly lower production in Toquepala and Caridad and much lower production in Cuajone that will be picked in the next few quarters. I like to comment also that Buenavista has a capacity of 180,000 tons of copper equivalent considering its milling capacity as well as SXEW plant capacity.

John Tumazos - John Tumazos Very Independent Research

If I could ask a second question and forgive my high level of interest. Is the current capacity roughly 0.6 million metric tons adjusted for grade fluctuations and the capacity additions about 0.5 million metric tons to yield a 2015 capacity projected of about 1.1 million tons?

Raul Jacob

Well, long-term that would be our goal in production, to be over a medium term that will certainly vary based on ore grade variances but once we develop all the projects that we mentioned through the call, our production should be in terms of capacity over 1 million tons close to 1.1 million tons.

John Tumazos - John Tumazos Very Independent Research

If I could bother you one more time, could you rank the five projects by rates of returns, Buenavista expansion, Angangueo, Toquepala expansion, Cuajone expansion, Tia Maria?

Raul Jacob

Well, we do that, but we don’t disclose that clear.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Operator

Your next question comes from the line of Christopher Buck from Barclays Capital. Your line is open.

Christopher Buck – Barclays Capital

Thank you. Just a very quick follow up regarding funding. In terms like, you guys are not expecting to come back to the bond market until you have some EBITDA coming online from some of your additional projects. So, I’m just wondering if you guys have a leverage target in mind and as where you already have quite low leverage ratios. So wondering a long term target?

Daniel Muniz

Yeah, basically we…

Christopher Buck – Barclays Capital

Thank you.

Daniel Muniz

We pointed out, we feel that no tapping the market needed for this phase of CapEx and for projects. Of course we recognize that good conditions out there and we will see whatever should a company – production went to the market yesterday. I mean there are great conditions to be achieved. We don’t need that and we just analyze if we weren’t at the markets in the near future, but we are looking at finding a project to look after.

Christopher Buck – Barclays Capital

Okay and do you have sort of a leverage target in mind?

Daniel Muniz

We do, I mean, understand that the balance sheet is underutilized but however we’ve been conservative in using our balance sheet given the cyclicality and the uncertainty that macroeconomic events have developed in the near past. So we don’t have a specific target in mind. We’ll look at how maximum things happen and what happens with the copper prices and the speed of our projects and probably analyze it.

Christopher Buck – Barclays Capital

Okay, fair enough and final one for me just wondering if you have a level of cash that you are comfortable on the downside. So what’s the limit that you are willing toward your cash get down to and sort of as a similar to the prior question, do you have somewhat of a cash target for your balance sheet?

Raul Jacob

Well, basically we believe that we can operate with a very low cash position that’s – it’s hard to say but in general terms about $200 million will be a very low limit to have pick up position, to maintain our operations with no inconveniences at all.

Christopher Buck – Barclays Capital

Perfect, thanks very much.

Raul Jacob

Let me, before we take the next call, let me answer on the question regarding the ore grades that the company had five years ago, looking at the 2006 10-K. Our ore grade was 0.1598% at that time. At that time I’ll have to remind our audience that copper price that we used was $0.90 per pound of copper and $4.50 per pound of molybdenum. Certainly, we are using now a much higher price than that.

Operator

Your next question comes from the line of Santiago Perez Javier from TBM your line is open.

Santiago Perez Javier – TBM

Hi Raul. Once again thanks for taking our questions. I just had two quick follow ups, regarding the expansion in Toquepala, has the environmental assessment being approved and also what price you are using currently to value your reserve? Thank you, as for copper mainly?

Raul Jacob

Well, until last year we used $1.80 to value our reserve, to estimate our reserves, now we will be using $2 from now on. And on environmental impact assessment would you like to comment on that Mr. Gonzalez?

Oscar González Rocha

Yes, we are waiting for this dialogue between the local government and the central government and the company and we planned to have the public audience again at the end of March then after that this is approved then we can get the approval maybe in about 30 more days after the public audience from the Minister of Mines and we can start construction right away.

Santiago Perez Javier – TBM

Thanks Raul and thanks Oscar.

Operator

(Operator instructions) Your next question comes from the line of Rene Kleyweg from UBS. Your line is open.

Rene Kleyweg – UBS

Thanks for the follow-up opportunity. I was just wondering what you could tell us on Angangueo, and Pilares in terms of gross cash cost estimates there?

Raul Jacob

Well, Pilares, it’s going to be at low very low cost similar to the one that we have for Caridad on a per ton basis. Basically, let me explain – and thank you for your question Rene, because it will allow us to explain a little bit on this. What we are doing here is, using the deposit enhancing exploited in the path of an underground mine. We will exploit at the beginning as an open pit and we’ll send about 15,000 tons of minerals per day with the ore grades that I mentioned much higher than our Caridad ore grade and replace.

These are very beginning of these projects, replace a portion of our mineral in the La Caridad by Pilares mineral which is over three times richer than the La Caridad. That will allow us to produce more copper by just replacing a higher content of copper mineral at the concentrator.

In the case of Angangueo, well it is also very competitive depending on the mineral that you working at if you think of which has zinc mine or a copper mine, the cash cost is different. At this point we don’t disclose the cash cost for Angangueo because where it feels they are doing some more work on that matter.

Rene Kleyweg – UBS

Thank you.

Operator

Your next question comes from the line of Dan Richmond, who is a private investor. Your line is open.

Dan Richmond

Thank you. Nice quarter. Would you please give us an update on the El

Alto project that you talked about a year or so ago?

Raul Jacob

Well, basically, for we are acquiring some properties and revenue just for – is – let me explain a little bit on this. Copper deposit located in the State of Baja California in Mexico. Exploration work at the site indicates that we have about 1.2 billion tons of mineral, sulphide materials with an average copper content of 0.5% and 0.25 grams of gold per ton.

And also we have 290 million metric tons of copper oxide with 0.35% of copper grade. These are very good ore grades by industry standards now. A deep drilling program of about 1240 meters indicated that we have another or additional 390 million tons of mineral material with 0.62% of copper content.

That all will be currently picking that means that we will basically have more mineral than what we thought. So the program for developing these properties we’ll have to be moving forward. In 2009, we identified a water source or the leaching operation of these project.

And in 2010, we found four wells, we developed four wells to have underground water for the project. The feasibility study was finished in 2010 and we are basically evaluating the next steps for this project. It’s developed as indicated in the feasibility study. We will produce in this project 190,000 tons of copper and 105,000 ounces of gold per year. We are still investing in land acquisition, energy, facilities and other required ancillary facilities for this project.

Dan Richmond

Thank you my question essentially was, are you still moving forward with this project and obviously the answer is yes. Thank you.

Raul Jacob

You’re welcome.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Raul Jacob

Well, thank you very much ladies and gentlemen for joining us in this conference call and we certainly welcome to attend the next one when we have the results on the first quarter of 2012. Thank you very much and have a good day.

Operator

This concludes today’s conference call you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Southern Copper's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts