Southern Copper Corporation (SCCO) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Southern Copper Corporation's First Quarter 2012 Results Conference Call. With us this morning, we have Southern Copper Corporation, Mr. Raul Jacob, CFO of the Peruvian operations and Investor Relations of Southern Copper, who will discuss the results of the Company for the first quarter and the year 2012, 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.

Thank you very much, [Treaky] and good morning everyone and welcome to Southern Copper's first quarter 2012 earnings conference call. Participating in today's conference are also Mr. Oscar Gonzalez Rocha, Southern Copper's CEO and Mr. Dan 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 cost, financial results, expansion projects and capital spending program. After that we will open the session for questions. Turning to our view in the markets, during the first quarter metal markets continue to be affected by negative macroeconomic events that affected consumers expectation (inaudible) Copper as you know is our main product with 77% of total sales in the first quarter of 2012. Even though we believe Copper fundamentals are sound for this year demand is negatively influenced by the indicated macro outlook. At this point, we perceive a different situation between the Asian and the developed markets. In China, several sources point to a growth in demand of approximately 7% to 8% for this year. In the U.S. and Europe, inventories are extremely tight and we see them increasing to more normal levels over the next 12 months particularly in the U.S. Demands from the emerging economies is also growing at a good pace, somehow offsetting weaker consumption from European and American markets. According to our sources, total refined corporate demand growth is estimated for the year at about 2.5% to 3% for this year 2012. If we consider global copper demand at about 19.3 million metric tons, this represents approximately 500,000 tons of additional refined copper tons require in 2012. On the supply side, production has underperformed badly in 2011 due to labor unrest, power shortages, weather…

(Operator Instructions) Your first question comes from the line of Felipe Hirai with Merrill Lynch. Please go ahead.

Hi, thank you. This is actually (inaudible). Good morning Raul, Oscar, and Daniel, thank you for the questions. And I have two questions. My first question is regarding CapEx, I know you just mentioned a $1.5 billion budget, but just to be clear, since you only invested $177 million in the first quarter, do you still believe you will reach this budget and what kind of ramp up you’re expecting the coming quarters? That’s the first question. And the second one, if you could provide a guidance for copper production in 2012 and what we can expect on ore rates going forward, do we still see improvements? Thank you?

Let me address the second question, first, Philippe, and then I’ll ask Mr. Oscar Gonzalez to comment on the capital expenditures forecast for the year. On production, whereas we have our guidance at the beginning of the year of 640,000 tons in total production for 2012, we are still maintaining that guidance that should also consider a 5% third parties copper in that number. So for 2012, we are maintaining our initial guidance of 640,000 tons of copper. And on the CapEx question, I will pass to Mr. Gonzalez to answer it please.

Yes, we are still expecting to spend most of the $1.5 billion, we start as long in the first quarter, but we already asked for some purchasing of equipment in about $300 million for the second quarter. Then we expect that we want to be very close to $1.5 million, because Buenavista is spending a lot of his $1 billion that they have for this year. And Southern Peru only has 387 that we expect to be very close to that amount in the year 2012.

Okay, perfect. Thank you, Oscar and all.

Your next question comes from the line of Louis Molinari with Barclays. Please go ahead. Louis Vincent Molinari – Barclays Capital, Inc.: Hello, good morning, everyone. And my first question relates to the hedging strategy. Did you have any changes in the hardest part of the year? And also if you’ve any expectations for all future hedges. This would be my first question. And my second question is related to the Cuajone project. We noted that the first half of the project was delayed by one year, so I just want to have more color on any reason for this delay. And also if could comment about process of obtaining environmental license took a (inaudible) expansion would be great. Thank you.

Okay. Xavier would you like to comment on the hedging strategy for the company?

Thank you. I will as we mentioned in the first half hedging strategy for the company and (inaudible) at the quarter of the board’s level. And analyzing capital means cash flows the project the market et cetera that’s how we make up decisions as you know that hedges were just sort of first quarter 2012 (inaudible) we’ve no more hedges in place. And at this board meeting the decision was not taken into at least at this level.

(Inaudible) you can answer the delays in the Peru project.

Yeah. On the first question on production for Cuajone, basically we’ve two projects that are being developed by the Cuajone operation. One is what we call it variable kind of grades that it’s getting to it’s completion, through this year in 2012, and we’ll have a slight improvement in production resulting from these projects. And for next year we’ve for the by the end of the first quarter of 2013, we have to schedule the start up of the high pressure grinding rolls facility that we’re also building in Cuajone. This facility will basically fracture mineral before it gets into the mill of Cuajone. And by doing that, we expect to improve the recovery and possibly the production or the throughput that the Cuajone concentrator can process on a daily basis. As a result of these two projects, we’re expecting an increase in production of 22,000 tons as it has been reported to the market. We have basically rescaled something that was for the high pressure grinding rolls scheduled by the end of 2012 to the beginning of 2013. It’s not a one-year delay. On the Toquepala license, let me ask Mr. Oscar Gonzalez to comment on it, please.

Yeah, certainly in the Cuajone, we are doing the [possibility] story within three companies, engineering companies from Tucson, Arizona, and it’s go from 85,000 tons that we are milling right now to 120,000 tons. We are expecting to have that results by the middle of this year and then take the decision and go ahead with that expansion that will be additionally – or quarter, Raul mentioned of the 22,000 tons of copper per year and 700 tons of molybdenum for the (inaudible). And about Toquepala, in Toquepala we are waiting for the Minister of Mines to approve the new date for the public... Hearing, hearing that we are going to have with the population of the Tacna region and we hope that, that will be approved either if the regional government of Tacna is not in favor of that project because they are trying to get some more back from the concessions that we have with the national government. But that – if that is the case, we are going to be ready to restart construction because we have 95% of the engineering done and then the construction will take 18 months in order to be ready for production. I don’t know if that answered your question. Louis Vincent Molinari – Barclays Capital, Inc.: Yes, perfect. Thank you.

Your next question comes from the line of (inaudible) with GBM. Please go ahead.

Hi Raul, Daniel and Oscar, thank you for taking my question. My first question is regarding a fair price concentrate, the sales of this (inaudible) company all time low, so we should be expecting this to continue? My second question is about the joint venture you mentioned in Buenavista, maybe if you can give a little more color about that joint venture please?

Buenavista, no. We are the sole owners of Buenavista (inaudible) I think that you probably meant Tantahuatay?

Yeah, with (inaudible) and Tantahuatay, sorry?

Yes. Well basically it’s a project that we started a few years ago with Buenaventura. As we indicated previously, we have 44.25% participation on these projects. Its gold, silver, mine at this point, wherever there is a copper body and they’re need the silver and gold. The profit at (inaudible) and now a specific plans has been developed at this point to cut on the copper portion of the mine that it obviously it’s a very interesting resource for the future or for the company and what we’re seeing here is that benefit of this investment basically the cash costs per pound of gold is $100 to $500 per year, and I mentioned already, the estimated production for 2012. And your second question was on third-parties concentrates, well, we do buy and sell concentrates in the market to adjust our metallurgical facilities capacity to our production capacity. So we have certain prior parts of the year we may acquire third parties copper concentrates and process them. And at certain parts of the year, we may sell concentrates and it’s the adviser, it’s basically the match between the production capacity of our smelting and refining facilities in Mexico and Peru, and the production from our mines. For this year, we’re expecting much better production from our own operations and obviously our own copper production is much, much lower in cost than the third-parties copper. At the end of the day, you pay market price, let discounts from third party’s copper, while for our own operations it’s what it cost to produce it and where – as you know we’re very, very competitive in cost. So for us it’s much better to use our own material than the third parties, but we need to acquire copper from other operations now and then.

But given that little more of the sale of – in the concentrate for this year, we are going to buy only 50% of what we buy – what we bought last year. Then we are going to get more production for that recent, we are going to request less amount of concentration on the third party.

Okay, perfect. Thanks a lot.

Your next question comes from the line of Daniel Rohr with Morningstar. Please go ahead. Daniel Rohr – Morningstar Research: Thank you very much for taking my question. Gentlemen just a couple of brief one, the first concerning the Angangueo project. You mentioned in the press release and then in your opening remarks that you’ve 36,000 of tons of copper concentrate, 41,000 tons of zinc concentrate, I just want to confirm, did those metals, those numbers are further to contained metal or to concentrate tonnage?

It refers to concentrate tonnage because the ore grade or the concentrates may vary. There are metal content may vary. However we have an estimate at this point, I could mention it now. For copper, we are expecting about 10,000 of ton copper production contained in these copper concentrate. For zinc, it will be 22,000 tons of zinc on a yearly basis. For silver 4.5 million ounces of silver per year, and on lead, about 3,500 tons of lead. I also like to point out that, production will come – first we will have much more copper production, and in the life of history and later on in time seen the remaining plants, they will have much more zinc production. But we’ll be relatively stable; will be the silver production that will hold at above the average that I mentioned. Daniel Rohr – Morningstar Research: Thank you very much for that information. And then if I may, regarding the Quebalix facility, how much additional copper throughput do you see that facility contributing to what at least the operations in 2012, and then how much in 2013 with a full year of operation?

For now, (inaudible) is just gold/silver mine, we found out resource at… Daniel Rohr – Morningstar Research: I apologize, I’m referring to SXEW facility?

Well, earnings is part of the equipment that we use for SXEW plant, and the benefit will be captured by the SXEW plant that we have – for both, the current two SXEW plants that we have, and the new SXEW plant that we are building in (inaudible). Daniel Rohr – Morningstar Research: Let me rephrase, just to extent it’s increasing recovery that you get out of the SXEW process, how much incremental tonnage from that – those improvement that you were raising?

Well for – let me say that little bit differently. Quebalix, it’s a facility that increases the production and improves the recovery. So these are the two effects and these are tied to the projects. So we will – in order to produce 120,000 tons of refined copper at the newest SXEW plant, we need to have several Quebalix in order to produce in our current SXEW plant, we have to use our Quebalix at full capacity. We don’t do the project with and without the Quebalix window we know that there are very important terms of the benefit that they provide. Daniel Rohr – Morningstar Research: Okay. Thank you very much. I appreciate it.

Your next question comes from the line of Garrett Nelson with BB&T Capital Markets. Please go ahead. Garrett Nelson – BB&T Capital Markets: Thanks for taking my question. I noticed that your copper, zinc and silver sales volumes all exceeded mine production during the quarter. So it appears you had a pretty significant inventory drawdown, should we view this as a positive read-through for overall demand? And can you comment on your current inventory levels?

Well, our inventories are basically in our refine operations probably less than a day and in general terms what we have had is some copper in progress that was – in process, I’m sorry, copper in process that we had at our inventories, in our production lines at the end of the fourth quarter that has been finished and sold through the first quarter of this year. Our inventories improved, we had in process about 12 million pounds that were – went out to the market in the first quarter and in Mexico about 9 million pounds, basically our copper in process was reduced by that that match through the first quarter. Garrett Nelson – BB&T Capital Markets: Okay, great. Thanks very much.

Your next question comes from the line of Ivan Fadel with Credit Suisse. Please go ahead. Ivan Fadel – Credit Suisse: Thank you for the question and congratulations for the sound results. My first question was regarding operating cash costs, which increased in Q1. Could you please provide a forecast of your cash flows in the remaining part of the year? And the second question refers to copper price, given (inaudible) various mining companies worldwide. Can you expect higher copper price in the second semester of the year? Thank you very much.

Okay. On the cash cost, basically we are expecting it to be at above these levels and here we have a big question mark related to how are we – what is going to happen with energy market basically, our main cost as you know its power and fuel, fuel is about 12% of our total cost and power about another 24%. So depending on the cost of these two main inputs to our production process that will affect our cash cost. In terms of our currency appreciation, we are seeing some currency appreciation particularly in our Peruvian operations. In Mexico, it still depending on how Mexico is going out of the economic slowdown that has affected the U.S. And the second question was on. Ivan Fadel – Credit Suisse: Copper price.

Copper price basically we have a positive view for the rest of 2012 at this point, our price internal price forecast is inline with the markets, obviously we believe that fundamentals of this market are very positive, and we think that Southern having very low cost, cash cost probably the lowest among their similar size companies will take a significant advantage of the current price environment. Ivan Fadel – Credit Suisse: Got it. Thank you very much.

Okay regarding by product production we are expecting to maintain as it is now, we gave guidance on production forecast at the beginning of the year, we’re main by product which is molybdenum expected to be at about 17,500 tons for the year, we expect to improve it little bit at this point it would be – we can’t be sure about that. So, I think basically we’re seeing the results of having Santa Eulalia operation back not on track, still on the process of recovering the full capacity. This facility was affected by a float in the last couple of years and we’re solving the floating programs through this year. And the other point was (inaudible) explained the company position on that. Basically, we evaluate the market circumstances on an opportunistic base, we take action on hedging. At this point, we have no hedges at all.

Okay, perfect. Thanks a lot.

Your next question comes from the line of Mandeep Singh with J P Morgan. Please go ahead. Mandeep Singh – J P Morgan.: Hi, Raul. Thanks for taking my question. We saw a sharp jump in dividends for this quarter after a sharp drop in the last quarter, which was attributed to a more prudent stance in light of the upcoming CapEx schedule. Since the capital position has changed, how should we think about dividends going forward? And do you think the higher dividend this quarter could be maintained in the upcoming quarters? Thank you.

Well, thank you very much for your question, Mandeep. And I’m sorry to say that we can’t comment on what the Board will think about when they discuss our cash position and their view in the market later on through the year. As I mentioned before, the way that the dividend is set in the company is not tied to payout ratio or a fix amount of dividend per quarter, it’s something that it’s discuss on the base of the outlook for the market, the company cash position, the amount of capital is required by our projects, so that’s how dividend is set. Now having said that you will know the company has been very keen on rewarding their shareholders through dividends. So basically the track record it’s something that it’s a reference of what the board may do in the future. Mandeep Singh – J P Morgan.: Thank you.

Your next question comes from the line of (inaudible) with Deutsche Bank. Please go ahead.

Hi, good morning to the first conference call, I just was to have an update on Tia Maria project, as you keep the start up for the first half of Southern sale and if someone else on (inaudible) the front, thank you.

German.

Yes, we’re still maintaining the guidance of start-up operations for the first half of 2015, that’s certainly as the condition that we received the approval of environmental (inaudible). We really have started if working on a new environmental impact assessment study, after we discuss our options with the Peruvian government, the government has also gave us you do know that we have our new government in Peru that took off in last July, and we have to pass on some new guidance regarding certain condition, we should consider for our study and we want to address these conditions that questions made by the local communities regarding the projects. The project and the observations or the points made by the consultant that Ministry of Energy and Mines approved higher from a UN agency last year. So all of this is being consider for us part of a new environmental impact assessment.

Your next question comes from the line of (inaudible) BBDA. Please go ahead.

Hi, I just have one little question from your cash flow statement. I just want to know where there positive $294 million is coming from in investing activities. It’s a set of softening business?

Could you repeat your question please?

Yes, sorry. Just on your cash flow statement, are you having investing activities in the line of (inaudible) short-term investment you have this quarter, the positive $294 million, just want to know where it’s coming from exactly?

Yeah, okay, now our cash flow. Let me see if I copy you well. You’re saying that on the cash flow we have on investing activities of sales – of short-term investment that amount for a net of $294.7 million, is that your question?

I just want to know where it does come from.

Okay perfect.

Thank you, very much.

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

Well with these we conclude our call for this quarter. We certainly appreciate your patient and we expect to have you back on when we report the send quarter of this year. Thank you very much and have a good day.

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