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

Executives

Raul Jacob - Head of IR

Genaro Guerrero - CFO

Analysts

Southern Copper Corporation (PCU) Q4 FY07 Earnings Call January 30, 2008 11:00 AM ET

Operator

Good morning and welcome to the Southern Copper Corporation's Fourth Quarter 2007 Results Conference Call. With us this morning we have Southern Copper Corporation, Mr. Genaro Guerrero, Chief Financial Officer; and Mr. Raul Jacob, Head of Investor Relations, who will discuss results of the company for the fourth 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 US GAAP.

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

Raul Jacob - Head of Investor Relations

Thank you very much Andrew. And thank you everyone again for joining us for the fourth quarter 2007 Southern Copper earnings conference call. As you know, the Southern Copper Board recently appointed Mr. Genaro Guerrero as Chief Financial Officer of the company.

Before I leave you with him, let me give you some background information on Mr. Guerrero. Genaro Guerrero is an industrial engineer that joined what today is Minera Mexico in 1983. He has a long career with our corporation. He has served in several acquisitions in the finance area of Grupo Mexico and Southern Copper. Among them Minera Mexico's Treasurer and CFO [inaudible]. Before being appointed as new CFO of SCC, he held a financial role in Southern Peru Limited, a subsidiary of Southern Copper.

Mr. Oscar Gonzalez Rocha, our CEO will also participate in today's conference call. I leave you with Genaro Guerrero.

Genaro Guerrero - Chief Financial Officer

Thank you Raul. And well good morning everyone. I'm very glad to participate for the first time in this conference call. And the agenda that we're going to try to cover today is including prices, production and sales volumes. Then we are going to review some of our financial results, capital expenditures, and then after that we're going to open the session for questions.

Before we go into the detail on the fourth quarter of 2007 and the year of 2007, I would like to mention that Southern announced today this morning our share purchase program authorizing the company to repurchase up to $3 million of Corporation's common stock. The share purchase will take place from time-to-time based on the market conditions and some other factors that have to be analyzed in this opportunity. The repurchase program has no expiration date and may be modified or discontinued at any time. Any shares acquired will be available for general corporate purposes. The company intends to finance the share repurchase program through available cash.

Now after that, let's focus now on the fourth quarter '07 and the last year performance. But before that, I would like to say that, even though the last quarter result has been affected by the legal... by the illegal strike in Cananea, the earnings for the year of 2007 has represented a record high for Southern Copper Corporation. This has been a consequence of very good average metal prices and especially in two of our main products that are copper and molybdenum. And also we have got a very nice increase on molybdenum production and of course in the sales of that metal.

We will start first with copper prices. The LME fourth quarter of 2007 average copper price was $3.26 per pound. That represents 2% higher than the same quarter of 2006. The average price for the full year of 2007 was $3.23 per pound, 6% higher than the $3.05 per pound in 2006. The 2007 copper market was characterized by a strong demand and a weak supply response.

The US housing downturn impacted global demand by about 1% and at the same time, the emerging economies grew on the world copper demand of course led by China, increased by 5% in 2007. For 2008, we think that the strong demand of emerging economies will overcome any weakness or volatility coming from the developed economies.

On the supply side, new projects and expansions that would contribute with more copper would be somehow offset by lower production from existing operations as well as delays on capital goods deliveries, technical and labor problems at the operations.

The full year 2007 copper production was 1,306 million pounds, only 2% lower than 2006. The fourth quarter mine copper production was 278 million pounds; this production was 30% below the 396 million pounds of copper produced during the fourth quarter of 2006.

The reduction of 118 million pounds in production quarter-to-quarter was mainly as a consequence of Cananea's illegal stoppage and lower old grade of Toquepala mine in Peru. Since I have now mentioned the illegal stoppage in Cananea, let me update on where we are in the situation of this facility.

On January 11, as you probably know, the Mexican Labor Ministry through its Federal Arbitration and Reconciliation Council declared the strike illegal and asked the workers to be back at their jobs within 24 hours. Their return to our regular production will be gradual due to their rehabilitation of the installations. At this time, one of our SX-EW plants in Cananea is back to work, expecting the second one to be producing in the next following weeks. Considering our expected ramping up of operations, Cananea copper production will be around 300 million pounds in 2008. That represents 38% higher than the 217 million pounds produced during 2007.

Now in respect to the 2008 copper production plan, Southern Copper Corporation is expecting to produce 1.4 billion pounds of copper. A smelter and refining operations in terms of copper production, the Peruvian Ilo smelter has reached full capacity during the fourth quarter after its modernization. Being this a smelter modernization, an environmentally driven project... I'm sorry. I'm very enthusiastic to report to the market that the average capture of the smelter was 95% in 2007, higher than the 92% required by Peruvian environmental regulations.

The smelting and refining production was lower by 32% and 37% respectively for the fourth quarter 2007 compared to the fourth quarter 2006. The production plan for 2008 is 1.2 billion pounds for a smelter production and around 1.2 billion pounds for refined copper production. This is including the SX-EW production.

Now let's talk about the copper sales. For the fourth quarter 2007, 293 million pounds were sold, 28% lower than the 404 million pounds sold in the fourth quarter of 2006.

Shifting to the molybdenum. The molybdenum prices were $32.1 per pound for the fourth quarter 2007, 28% higher than the same quarter in 2006. For the full year, the average price was $29.9 per pound, 22% higher than 2006. For the full year, molybdenum production increased 37% from 26 million pounds to 36 million pounds. During the fourth quarter '07, molybdenum production increases 15%, dropped 8.2 million pounds to 9.4 million pounds. These production increases were the result of higher upgrades in the Toquepala, Cuajone and Caridad mines. Due to such production increase, fourth quarter molybdenum sales volume increased from 8.7 million pounds to 9.7 million pounds, 11% positive variance and a 40% positive variance for the full year compared with 2006. The better molybdenum prices combined with production increases contributed significantly to Southern Copper Corporation profitability in the fourth quarter and in 2007. Southern is expecting to produce 33 million pounds of molybdenum for 2008 year.

Well, that has been in relation of prices production and sales volumes. And now I would like to comment some of our financial results. The sales for the year of 2007 increased to a record of $6.1 billion from $5.5 billion. This is basically the result of a higher average copper and molybdenum and silver prices and higher molybdenum volumes as we have mentioned. Net sales in the fourth quarter of 2007 decreased 355 million when compared to the fourth quarter '06. The decrease in net sales was the result of lower volumes sold of copper, zinc and silver. The lower volume sales were partially offset by the higher molybdenum and silver prices and higher molybdenum sales volume.

Copper prices production swap during the year has been included in net sales. These swaps were favorable for around $8 million during the quarter... during the last quarter and for the full year $11 million.

Now, talking about cost. Total operating costs for the fourth quarter '07 was $664 million compared to $682 million in the same period of 2006. Cost of sales at the Mexican units decreased by 71 million due to the strike. Worker's participation and mining royalties also decreased the cost by $23 million during the period. But on the other hand, $37 million of higher cost was recorded from our Peruvian operations due to a higher labor, higher fuel, and power cost. An increasing third party concentrated food chips [ph] explained the remaining difference of the $48 million reduction in Southern Copper Corporation cost of sales.

Now going a little bit down in the P&L, our administrative expenses increased $9 million. This is basically due as a result of adjustments in the retirement plan for Mexico and the appreciation of the Peru currency in respect to the dollar and some increasing consulting fees. The depreciation $11 million more due to the capitalization of the Ilo smelter modernization project and higher amortization of leach material cost. In relation with exploration, $10 million higher after including the cost of Tia Maria feasibility studies and Los Chancas, pre-feasibility study, both of them finished during the last quarter of the year.

Now talking about EBITDA. For the full year 2007, EBITDA increased by $448 million, $3765 million equivalent of 62% of sales compared to an EBITDA of $3360 million in 2006. Year-over-year net sales decreased by 22% and operating cost and expenses by 3%, yielding an operating income reduction of 35%. The company's operating income amounted to $630 million in the quarter, which compares unfavorably with last year's fourth quarter operating income of $968 million.

EBITDA for the fourth quarter was $712 million, 30% lower than last year's fourth quarter EBITDA of $1020 million. The EBITDA margin was 55% of sales lower than the 62% of sales registered in 2006.

Now, the net income for the year of 2007 was $2.2 billion, 9% higher [inaudible] million achieved in 2006. Fourth quarter 2007 net income decreased $311 million from $655 million year-over-year, a 52% reduction. Earnings per share amounted to $1.06 for fully diluted shares compared to $2.23 for fully diluted shares for the fourth quarter of 2006.

During the fourth quarter, a non-cash charge to income tax of $90 million was recorded to recognize the effect on taxes of Minero Mexico's dividends paid to Southern Copper Corporation during 2007.

Now, our capital expenditures. The capital expenditures including exploration expenses amounted $82 million during the fourth quarter of 2007, a year-over-year decrease when compared to the $131 million extended in the fourth quarter of 2006. The difference comes from the completion of the Ilo smelter modernization and that happens in January 2007. The company has an investment program that will increase total copper production in about 270,000 tons by 2011. The 39% increase in production will be achieved at a capital cost of $2180 million. As has been informed to the market, the program is focusing on a group of projects based in Peru and let me inform you on new developments regarding these projects.

The first one is Tia Maria project. This project is located in the Arequipa region. The total resource is 638 million tons of minerals with an average copper ore grade of 0.39%. When finished, this project at the end of 2010 will produce 120,000 tons of copper per year, and for the next 19 years. The company is currently bidding to dry and wet areas [ph] of the project and the 2008 budget for the project is $65 million. On the expansion, for the Toquepala and Cuajone mines as well as the Ilo metallurgical facilities, the company has started the process of constructing feasibility and environmental impact to studies. The result of these studies is expected to be ready at the end of 2008. The total budget of these studies for the year of 2008 is around $36 million. For 2008 the company capital expenditure [inaudible] amount is $513 million. Out of those, $100 million will go to the Peruvian expansions that we already mentioned, and around $150 million will be for maintenance capital in Peru and Mexico, and the remaining will be used for several projects that will improve of course our Southern Copper Corporation's productivity.

Now talking about payment of dividends. The policy of the company to review through each of the Board meetings, the capital investment plans, cash resources and expected future cash flow generation from operations in order to determine the appropriate quarterly dividend. Then accordingly the company declared a quarterly dividend of $1.40 per common share to be paid on February 29th, 2008 to common shareholders at the close of business on February 12, 2008.

Well, that is basically what I have to report through this conference call. And then I will like to open the floor room for questions. Thank you very much for your attention.

Question and Answer

Operator

[Operator Instructions]. Your first question comes from Oscar [inaudible]. Go ahead, sir.

Unidentified Analyst

Hi, good morning everybody. Couple of questions please, and the first one, can you tell us what your expectations for zinc and silver production are for 2008 as well as lead?

Genaro Guerrero - Chief Financial Officer

How are you doing? Well, in respect of Zinc, our guidance for 2008 Zinc production is 300 million pounds of production for the year.

Unidentified Analyst

Do you have zinc� [inaudible].

Genaro Guerrero - Chief Financial Officer

For silver, it should be around the same that we have been producing in 2007, depending on where... when the company solves the problem for the units that are on strike. That number will go up obviously. Lead, we'll maintain our current lucky trend.

Unidentified Analyst

And this is where the question was going. There has been report that perhaps a couple of the mines in Mexico will be closed. Do you foresee any closures on your mine on the zinc, lead side?

Genaro Guerrero - Chief Financial Officer

Yes, with 600 million pounds of zinc already are including the decision of... on the closing of the [inaudible]. The company has decided to stop that mine. The company is going to continue exploring the mine and continue having it, but at this time, the decision is to stop operations.

Unidentified Analyst

Okay, thank you Genaro. And then secondly, on your CapEx expenditures, you have a budget of $2.1 billion over the next five years, $530 million in 2008. How do you foresee the expenditures happening in 2009, like I mean... is that going to be $1.5 billion year in terms of expenditures? How can you get the Tia Maria to operate in 2010, if you don't have that kind of expenditure?

Genaro Guerrero - Chief Financial Officer

I understand your question Oscar and yes, there is a very intensive capital expenditure program for the following four years. This year, well we... as we mentioned, we are going to spend the $530 million. That is including of course maintenance and another project, and for 2009, we are expecting to spend $950 million in project plus maintenance. For 2010, we are expecting to invest $965 million plus maintenance and for [inaudible] at the end of our project, this number is going to decrease to $127 million plus the maintenance of the year. The maintenance of the year is usually around $150 million.

Unidentified Analyst

Okay. And then just a follow-up on that if I can. What do you expect then your dividend policy will... do you foresee that changing in 2009 and 2010 with higher capital expenditures?

Genaro Guerrero - Chief Financial Officer

No, I don't think so. We will continue as I have mentioned reviewing with the Board of Directors in respect of our cash availability and so what is going to be the dividend declared.

Unidentified Analyst

All right. Thanks very much. And it was nice to hear you looking forward to catching up at some point, and now I'd let the next guy ask questions.

Genaro Guerrero - Chief Financial Officer

Thank you very much Oscar.

Operator

Your next question comes from Jodie [inaudible]. Go ahead.

Unidentified Analyst

Hello. Good morning, gentlemen. My first question comes along the lines of the income tax. We saw the income tax rate, they rose by a couple of points in 2006 versus 2007, is it because of differentials in Peruvian tax versus Mexican tax?

Genaro Guerrero - Chief Financial Officer

Yeah, Jodi, well, I suppose that your question is to... that if we can...

Unidentified Analyst

Revert.

Genaro Guerrero - Chief Financial Officer

Revert it?

Unidentified Analyst

I mean not revert it, but go back to the percentages of tax rate that you had in 2006 or should we expect 34%, 35% levels in 2008 going forward?

Genaro Guerrero - Chief Financial Officer

Yes, of course, of course we can go back to those levels of income taxes or income tax rate.

Unidentified Analyst

Okay. So, what levels should we expect in 2008 going forward, so you want 31% or closer to 35%?

Genaro Guerrero - Chief Financial Officer

Okay. Let me... I am going to ask a question in order to explain a little bit what happened with that income tax amount that we recorded in the fourth quarter. And this of course is a charge to income tax, it's a non-cash item and was recorded to recognize the effects on taxes for Minera Mexico dividends paid to Southern Copper, its parent company. More specifically this tax deferred recognition on the rise from the difference between the effective tax rate in Mexico and the effective tax rate in the US applied the difference over the portion of the dividend state from the Mexican subsidiary, that is Minera Mexico to its parent company or to its parent... to the US parent, that is Southern Copper Corporation. Again, this recognition is a non-cash charge and corresponds to the portion of dividends paid by Minera Mexico during 2007. This actually is a catch up for the whole year. And for the future, well that... I would say that that is going to depend on the calculation of the effective tax rate in Mexico versus the effective tax rate in the US and of course that will be affected by several tax credits and our tax plan for the following years.

Unidentified Analyst

Okay. Thank you for the... thank you for the explanation. And one last question if I may ask. You mentioned the mining production level for 2008 that you guys expect. Do you guys expect a recovery in the smelting and refining production for 2008 as well to 2006 levels?

Genaro Guerrero - Chief Financial Officer

Yes, we are expecting to recover that. And we are expecting to improve it a little bit.

Unidentified Analyst

Okay. Could you give a little color on the levels should we see... expect 1.3 billion pounds for smelting and refining more or less along those lines?

Genaro Guerrero - Chief Financial Officer

Yes. Yeah, I mentioned 1.2 billion pounds for smelting and refining for 2008.

Unidentified Analyst

Okay. Thank you so much for your time guys.

Operator

Your next question comes from [inaudible].

Unidentified Analyst

I just have a question on the cost front. I would like to know what was the cash cost per pound in the fourth quarter of 2007 and for the full-year 2007, and how do you expect this cash cost going forward in 2008? Thank you.

Genaro Guerrero - Chief Financial Officer

Okay. The company cash cost per pound produced in the fourth quarter and this is before subtracting by products revenues, was $1.57 per pound. This is higher $0.47 than $1.10 fourth quarter of 2006. This increase is mainly due to the copper production reduction that represents around $0.44. Cash cost inflation explains the remaining difference; we've got a little bit higher cost. Including the effect by products revenues, the company cash cost was negative $0.27 per pound in the fourth quarter of 2007. These figures compares with a negative cash cost of $0.28 per pound for the same period of 2006. Now, for the full year of 2007, cash cost before by product, credit was $1.36 per pound. This compared to the $1.28 per pound for 2006, $0.08 increase due to year. The company estimation for the full cash cost for the year of 2008 is around $1.33 per pound.

Unidentified Analyst

Thank you. Thank you very much.

Genaro Guerrero - Chief Financial Officer

Thanks.

Operator

Your next question comes from Mr. [inaudible]. Go ahead sir.

Unidentified Analyst

Hi, this is Stephanie. I have one quick question regarding.. I know you outlined the CapEx distribution based on the $2.1 billion growth investment. I was curious though, is there any possibility that you guys could come to market to finance some of that or would you just continue to manage your dividends?

Genaro Guerrero - Chief Financial Officer

No, I think that there is a... that there is very strong possibility to go to the market and try to get finance for those projects.

Unidentified Analyst

And do you have any kind of timing by doing that? Can you by any chance give the CapEx distribution again, I think I missed it earlier?

Genaro Guerrero - Chief Financial Officer

Okay.

Unidentified Analyst

Thank you.

Genaro Guerrero - Chief Financial Officer

And do you mean for the next four years?

Unidentified Analyst

Yes.

Genaro Guerrero - Chief Financial Officer

Okay. In 2008, and I am going to tell first about the projects. For 2008, we have $100 million.

Unidentified Analyst

Okay.

Genaro Guerrero - Chief Financial Officer

For 2009 $950 million, 2010 $965 million and 2011 $27 million.

Unidentified Analyst

Perfect, thank you.

Genaro Guerrero - Chief Financial Officer

No problem.

Operator

The next question comes from Jorge Rodriguez [ph]. Go ahead sir.

Unidentified Analyst

Good morning, my question is regarding the ore grades at Toquepala, do you have the actual figure of the decline in ore grades, and is this something that may linger on for the coming quarters.

Genaro Guerrero - Chief Financial Officer

Well, let me check with Mr. Gonzalez Rocha, are you in the line? Yes, probably we missed him. Then I will pass this question to Raul Jacob, who has some information in relation with that. Go ahead Raul, please.

Raul Jacob - Head of Investor Relations

Thank you Genaro. In 2006, the company declared new reserves for the Toquepala mine as a consequence of these review in the reserve base of this operation. We also adjust the long-term ore grade of the Toquepala operation. Last year in 2007, the average ore grade for Toquepala was 0.74% for copper. For the year 2008, our current production plan indicates that we will have an ore grade of 0.62% for the Toquepala mine. So, that will affect our production of copper and concentrates coming from this operation, but at the same time we will have some more copper coming from Canada will improve or basically set off somehow the loss in production in Toquepala.

Unidentified Analyst

Okay, thank you.

Operator

The next question comes from Rodriguez [inaudible]. Go ahead sir.

Unidentified Analyst

Good morning everyone. I have two questions. The first one is what is your copper and molybdenum sales forecast for 2008? And the second one is, what do you think about the recent change in the union positions here in Mexico?

Genaro Guerrero - Chief Financial Officer

Okay Rodriguez, let's try to cover first your first question. In terms of sales of copper, our sales are going to be our production for... the production estimate that I gave you for 2008. That was 300� hold on... that was 1.4 billion pounds of copper. And for molybdenum, 33 million pounds of molybdenum. Can you repeat your second question please?

Unidentified Analyst

What do you think about this recent change in the union position here in Mexico regarding the meeting that was yesterday between union and the [inaudible] agency here?

Genaro Guerrero - Chief Financial Officer

Rodriguez, about this question, let me pass the question to our Council in Southern Copper Corporation. This is Mr. Armando Ortega, who is going to take care of your questions.

Armando Ortega Gomez - Vice President - Legal, General Counsel, Secretary, Director

Yes, good morning. I think we are simply hearing and reading what the union declared yesterday. We are not sure whether the union has a different position or not. Unfortunately that union is untrustworthy, and I think we wait and see. I don't think at this juncture we have anymore elements to have an opinion, an educated opinion as to where these gentlemen are leading or not.

Unidentified Analyst

Okay. Thank you Armando.

Genaro Guerrero - Chief Financial Officer

Okay. If we don't have any other questions, thank you very much for your attention and for joining us in this conference call. Is there any other question?

Operator

Your next question comes from Dan Richman [ph]. Go ahead sir.

Unidentified Analyst

Yes. I noticed on your December 31st balance sheet a new category of current assets called investments with a balance of almost $118 million. Could you tell us what this is and then my next question. I noticed under other non-current, other liabilities they increased $58.9 million in the fourth quarter. Could you tell me what the major elements of this increase in other liabilities are and which balance sheet or expense accounts got charged for the debit?

Genaro Guerrero - Chief Financial Officer

Okay Dan. In relation to the first question, this has been separated from the cash and marketable securities, because this is a series of investments in different papers with different maturities, that there is no cash marketable, and that is the reason that we have separated that from the total $170 million.

Unidentified Analyst

Thank you. And the increase in other non-current liabilities of $58 million?

Genaro Guerrero - Chief Financial Officer

Well in that respect, I don't have the breakdown at this moment in front of me or off the top of my hand. There... I know that there are... those are reclassifications. But well if you are interested on the detail of that, we can provide you the breakdown, well later on during the day.

Unidentified Analyst

Thank you. That was in my e-mail to you yesterday.

Genaro Guerrero - Chief Financial Officer

Yes. We note them and we have your e-mail and then we will prepare our report and we'll send that to you.

Unidentified Analyst

Thank you.

Genaro Guerrero - Chief Financial Officer

Well, thank you very much. We don't have any other question. We appreciate a lot your assistance to this conference call. And well, we will... I hope that we can hear you and that you can join us again for the next conference call. Thank you very much.

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 Corporation Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts