Southern Copper's (SCCO) CEO Oscar Gonzalez Rocha on Q2 2016 Results - Earnings Call Transcript

| About: Southern Copper (SCCO)

Southern Copper Corporation (NYSE:SCCO)

Q2 2016 Earnings Conference Call

July 26, 2016 11:00 AM ET

Executives

Raul Jacob Ruisanchez - Vice President, Finance and Chief Financial Officer

Oscar Gonzalez Rocha - Chief Executive Officer

Daniel Muñiz - Executive Vice President of Southern Copper

Analysts

Leonardo Correa - BTG

Felipe Hirai - Bank of America

Ivano Westin - Credit Suisse

Carlos de Alba - Morgan Stanley

Alfonso Salazar - Scotiabank

Sasha Bukacheva - BMO Capital Markets

Guillermo Estrada - GBM

John Tumazos - John Tumazos Very Independent Research

Marcos Assumpçao - Itaú BBA

Meri Luiz Kaynar - BlueBay

Mandeep Singh Manihani - JP Morgan

Operator

Good morning and welcome to Southern Copper Corporation’s Second Quarter and six months 2016 Results Conference Call.

With us this morning, we have Southern Copper Corporation, Mr. Raul Jacob, Vice President, Finance and CFO, who will discuss the results of the Company for the second quarter and six months 2016 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 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. You may begin.

Raul Jacob Ruisanchez

Thank you very much, Richard. Good morning to everyone and welcome to Southern Copper Corporation’s second quarter 2016 earnings conference call. Participating with me in today’s conference are Mr. Oscar Gonzalez Rocha, Southern Copper’s CEO and Board Member; and Mr. Daniel Muñiz, Executive Vice President of Southern Copper and also Board Member.

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

Now, let me focus on the copper market, the core of our business. During the past quarter and regarding copper, we have seen some improvement in its prices, mainly attributable to a recovery of consumption in China and some demand from North America. We see the refined copper market where we do most of our business in relative balance due to the following; demand is growing at about 2.5% worldwide. This alone will absorb approximately 500,000 tons of copper.

Additional production will be significantly offset by production cuts. Lower production due to operation closures and cuts are currently estimated at approximately 850,000 tons. In addition to these production cuts, we believe that expected supply will be reduced in the coming quarter from delays in project startups, technical problems, labor on rest, excess government taxation and other difficulties. We think that all of these elements will significantly offset new production coming to the market as a result of past investment.

Let me now focus on Southern Copper’s production for the past quarter. Copper mined production increased by 26.1% in the second quarter of this year, that is 221,661 tons, a new Company record. Last year, we had 177,616 tons in the first quarter of the year. This was mainly the result of higher production at our Buenavista mine that increased its production by almost 160% and the IMMSA mine had increased its silver production by 25%.

Regarding Zinc, it represented 4.3% of our sales in the second quarter of this year. Mined zinc production was 19,994 tons in the second quarter of 2016, 43% higher than the same period of 2015. This was due to the solution of last year’s problems at the Charcas and Santa Eulalia mines.

Looking at our financial results, for the second quarter of 2016, sales were $1.3 billion; $47.9 million lower than sales of the second quarter of 2015 that is 2.3% less or 3.5% less. Copper sales volume increased by 19.2% in this quarter, but value decreased by 8.9% in this scenario lower oil prices.

Regarding byproducts, when compared to the second quarter of last year we had higher sales of molybdenum by 28%, due to significant negative price adjustment that affected moly sales in 2015, not this quarter. This quarter we have a normal quarter regarding that. In 2016, in the second quarter silver sales increased by 28.7% due to higher volume, 25.8% increase in volume of silver and prices that increased slightly by about 3%. Zinc sales decreased 2.6% due to lower prices that decreased by 13%, however, partially offset by higher volume of 15.3% in zinc sales.

Regarding operating cost, as we mentioned before our copper production increased by 26% when compared to the second quarter of 2015. However, our total operating cost on expenses increased only by 8% or 70.2 million when compared to the second quarter of last year. So we increased production by 26% and our cost increased only by 8%. The main cost increments have been in depreciation, leachable material, repair materials, energy, sales expenses and other expenses. This cost increases or increments were partially compensated below price discovered, [indiscernible] and other materials.

EBITDA for 2016 was 555.4 million that is up 41.6% margin compared with 637.4 million or 46.1% margin for the second quarter of 2016.

Cash cost, operating cash cost per pound of copper before byproduct credits was $1.41 per pound in the second quarter of 2016, the same as in the first quarter of this year. Remember this result - we think the cost were in higher treatment and refining charges, resulting from the Buenavista concentrate copper sales and lower premiums that were offset by lower administrative expenses, which increased by 12.7% and lower leachable material got decreased by 37%.

Southern Copper operating cash cost including the benefit of byproduct credits was 90.7 cents per pound in the second quarter of this year. This cash cost was 7.4 cents lower than the cash cost, 98.1 cents that we had in the first quarter of this year that is 7.5% lower cash cost.

Regarding byproducts, we had a total credit of $249 million or 50.7 cents per pound in the second quarter. These amounts compare with a credit of 203 million or 42.5 cents per pound in the first quarter of 2016. Total credits have increased for all byproducts, for molybdenum 47.1%, for zinc 23.2%, for silver 19.1% et cetera.

Net income attributable to SCC’s shareholders in the second quarter was 221.9 million that is 16.6% of sales or diluted earnings per share of $0.292.

Capital investments were 564.9 million for the first half of this year that is 6.6% higher than the first half of 2015. This represented 138.8% of net income. In 2016, we continue with the development of our investment program, increased copper production capacity by 90% from our 2013 production level of 617,000 tons to 1.2 million tons.

Regarding our Mexican projects, the Buenavista project in the Sonora state that has a budget of $3.5 billion in which the company has already invested 3.2 billion. Excluding the almost completed Quebalix IV project and some infrastructure facilities, all the other facilities of this program are currently operating, and we are expecting to increase production by 200,000 tons to produce 460,000 tons of copper in 2016 and 500,000 tons in 2017. We also expect to increase our Buenavista molybdenum production to a capacity of 4,600 tons per year. The Buenavista program is being finished on time and under budget.

The new copper molybdenum concentrator, this facility has an annual production capacity of 188,000 tons of copper and 2,600 tons of molybdenum. The project will also produce 2.3 million ounces of silver and 21,000 ounces of gold per year. The concentrator has completed its ramping up phase which is six mills already in operation. In September of last year, we obtained the first copper concentrator locked and the plan is now running at 105% of its design capacity.

The Quebalix IV, which is a facility for crushing, conveying and spreading of leachable ore, it’s a project that has the main objective to reduce the processing time as well as mining and hauling cost for leachable material. This facility will also increase production by improving the SX-EW copper recovery. It has a crushing and conveying capacity of 80 million tons per year and is expected to be completed in the third quarter of 2016. As of June 30, 2016, the project has a 98% progress almost finished, with an investment of 248.4 million out of the approved budget of $340 million.

The remaining projects to complete the $3.5 billion budget program includes investment in infrastructure which are power lines and substations, water supply, tailings dam, mine equipment shops, internal roads, et cetera.

Focusing on the Peruvian projects, the Toquepala Expansion Project which is in the Tacna region in Peru. This is a project that includes a new-state-of-the-art concentrator which will increase annual production capacity by 100,000 tons of copper to 235,000 tons in 2018. It will also increase molybdenum production by 3,100 tons at an estimated capital cost of $1.2 billion for the whole facility. Through June 30 of 2016, we have invested $431.1million in the project. The project is expected to be completed by the second quarter of 2018.

The Toquepala High Pressure Grinding Roll system is [indiscernible] main objective of this project is to ensure that our existing concentrator will operate at its maximum milling capacity of 60,000 tons per day, even with the expected increase of the ore material hardness index. Additionally, recoveries will be improved and production enhanced with a better ore crushing. The budget for this project is $40 million and we have invested $11.7 million as of June of this year. It is expected to be completed in the fourth quarter of 2017.

The Cuajone Heavy Mineral Management Optimizing Project, which is in the Moquegua region of Peru. This is a project that consists of installing a primary crusher at the Cuajone mine pit with a conveyor system for moving the ore to the concentrator. The project aims to optimize the hauling process by replacing rail haulage thereby reducing operating and maintenance costs as well as the environmental impact of the Cuajone mine. The crusher will have a processing capacity of 43.8 million tons per year. The main components including the crusher and the overland belt have been acquired and we have started excavations and civil work.

As of June of the year, we have invested $102.2 million in this project out of the approved capital budget of $165.5 million. The project is expected to be completed by the second quarter of next year.

Dividend announcement, regarding dividends, as you know, it is the Company policy to review at each board meeting cash resources, expected cash flow generation from operations, capital investment plan and other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on July 21, the Board of Directors authorized a cash dividend of $0.05 per share of the common stock payable on August 25 to shareholders of record at the close of business on August 11 of this year.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question online comes from Mr. Leonardo Correa from BTG. Please go ahead.

Leonardo Correa

Hi, hello. Good afternoon everyone. My first question on leverage Raul, we are seeing your net debt-to- EBITDA potentially creep up to three times. Looking at how conservation the balance sheet has been over the cycle, I just want to get an impression from your side on what would be the upper limit tolerance here and potentially would you be looking at some measures to reduce leverage like asset sales or cutting CapEx and potentially reducing the dividend. The second question on, this is more of a longer term question, but just on your long term volume target for copper, we’ve just gone over 1.2 million tons. The question is how long can you sustain those levels before having to invest in replacement projects? Those are the questions. Thank you very much.

Raul Jacob Ruisanchez

Yes regarding - I’m sorry for the confusion. Regarding the leverage, we have issued $2 billion in bonds last year and we are basically using the money that was received from the bond issued. We believe that the future the generation of cash of these investments which has been even better than our initial expectations as we have reported in cash cost and regarding the way the Buenavista operation is performing nowadays, will let us to have a reasonable cash position in order to maintain the company on a sound base, and we are not concerned regarding the current level of total debt-to-EBITDA, we think it’s in the parameters that we expected when we did furnish.

Operator

Thank you. Our next online comes from Felipe Hirai from Bank of America. Please go ahead.

Felipe Hirai

Hi, good morning and good afternoon everyone. So we have a couple of questions here. The first one is as usual, so what do you expect you see with the CapEx this year, because this year it seems that you are trailing behind on your guidance for the full year. And now the second question is related to Tia Maria project, so if there is any update on that front or actually if you could give us a broader view on what’s going on in the Peruvian market after the election of Topeka, if you think that the environment for Topeka opening up new projects could improve and is that could possibly impact Tia Maria. Thank you.

Raul Jacob Ruisanchez

Hi, let me focus on the first point, on the CapEx. Basically, we are maintaining the CapEx that we are seeing for our projects. The spending is not necessarily as expected, we are expecting a much lower CapEx expenses than our initial forecast for the year. At this point, we’re decreasing our view on CapEx for 2016 to a lower number. Currently, we believe that we will spend $1.4 billion in capital for 2016. For next year, will be $1.9 billion; 2018, 1.3, then it drops to $700 million and then to $400 million. That’s for the next few years. Regarding the Tia Maria would you like to comment?

Oscar Gonzalez Rocha

Yeah. Yes about Tia Maria, we are waiting that the new government, they will took place that will be next Thursday and then after that request they are meeting with the authorities in order to see how they plan it to establish this project with the local authorities and with the recent government in order that we can proceed as soon as they will study the dialog table in order to reach an agreement with the people of the [indiscernible].

Raul Jacob Ruisanchez

Let me add to what Mr. Gonzalez said that we are very positive regarding the - our expectations in the new administration. We believe that they understand our business well and they’ll take very positive actions in order to improve the development of mining in Peru in general and particularly regarding our projects in Peru as well.

Operator

Thank you. Our next question online comes from Ivano Westin from Credit Suisse. Please go ahead.

Ivano Westin

Hi, Raul and Oscar and Daniel. Thanks for the questions. The first one is on your production guidance. I appreciate if you could provide an operating guidance four your five years plans from 2016 and through 2020 in terms of your annual total coverage production. The second point is you have got a couple of expansions, you’ve got Buenavista expansion in Cuajone , you have got Toquepala new concentrator, so in all of these expansions, what is your expected additional reduction on your current cash cost before and after byproduct for next year? Thank you very much.

Raul Jacob Ruisanchez

Okay, thank you very much for your questions. Regarding production our current view on copper production is as follows; for this year, as I mentioned 913.5000 tons, for 2017, 926,000 tons, for 2018, 1.61 million tons, same figure for 2019 and 2020, 1.2 million tons. Regarding cash cost, as we are moving forward with these expansions and these new projects, we will see improvements in our cash cost as long as the prices of the commodity that we consume hold, as you know oil prices may be different in the future much higher for instance and that certainly will affect our cash cost as well as some other variables that are usually impacting cost. But our current view for cash cost considers for this year basically the same cash cost that we mentioned to the market, about $0.91 per ton. For next year, when we have much more production and some more production of silver and molybdenum, we are expecting $0.84 for 2018, $0.82 and then $0.80 for 2019 and 2020.

Operator

Thank you. Our next question online comes from Carlos de Alba from Morgan Stanley. Please go ahead.

Carlos de Alba

Thank you very much. Just quick question on these cash costs after byproduct that you mentioned. Did you share the forecast before by products or alternatively what is the moly price and silver price used to calculate after byproduct numbers? And then any updates on El Pilar and also in the guidance that you provided for production, when do you expect the year to start to coming into production?

Raul Jacob Ruisanchez

Okay in regarding the cash cost before byproducts, for this year we are expecting 141, which is what we have in the first half of the year. Next year where we have a much more production, that number should decrease to 133. For 2018 where we will have portion of the Toquepala expansion of 128, 129 for 2019, and that will hold for 2020 as well. In 2020, and this is addressing your second question Carlos, we will have the major contribution for the Tia Maria project. It will start producing - it will be from 2019, but 2020 will be pretty much a full production year for Tia Maria.

Carlos de Alba

Excellent. And anything on El Pilar?

Raul Jacob Ruisanchez

Yes, for El Pilar we are considering production coming in the years 2018 and on, a little bit more than 35,000 tons per year.

Carlos de Alba

Alright, excellent. Thank you very much.

Raul Jacob Ruisanchez

You’re welcome.

Operator

Thank you. Our next question online comes from Mr. Alfonso Salazar from Scotiabank. Please go ahead.

Alfonso Salazar

Thank you. Thank you, Raul, thank you Oscar. One follow-up in the cash cost. If you can tell us what is the exchange rate for the Mexican peso and Sol that you use for this cost. And also I agree that you mentioned more favorable to mining investments, but also for the metal refinery. If I am correct, I think you have a project to - an old project to expand Ilo refinery long ago before the changes in the environmental legislation. Can you remind us what was it then, back then, and if you think it makes sense to rethink about an expansion to the refinery?

Raul Jacob Ruisanchez

Yes. Regarding the exchange rate we are using, we are considering basically this year’s market for exchange rates both in Mexico and Peru. The average to the year is more or less with what we are considering and regarding the plans that we had from the past for doing an expansion that was smoked on refinery. Let me turn to Oscar Gonzalez to answer that.

Oscar Gonzalez Rocha

Yes, we had a story in the possibility to do the expansion and revise with what we have in the past for the expansion of the smelter and the refinery. The refinery will go to 280,000 tons that is the capacity now to 320,000. And the smelter we have plan to use 80% of the production of Toquepala mine, with the approval is the case because the affectability story will say that it is better to do that expansion as more expansion in Ilo now.

Alfonso Salazar

Okay, excellent. And then do you think it makes sense to because of there are lot of concentrates in the country, do you know to thinking in further expansions later on?

Oscar Gonzalez Rocha

You mean of this matter.

Alfonso Salazar

Yes. Yeah, I mean of Ilo the smelter and the refinery to give added value to the concentrates in Peru, which have been increasing with Cerro Verde on Toromocho and Las Bambas and all these new mines?

Oscar Gonzalez Rocha

Sure, they are thinking in building a smelter in Matarani port for smelt the concentrate from Las Bambas and Cerro Verde. They are talking to do a joint venture with the two companies in order to study the possibility to relay a smelter in Matarani port for their concentrates.

Alfonso Salazar

Okay. And, but you don’t have plans at this time to expand their further. I mean you’re planning more than anything for the Toquepala expansion right for your own needs?

Oscar Gonzalez Rocha

Exactly, because we cannot do expansion more than our production of Toquepala, because if we need to do something else for the other companies we will need to be a newer smelter and we are not talking about that right now.

Alfonso Salazar

Okay, excellent. Thank you for that clarification.

Daniel Muniz Quintanilla

Let me add Alfonso that we do believe that these current air standards are economically unfeasible. And we are expecting a correction on that from the new government. That’s our expectation.

Alfonso Salazar

Okay, thank you very much all.

Operator

Thank you. Our next question online comes from Sasha Bukacheva from BMO Capital Markets. Please go ahead.

Sasha Bukacheva

Thank you, thank you, operator. Raul, couple of questions actually. Number one, we know that Buenavista concentrator has been running above design, which is encouraging. How sustainable these things are and also if there are an opportunity to further increase production there on the bottlenecking inefficiencies?

Raul Jacob Ruisanchez

Okay. Well, we think that the milling capacity I think as I mentioned before we have six mills, they are operating slightly over what we expected as design capacity. Our engineers have worked on changing the process slightly to improve the milling potential of this facility. And it’s working so we’re happy about that. There is a possible expansion for the future of this facility to increase the milling capacity to 120,000 tons per day, which is but right now we have no current plans on that regard. It’s just a possibility, there will be review after we finish this investment program and when we are assured that our operations are running smoothly.

Sasha Bukacheva

So in the absence of an expansion, are you able to quantify potential production benefit just on the bottlenecking and optimization of the capacity that you already have. So could we see like an extra 20,000 tons like an extra 30,000 tons or if there are number that might be attainable?

Raul Jacob Ruisanchez

At this point, we don’t have anything to comment on that Sasha. It’s a - we want to operate this facility, which is brand new and it’s doing that certainly very well at its full potential. After we stabilize the operation we may consider some growth. But at this point this is what we are focusing on in running the facilities as best as we can.

Sasha Bukacheva

Okay and my second question was on - I am sorry.

Daniel Muniz Quintanilla

No Sasha, we really want to add, I will then chime in. I mean of course this is regarding the concentrator, you asked about concentrator. Regarding the new copper-molybdenum facility, what we call number three, and that’s currently I mean running at a rate of the 100,000 tons and it’s confines to 120,000 tons. Once we increase the grade of the POS that will yield an additional 20,000 tons I mean. So that is a potential on that we having the bottleneck so to speak based on the tons that have been redesigned after the reportable accident two years ago -

Sasha Bukacheva

Okay. So with that incremental 20,000 t be in the guidance you provided or might that be in addition to it?

Oscar Gonzalez Rocha

I don’t have the breakdown of the guidance it should be in that included - correct.

Raul Jacob Ruisanchez

Yeah, it is included in the guidance for the next year Sasha.

Sasha Bukacheva

Okay, thank you. My second question was because you’re installing high pressure grinding rolls at Toquepala wrestle around the same time as the concentrator. So you are guiding to an increment - to production at the mine increasing to 235,000 tons in 2018. So presumably that includes the benefit of the high pressure grinding rolls. In the event that the installation of the high pressure grinding rolls is delayed, what sort of production impact might we see in 2018 at Toquepala?

Raul Jacob Ruisanchez

Well Sasha, we don’t plan to do things the wrong way. What we are planning is to finish this facility, which is the second one that we are constructing at our Peruvian operations and there is a third one that is we are building for the new concentrator as well, so it is an equipment that we have been running in Cuajone and we are running it very well actually. And we are building the same equipment in Toquepala in order to stabilize the milling capacity of the current concentrator. The hardness of the rocks in the operations, it’s making us to consider this as a new facility. As you know the capital cost is not - it is important that is not that high if you consider what that expansion may cost. And so we are doing this considering that times that we’re assuming are fine in terms of letting us finish on time and accordingly to our forecast.

Sasha Bukacheva

Okay, thank you very much. That’s it from me.

Raul Jacob Ruisanchez

Thank you.

Operator

Thank you. Our next question on the line comes from Guillermo Estrada from GBM. Please go ahead.

Guillermo Estrada

Hi, good morning everyone. Well, I have a question regarding Toquepala’s expansion. Now, you expect the project will be completed the second quarter of 2018 meaning that production will start by third quarter right? So you could share the copper volumes evolution for this project starting in 2018, it will be very helpful. Thanks.

Raul Jacob Ruisanchez

Yes, it is about 80,000 tons that will be completed by that project in 2018.

Operator

Thank you. Our next question on line comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Hi, Raul, I have a question regarding moly production. We have seen a solid jump on copper production over 20% year-on-year while moly was the only byproduct that actually declined and I know you mentioned this was due to lower grade. But I just want to understand the trend going forward if we can expect grade to recover and if we can forecast moly production increase as you increase your copper production overtime within.

Raul Jacob Ruisanchez

Well, this year molybdenum production has been affected by lower ore grades at Toquepala and Cuajone mines. When we do the mining plan for our operations we focus on obtaining - on the most efficient way that copper that rich in our deposit. Molybdenum comes as a byproduct and usefully they ore grade varies significantly for a time. We’re expecting the molybdenum production to increase accordingly with investments that we’re doing and we believe that we should see better production, as I say for Toquepala we’re expecting to increase our production by 3,100 tones when we have the new concentrator up and running. And in the case of Buenavista, we are looking how at how the ore grades are going to behave for molybdenum in the next few years. Currently we are making an assumption that is relatively conservative regarding these. And as a consequence where molybdenum production should be increasing by about 2,000 tons once we finish Toquepala concentrator, the new concentrator and another 2,000 tons when we have Buenavista concentrator, molybdenum plant finish.

Unidentified Analyst

Okay, that’s great. Thank you.

Raul Jacob Ruisanchez

You’re welcome.

Operator

Thank you. Our next question online comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Hello, thank you. My question relates to potential bond issuance given that most of the proceeds from the last issuance where you stop and you are running negative for cash flows? Thank you.

Raul Jacob Ruisanchez

Okay, we don’t feel that we need to go into the debt markets at this point, where obviously I know I’ve seen if market prices have retrained, have changing their trend we will consider some other actions. But at this point, we are reviewing how the operations are generating cash and we are expecting to use that cash in order to move on with our projects. Please keep in mind that we pretty much are done with the Buenavista investments and we are focusing on the Toquepala concentrator at this point. In the case of Tia Maria, we are spending some money but it’s basically for social work. So basically what we have to develop at this point is Toquepala expansion project.

Operator

Thank you. Our next question online comes from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

John Tumazos

Thank you very much. We saw that there were share buybacks in the March quarter but not in the June quarter. Could you talk a little bit about your goals between share buybacks, increasing dividends as the CapEx is completed in Mexico and getting further along in Peru and the $6 billion debt level and just give us a flavor for whether paying down the debt is more important than buying stock or increasing dividends, they are all god’s good work of course?

Raul Jacob Ruisanchez

Go ahead Daniel.

Daniel Muniz Quintanilla

But I understand the question is how we decide on increasing, I mean bond buyback and dividends. And I am here on the board, we sort of maintaining track records and that we we’ve been trying to do in the past. As you know even the worst of time after of course with five, we tried consistently our dividend policy. I mean we’ve been paying dividends last year. We haven’t bought share this quarter as you put it out, we did a little bit of buyback in the first quarter and we maintained the dividend. I mean of course we have further expansion in front of us, we are hoping to have Tia Maria moving off as we Raul Jacob pointed out with new administration, but we want to try to be prudent in concerning our task balance big advantage of this projects and not to be in the middle of the road and that’s why we as a board has decided to cut down or maintain a minimum dividend and cut the buyback shares.

John Tumazos

Thank you very much.

Daniel Muniz Quintanilla

Thank you for the question.

Operator

Thank you. Our next question online comes from Wilfredo Ortiz [ph] from Deutsche Bank. Please go ahead.

Unidentified analyst

Good morning gentlemen and thanks for the call. Two things for you, sort of following-up on what’s been touched on buyback and couple of others, in terms of how you think specifically on signing off Tia Maria and given where debt levels are whether there is required iron ore and required copper pricing for you design not from the project?

And then secondly the 1.4 billion CapEx guidance for Tia Maria, what room is there for that number to come down in the current environment? Thank you very much.

Raul Jacob Ruisanchez

Okay, regarding the second question, we think that the budget maybe adjusted down work, we haven’t done that. We’ll see as we move on overtime. Regarding the funding of Tia Maria, we believe that the cash even at this price, the cash that we are generating will be enough to go ahead and finish the Tia Maria project and the Toquepala project which are the ones that we’re developing at this point. As I say Buenavista operation almost finished, so that regard we don’t have to worry much on the Buenavista expense for CapEx.

Buenavista, it’s the foot type, it’s generating cash for the corporation. We are having the ramping up of this concentration number two for Buenavista this year. It will be at full speed for the full year in 2017, also as Daniel Muniz mentioned, we’re expecting and increasing our SX-EW production for the new SX-EW three plants in Buenavista. So these two facilities will be contributing significantly to the production profile of the company at a very competitive cost which is already reflecting in our cash cost.

Operator

Thank you. Our next question online comes from Marcos Assumpçao from Itaú. Please go ahead.

Marcos Assumpçao

Hi, good morning, everyone. Three quick questions here. First one, if you could comment a bit on the reason behind the strong moly price rebound in the quarter and if you think this prices are sustainable?

The second question, out of the $1.9 billion CapEx for 2017, how much is coming from Tia Maria?

And the last one, also in Tia Maria, if for any reason the Tia Maria CapEx is delayed again, would you reconsider being more active on the buyback program already in 2017?

Raul Jacob Ruisanchez

Okay. Basically, well the molybdenum market has been in deficit in the last three quarters, that’s are recollection fit. However, there is plenty of molybdenum inventories out there, so the market is observing these inventories. And on top of that we have news on some important producers that have shut down their operations particularly in China. So these two things are certainly helping our molybdenum market.

We thing that as long as we have this situation, we will be - we will have some support of prices where they are now, not then certainly much higher than that. At the same time, we believe that a significant portion of the market is not making money but actually losing cash at the current price level for molybdenum market. So we’re expecting prices to remain where they are or improve slightly over the next few quarters.

On the Tia Maria budge for 2017, we’re budgeting $375 million for that, so that’s our budget. And Marco tell me your last question again please.

Marcos Assumpçao

Yes. So if by any reason your Tia Maria project is delay or the CapEx is delayed again and you have to disburse much money in 2017, so CapEx - overall CapEx will be lower, would you be reconsidering be more active on the buyback program because if CapEx is below 1.5 billion, you’ll probably be generating a lot of free cash flow.

Daniel Muniz Quintanilla

I mean at that point, I mean of course that happens. I mean - we then we are returning cash flow shareholders, we put in people doing that. At that point the board decide whether it’s evidence of buyback.

Marcos Assumpçao

Alright, perfect. Thank you very much.

Raul Jacob Ruisanchez

You’re welcome.

Operator

Thank you. Our next question online comes from Meri Luiz Kaynar from BlueBay. Please go ahead.

Meri Luiz Kaynar

Hi, thank you. I had a question along the new issue side as well. I was just wondering what is the minimum cash you need for run the business and just thinking about the CapEx guidance that you have and if we run your EBITDA figures around flat corporate prices but reflect the volume growth, I mean it looks you would be - you would be utilizing the full cash balance almost for this CapEx. And in that case, can you give us an idea, what’s the minimum cash balance so we can gauge whether you think when you would start thinking about being more cautious on the liquidity side? Thank you.

Raul Jacob Ruisanchez

Yes. Where we could be running our business with cash position between $150 million and $200 million, that’s basically in it.

Meri Luiz Kaynar

Okay. And in the Metal & Mining Conference earlier this year, you mentioned that there would not be - you wouldn’t plan to have an issue this year but is this still the case or your perceptions have changed as the second quarter and little bit of the third quarter is playing out?

Raul Jacob Ruisanchez

Go ahead.

Daniel Muniz Quintanilla

I think the position are becoming, we have been seeing as of course rate going lower in steel, I mean not volume lower, probably lowest ten year has been 130 I guess [Technical Difficulty] There is a lot of CapEx that we could delayed we wanted to. We had a discussion at the board last week whether it’s prudent issue are not again. I think most of the board were kind of confident with the cash position and we believe that the company’s cash generation looks for this year and next year. So I mean I think it’s an open still out there. I am in the conclusion of the way, I mean let’s not do that. We might be immediate, we could have a revolver or something else that I mean of course their attractive rate out there very aggressive market and I mean a lot of interest kind of enquiries that we receive. So I mean it might a good idea I think after the summer and after the European so to speak to think about if it’s prudent to do at smaller or not much smaller to ensure that we can compete and once we have a little bit of light so to speak from the new government regarding it.

Meri Luiz Kaynar

Okay, that’s very helpful. Thank you.

Daniel Muniz Quintanilla

Thank you.

Operator

Our next question online comes from Mandeep Singh from JP Morgan. Please go ahead.

Mandeep Singh

Hi, thank you. My first question is for the first six months of 2016, you saw copper production of 457,000 ton but sales were 433. Was there a special reason for sales to be about 5% below production and if we should see you know some catch up by sales in the second half?

Secondly, I am not sure if you’ve already given this, but do you have any moly production guidance for this year and coming years?

And finally, can you just remind us what was the year for the startup of the El Pilar mine? Thank you.

Raul Jacob Ruisanchez

Okay, let me start by the last question. In El Pilar, we are expecting it to start productions by 2018. On your first question regarding why we haven’t solved all that we produce in the first quarter is because of the nature - this first half - sorry, is because of the nature of our production now. Most of the new productions coming from Buenavista, it’s in the form of copper concentrate. And the way to handle to handle this material it takes a little bit longer in order to sale than refine copper. So that explains why we haven’t - where we haven’t sold all the copper that we produce in the first half of the year. That should adjust once we find an optimum inventory of our copper concentrating transit through the next few quarters that for now that’s what is happening. It’s the nature of the company.

We have - we still have about 80% of our business under refine copper market but the news is that it used to be less than 5% is now 20% which is copper concentrate sales.

Regarding molybdenum, we gave an indication on what we expect for this year. We mentioned that we want to produce 22,800 tons of molybdenum in 2016. For next year, we expecting the new molybdenum plant in Buenavista to - that have the capacity of 2,000 tons to be operation and that should improve our production profile. And for Toquepala, it will be once we initiate operations in that new plant, new concentrator that has the capacity of molybdenum for 3,100 tons. At this point, I don’t have the current forecast for molybdenum production at hand.

Mandeep Singh

Thank you.

Raul Jacob Ruisanchez

You’re welcome

Operator

And our final question comes from Jean Bruney [ph] from BBVA. Please go ahead.

Unidentified Analyst

Hi there, just a couple of questions. The first one is Grupo Mexico community as it says that your recognize a mining division and you get some saving from that, just want to get more color in them of in molybdenum that it represent?

And the last question is on the you are sourcing that you basically finalize as a commercial program for the Buenavista, the concentrator number two, we’ve better condition than the benchmark, just if you can give us color on this as well? Thank you very much.

Daniel Muniz Quintanilla

Thank you. Let me just make sure that I understand your question regarding the Group Mexico earnings release. I mean that refer to the - sort of expenses reduction, is that correct?

Unidentified Analyst

That’s basically you are saying that you recognize a mining division and you get some saving?

Daniel Muniz Quintanilla

Sure, let me explain what we are doing there. I mean we’ve been - since we’ve implemented FEP for the whole company, we’ve set up a new corporate area that has been ignored to avoid having three directors in the country you know we have the U.S, Peru, Mexico and now Spain, but we’re trying to have small overhead in terms of management and have to move most of the people to the operations as opposed to having many headquarters. We’ve reduced, I mean of course in the conference call we have [Technical Difficulty] we’ve done a lot of different things and that’s why in the Grupo Mexico earnings release are not much in the Southern Copper, all Southern Copper has always in doing a lot of this kind of work to optimize costs and to be more efficient. And we set up a share services center in [Technical Difficult] in the Northern part of Mexico where our mines of Buenavista and Cuajone.

And the second question was?

Unidentified Analyst

Was on the commercial program for the Buenavista, you said that you concluded, a better condition in the benchmark?

Daniel Muniz Quintanilla

Sure. I mean yeah we’ve - of course one of the first five in Grupo Mexico and Southern Copper is that we’ve had the challenge of doing so much concentrate and this of course has [Technical Difficulty]. The new concentrator of Buenavista there is 75 increased production that we’ve reported here has been fold as concentrate. So we’ve been selling concentrate I mean you know the benchmark we set every year and we’ve been able to sell our concentrate at lower TCRP that what was benchmarked at the beginning of the year by the industry. So that was the comment you are referring to.

Unidentified Analyst

Okay, prefect.

Daniel Muniz Quintanilla

Thank you.

Operator

At this time as we have no further question, I’d like to turn the call back over to Mr. Jacob for any closing comments.

Raul Jacob Ruisanchez

Well, with this we are concluding our conference call for Southern Copper second quarter of 2016 results. I appreciate your participation and hope we have you back with us when we report the third quarter of this year. Thank you very much and have a very nice day.

Operator

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. 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!