Southern Copper Corporation (SCCO) Q4 2011 Earnings Report, Transcript and Summary

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.

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…

(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.

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.

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?

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.

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?

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:

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?

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: Rene Kleyweg – UBS: Thank you gentlemen.

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?

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?

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.

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

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

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.

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

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?

Yes.

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%.

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.

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.

Okay. Thank you so much.

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?

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?

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 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?

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?

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.

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

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?

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.

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?

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.

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?

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

Thank you.

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?

Yeah, basically we… Christopher Buck – Barclays Capital: Thank you.

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?

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?

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.

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.

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?

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 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?

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.

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

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?

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.

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

You’re welcome.

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

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.

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