Southern Copper Corporation (SCCO) Q2 2012 Earnings Report, Transcript and Summary

Good morning and welcome to Southern Copper Corporation Second Quarter and First Six Months 2012 Results Conference Call. With us this morning we have Southern Copper Corporation’s Mr. Raul Jacob, CFO of Peruvian Operations and Investor Relations of Southern Copper, who will discuss the results of the company for the second quarter and the first six months 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 that are subject to risks and uncertainties. Actual results may differ materially and the company’s cautions do 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 expected – expressed in full U.S. GAAP. Now I will pass the call onto Mr. Raul Jacobs. Please go ahead, sir

Thank you very much, Michelle, and good morning to everyone, and welcome to Southern Copper’s Second Quarter Earnings Conference Call. Participating in today’s conference are Mr. Oscar Gonzalez Rocha, Southern Copper’s CEO and Mr. Daniel Muniz, Copper Mexico’s CFO. On today’s conference call we will begin with an update of our view in 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 call for questions. Focusing on the metal market and prices of the metals that Southern Copper use, during the first half of 2012 metal markets continue to be driven by negative macroeconomic events that effected consumer expectations. The most important ones being Europe’s debt crisis particularly the provinces in Spain and Italy and the possibility of a slowdown of the Chinese economy. Even though we believe copper fundamentals are sound for 2012, demand has been repeatedly negatively influenced by the macro outlook for Europe and China. At present we perceive a difference in the situations of the Asian markets and the developed markets. In China several sources point to a growth in demand of approximately 7% to 8% for this year. That’s for copper, which should give support to the market of copper in the next few months. The United States and Europe although demand is weak, inventories are extremely tight and we see them increasing to more normal levels over the next 12 months are equally in the United States. Demand from emerging economics are also growing and some – and that this is somewhat offsetting the weaker consumption that European and the United States markets. See our view currently estimates that there will be a total refine copper demand growth of 3.5% for…

Ladies and gentlemen, this is the conference operator. Today’s conference is having a few technical difficulties. We will commence shortly. Thank you for your patience.

You’re on, you’re on the line.

Okay. Ladies and gentlemen, my apologies for this interruption. We are experiencing some technical problems at the carrier of the conference call. Now let me recap talking my expansion on capital projects. As I said, the Board of Directors approved a $1.5 billion capital expenditure program 2012, which are being used for our project in Mexico and Peru, as well as for maintenance and replacement capital. Regarding the Buenavista projects, the Quebalix projects, overall progress is 98% and this facility would begin operating in September of this year. Through June 30, we have invested $71 million of the $77 million budget. This investment consists of our crushing, conveying and spreading systems that include SX/EW corporate production by increasing recovery and reducing the required time to extract copper from mineral. The construction of our molybdenum plant for the current concentrator in Buenavista is at 48% of progress. The project has a budget of $38 million and it’s expected to begin operations in the first quarter of 2013. It would produce 2,000 tons of molybdenum contained in concentrate. The effective EW 3 plant, it also at the Buenavista mine is moving forward. Plant improvement from Tia Maria in the low western increased the analytic plant capacity from 88,000 tons to 120,000 tons. ACC in yuring was multiplied by the supplier to include the construction of an additional conveyor line. Overall progress of the project at the end of June is 31%. The new plant should begin operating in the first half of 2014, and have a total back its cost of $444 million. The Buenavista mining expansion project includes mine equipment acquisition and a new concentrator with an estimated annual production capacity of 188,000 tons of copper, and 2,600 tons of molybdenum. This project has a capital budget of $1.4 billion, and…

(Operator Instructions) Your first question comes from Carlos de Alba from Morgan Stanley. Your line is open. Carlos de Alba – Morgan Stanley: Thank you very much. I would like to ask you three questions. The first one is, on the sustainability of the lower costs that we saw in the second quarter, and clearly a very good performance that underpinned the results, but you mentioned reduced worker’s participation and reduced energy costs as the main pillars of this decline, can you comment a little bit about what you are seeing in the third quarter? And then to what extent these reductions are sustainable? And the second question is regarding the dividend policy. The – we have seen dividends being part share buy-backs, part cash, than an increase or a full cash dividend of around $0.50-something per share, and now a decline to around $0.25, $0.24 per share, could you comment what is the company’s policy? And what can we expect going forward as you accelerate the CapEx deployment? And then finally, could you talk a little bit about the reasons behind the six months delay on the Buenavista SX/EW 3 project and the Angangueo project? And also I noticed that the CapEx for these two projects did not increase despite the delays, so if you can clarify why that was the case? I would appreciate that. Thank you.

Okay Carlos, let me comment first on the cost. Basically what we are – we have better cash cost in the second quarter due to the response in off grade and recoveries of our operations of Cuajone, Buenavista and Caridad. We believe that we will sustain the current levels of production for the rest of the year for these three operations. On – and that, on the production side of the cost, as obviously we produce more copper, our cash cost decreases somehow. Regarding the prices, what we’re seeing is that energy and fuel and helping us a little bit cost-wise. Cost reductions, driven by energy, were about $6 million in the second quarter. In the case of worker’s participation, we have a reduction in this quarter, when compared to a prior one, but as the company faces higher prices, obviously that figure may change. The reason why worker’s participation has been – has decreased is mainly the result of the lower earnings before taxes. Regarding the dividend question, I’ll – would appreciate if Daniel Muniz could make a comment on that.

Sure. Carlos, thank you. As you know, we don’t have a definite policy written in stone, what we do (audio gap)

Excuse me, this is the operator. We are experiencing technical difficulty. Our speaker’s line has dropped. Please wait for a moment. We will reconnect.

Carlos, we’re still on the line. Let me focus on your third question, while we wait for Daniel to reconnect. Basically, on the Buenavista, the SX/EW 3 plants, I’ll ask Mr. Gonzalez to comment on the equipment delay and the postponement of the start up of the investment.

Yes. Normally what it is that the delivery of the equipment that we are buying for this project of the portion of the concentrator of Buenavista mine is delaying. And for that reason we are extending the termination of the project in order to be in operation. And in Angangueo, that was the other one that you mentioned, we are starting a little late for some problem that we have with the government of the state in Michigan. And we hope that we can resolve that and recover the timing in order to be at the beginning of the 2015 year. Carlos de Alba – Morgan Stanley: Thank you very much. Just to clarify, if I may. On the Buenavista, I was talking about the SX/EW 3 project.

Oh. Carlos de Alba – Morgan Stanley: And I think you mentioned the concentrator.

Okay. The SX/EW plant, we are using the equipment that Tia Maria bought for that project, and we are sending that to Buenavista, and I hope that they will receive it on time and starting the installation. That will be really not having any delay. I don’t know which dates you had before, but that is in the beginning of 2014 – the start of the operation. Carlos de Alba – Morgan Stanley: All right. And Angangueo will start in the first half of 2015, correct?

Exactly. Carlos de Alba – Morgan Stanley: All right. Thank you.

Your next question comes from Marcos Assumpção from Itaú BBA. Your line is open. Marcos Assumpção – Itaú BBA: Hi. Good afternoon, everybody. First question is as regarding the Quebalix project in Buenavista, which is, it’s going to be starting up very (audio gap) what could be the benefits that this project brings in terms of potentially a little bit of higher production because of the increasing recovery? Or a little bit of a lower cost? What could we see in terms of benefits of this project starting up in the second half of this year?

Marcos, how are you? Well the Quebalix is a facility that allows us to explore the tax for the SX/EW plant in a better way. By reducing the size of the rocks through the crusher and then spreading them more orderly through the conveyer belt system, what we need – get is two benefits. The first one is that we increase the recovery of the contained copper in the SW/EW – in the oxides and material process for the SX/EW plant. Usually in our case, that recovery increases probably speaking from about 50% to 70%. This second benefit comes from the time that we have to – for getting this material or this copper recuperated. Usually you have at Quebalix, your recovery rate will take about five years in order to recuperate all the metal that is contained, or that most of the metal that is contained in the ore, while the Quebalix had the figure reduces to three years. So those two benefits are part of we’re expecting from the Quebalix. This project is tied to the SX/EW 3 partially, but we also benefit our current SX/EW operations.

Your next question comes from Felipe Hirai from Merrill Lynch Brazil. Your line is open. Felipe Hirai – Merrill Lynch Brazil: Hi, Raul, Daniel, two questions. My first question is regarding CapEx. You maintain the guidance for this year for $1.5 billion, but I guess they was seeing CapEx running well below this level. What should we expect for the second half as you think – do you still think it’s achievable to get to this $1.5 billion? And also, if possible, if you could provide some kind of guidance for next year, it would be great? That’s my first question. Thank you.

Okay, Felipe, well regarding the budget, our current view is that we will accelerate our capital spending through the year, so we believe that in the second half, we will have much more CapEx expenses. At this point, we have not changed our view on the CapEx for 2012. For the remaining or the future years, what we have scheduled at this point, and this is certainly will be reviewed at year-end and the beginning of next year, we’re expecting to spend about $1.6 billion in 2013 to accommodate the projects that we discussed in this conference call. Felipe Hirai – Merrill Lynch Brazil: Thank you. And if I may, a second quick question. Could you provide an update on your current hedge positions, if any are done?

Very simple, we have no hedge positions at this point. Felipe Hirai – Merrill Lynch Brazil: Oh, that’s great. Thank you very much.

Your next question comes from Leonardo Capas from Deutsche Bank. Your line is open. Leonardo Capas – Deutsche Bank: Hi. Thank you very much. So into this quarter you also provided the estimate from just the top of the Tia Maria project and on your earnings release, but now there is no more estimates provided. Do you still believe it’s feasible to the degree by 2015? Could you detail a little bit more on the project timeline? That’s my first question. Thank you.

Hold on a sec, please, Leon – Leonardo, Tia Maria is scheduled to start-up at the beginning of 2015. We arrived to that figure, assuming that certain timeline for getting the appropriate permits that we need to get, after finishing our environmental, the new environmental assessment that the company is preparing. On the delivery of the new plan that we will need to design because we mentioned that the plan that we designed for Tia Maria was sending to Buenavista, no? Leonardo Capas – Deutsche Bank: That’s true. Just one more question. So what’s the annual production you expect for the Tantahuatay mine to reach? And how much do you expect it to contribute in our earnings?

Well for the year, Santawathai is currently scaled to produce about 118,000 ounces of gold and 565,000 ounces of silver. Depending on price that should convert into an additional benefit for the company. At current prices the contribution amount is a little bit ahead of $3.5 million, so in six months that will be about $21 million of additional contribution. Leonardo Capas – Deutsche Bank: Thank you very much.

Your next question comes from Leonardo Korea from Barclays Capital. Your line is open. Leonardo Korea – Barclays Capital: Hi. Good morning, everyone. Good afternoon. My first question, Raul, is regarding the dividend environment in Peru and if you can share with us your latest thoughts on what can change and how the miners have been involved in those other projects that are expected in the region, especially now with the recent cabinet changes that we saw. So if you can just give us an update on what’s happening and how potentially more confident you are with the recent changes that Humala has been adopting. And my second question is still regarding CapEx and projects, the understanding here that we had is that the Angangueo project was reduced in size (inaudible) copper production, so maybe if you can walk us through on why exactly you downgraded future expectations that would also help us a lot. And then finally if you can go back to Carlos question on dividend, that would also be helpful. So thank you very much.

Your first question was about – I couldn’t understand what you said, but I believe that you want us to give a comment on the current operating circumstances the mining company grew due to the recent change in cabinet, is that right? Leonardo Korea – Barclays Capital: Yeah, I mean just an evaluation of what the recent political changes and how that can potentially impact the business confidence in mining activity and growth project, et cetera.

Well currently the Mining and Energy Minister is the same in the cabinet, so we’re expecting the same policies to hold, no changes in other words. So on that, we’re not seeing any variances. The government is trying to help companies to go ahead with the projects and that’s the case for us as well. And your second question – I’m sorry that we couldn’t get you well to the phone, but I understand that you refer to the – why the change in production in Angangueo? Is that your question? Leonardo Korea – Barclays Capital: Yeah, we were working with a number which was closer to 30,000 tons, 40,000 tons and now the recent number is closer to 10,000 tons, so anyways we could be missing something, but I thought there was a bit of a reduction in future outputs from Angangueo?

Sorry, sorry Leonardo, but we can’t copy you well. Leonardo Korea – Barclays Capital: Yeah, was there any – well what I’m asking is, was there any change in the Angangueo project in terms of future output of copper?

No. The thing here is that between the prior quarter and this one, and that could be a source of confusion for what I certainly like to apologize if that’s the case, it’s that the – in the prior quarter, we had a clear idea of how much concentrate was the Angangueo mine going to produce, while in this quarter, we have to find the figures that we have for production and that’s why we are, we’re indicating the estimated production for the metals of the Angangueo, the metal content. In other words, on the prior quarter, the report indicated about 36,000 tons of copper concentrate. Now we have a much clearer view on that and that’s why we have today contained copper, which is 10,400 pounds of copper, 9,700 tons of zinc and 3,900 tons of lead. And our – is Daniel Muniz back on the call?

Yes, I am. Thank you, Raul. I apologize. There’s been a lot of technical difficulties today, but I’ll be happy to take the dividend question. Can you hear me?

Go ahead, please. Leonardo Korea – Barclays Capital: Yes.

Yes. Good. Thank you. Well as I was trying to explain, Carlos, and I figured that they – you could listen, we don’t have a dividend policy written in stone at Southern Copper, but however, we’ve been trying to maintain a steady track record throughout the years. This time, the way the board has decided to reduce the payout ratio based on the CapEx that Raul has just explained, and to not only based on estimations, but also based on our commitments for those expenditures. We have $1.5 billion 2012 CapEx budget, and we’ve committed for certainly more. So we looked at the copper environment and the drop in all the metal prices and the macro environment, and our Board decided that it was prudent to decrease the paired ratio and to decrease dividends and the dividend paid. So we are committed to fulfilling and completing our projects, and that’s the rationale of our prudence in this quarter. Whether we’re going to keep on with this pay-out ratio going forward, I’m sorry I’m not able to tell. We really debate it every quarter. So we’ll look at it next quarter. But we do, or our Board and the Company has a commitment to really deliver these projects, so we are working on it. And that’s the answer.

Your next question comes from Mandeep Singh from JP Morgan. Your line is open. Mandeep Singh – JP Morgan: Hi, all. Congrats on the results, and thanks for taking my question. The question is related to your copper production that saw strong recovery in your own mine production, and the run rate has now reached above the 2012 guidance. So the first part is, was the improvement in grades and recoveries as expected or was it better than what you were expecting? And what do you expect for production for the rest of the year? And if you could please comment on the impact that it has, if at all on your production guidance of 640,000 tons, and the mix between your own production and the third-party concentrates? And my second question is related to your CapEx. I understand that you’re maintaining your CapEx budget of $1.5 billion for the year. But if you could just elaborate a little bit on the projects, where we will see accelerated CapEx in the second half? Thank you.

Okay. Let me start by the production guidance. We are maintaining our guidance for the year, which is 640,800 tons of copper. However, we are reducing the share of third-party copper on this troubled member, from 30,800 that we indicated at the beginning of this year, to 21,300. That is our current forecast for third-party copper. Regarding capitals, we are expecting, usually capital budgets usually are lower at the beginning of the year, when budgets are being developed. Because, let’s say, in the first quarter you basically could purchase orders have to do some advance statements, but they are not as important as the ones that you have to do when you start getting the equipment that you already put the purchase order for. So that’s why we’re expecting to have much more expenses on the second half of the year than on the first part. So what is the maintenance CapEx? Now in the case of the projects we have been working through 2011 very hard in defining the project, defining the basic and detailed engineering and now we’re in the process of purchasing of the equipment. As part of that process the company as we indicated through the call, transferred the SX/EW plans of the Tia Maria to Buenavista. And also through the purchase orders on several mining equipment was mentioned in the call. So we will start getting that equipment in the second half of 2012 and as a consequence our CapEx will increase accordingly. Mandeep Singh – JP Morgan: Thank you.

Your next question comes from Derrick Nelson from BB&T Capital Markets. Your line is open. Derrick Nelson – BB& T Capital Markets: Hi, guys. You’ve outlined the progress of each individual growth project, but is there any change to your longer term copper production and CapEx forecast through 2016 from the previous numbers you’ve published or can we assume that prior guidance is still intact?

Yes, there is a little change in the guidance due to the delay of the SX/EW plan to start up on that. And also we are considering now the Angangueo project with some production that was not there since the beginning of the year. But there are minor changes basically to our guidance. For next year we are expecting to have about 654,000 tons of copper, for 2014 that will be 712,000 tons, for 2015 996,000 tons, and for 2016 1.1 million tons of copper, that’s our current view on the company’s increasing production. Derrick Nelson – BB& T Capital Markets: Great. Thank you. That’s very helpful. And then as you mentioned the equity income recognized from your 44% interests in the Tantahuatay mine added $0.02 or $0.03 to earnings for the quarter, can you help us with how to think about the gold and silver production and costs at that mine going forward? I’m just trying to get a better sense of what your equity income might look like in Q3, Q4 and into next year.

Well for Tantahuatay, we already gave guidance on production for the year. It’s about 118,000 tons of copper and 650,000 tons of silver – I’m sorry...

That was gold, that was not copper.

That would be great, but I’m so sorry that, that cannot be the case. I mean ounces. I’m so sorry to everybody. So let me repeat it again. It’s 118,000 ounces of gold and 650,000 ounces of silver. That’s for the year. At current prices, that should be about $3.5 million per month and that is basically what is coming to our P&L. Besides this, the company is getting back some stockholder’s loan that the joint venture did and that will certainly help our cash flow as well. Derrick Nelson – BB& T Capital Markets: Okay.

But the numbers are in the range of what I mentioned regarding the profits as well. Derrick Nelson – BB& T Capital Markets: Got it. Thank you.

Your next question comes from Juan Lopez from GBM. Your line is open. Juan Lopez – GBM: Hi. Good morning. Thank you for the conference call. Most of my questions have been already answered, but I would – I have a question that may not be familiar right now, but I have – I would like to know regarding the two power plants that will in Mexico is planning to build, how is the related to Southern Copper mining production if the company will pay that market prices of income stock benefit are to be expected?

Thank you for the question.

If you...

Oscar, will you?

Yeah. Thank you. As you know, Juan, the toplands are being built by a group in Mexico, but of course the off-staker and the idea is to lower the electricity consumption costs for Minas, Mexico. As you know Minas, Mexico has, in Mexico, electricity costs are very high compared to the U.S., and sometimes higher than Peru. So idea is, we’re working on it. The plans will not be ready now. They’re being worked on. And they’re being built, as you know, by Siemens on the front of the infrastructure direction of Mexico. And the idea is definitely for some copper to save costs. We have not concluded the independent engineers’ modeling, et cetera. We’ll give you exact details when we have them. Juan Lopez – GBM: All right. Thank you very much.

The next question comes from Rene Kleyweg from Renaissance Capital. Your line is open. Rene Kleyweg – Renaissance Capital: Good morning, gentlemen. Just two things. One, if you could provide us a bit of an update on the timing of permits. We talked about it on Tia Maria, and just in terms of when internal expectations are and what the next big bench, big sort of time-critical events are on those. And then just, I guess, more for Daniel, you know you’ve got this extremely attractive financing in place at 5%, but because of the cash balance you’re running, you’re interest on your net cash balance is effectively nearly 10%. You just cut your dividend, and yet we’re only talking about a billion dollars or so in cash, which is not really sufficient to do anything in terms of any major acquisitions. So I’m just trying to understand the dynamics at work. I mean I appreciate CapEx is going up in the second half of the year, but operating cash flow will cover that. So, you know, just trying to get a better feel of how we should be thinking about that over the next two, three years. And what is the point of keeping that cash balance on the balance sheet, when it’s not really sufficient to make any sort of significant acquisitions?

Okay. In the first question about Toquepala and Tia Maria. We have stated that, that would be at the beginning of year 2015 if we have all the approvals of the environmental impact studies in both of the projects, and start production maybe in the Tia Maria, the middle of 2015, and in the case of Toquepala portion, either at the end of 2014 or beginning of 2015. Rene Kleyweg – Renaissance Capital: Sorry. It was more in terms of the permitting, the timeframe on the permitting, as opposed to the production. Apologies.

The permits?

We have to comply with several permits in order to go ahead with expansion. But you told us you have, you have to – the first thing that you have to do is you have to present your environment as impact assessment. In the case of the corporate plan expansion, we already did that. We already did some workshops that we have to do with local communities and there is one final workshop, which is the most important one that is with the authorities participating in it and the local community’s representatives. That one, we had it in September of 2011, and was – even though it was a specific meeting with no problems at all, due to the fact that about 80 kilometers away from where we were having the meeting, we had some social unrest. Due to that fact, the authority decided to, not to go ahead with the environmental impact assessment approval. The company has been in talks with local communities and with the regional government of Tacna in order to clarify the benefits of the projects for the region and we think that we’re moving forward in this talks. But we need to – what we need to do, it’s to have that last meeting happen. And after that, we will start the construction. We’re assuming that we will get to some solution on this by year-end. In the case of Tia Maria, we’re currently doing the environmental impact assessment. After that, we will present it to authorities and then there is a process of first, the authority have, legally speaking, 30 days to answer back the company. Usually takes a little bit long. We’re assuming some cushion for that. And also, we should get some questions or concerns from the local communities. That has a defined timeframe and we already answered most of the questions in the past process for Tia Maria. So we believe that we shouldn’t have that many questions and concerns from local communities because we already tackled those in the past. However, that could be the case and there are some questions. So assuming certain timeframes for each of these steps, we arrived to about the first quarter of 2015, at the start-up moment for the Tia Maria project and then the ramping-up will take project to be at full capacity by mid-2015. Rene Kleyweg – Renaissance Capital: Okay. And that’s so the Tia Maria you’re assuming EIA by the first quarter of next year? Or is it more second, first half of next year?

No. At the beginning of next year when we – definitely we need the approval of the (inaudible). Rene Kleyweg – Renaissance Capital: Thank you.

(Operator Instructions)

The listener had a question that I ask, Daniel, if you can comment on that please.

I’m sorry. Mr. Quintanilla’s line has been dropped again.

Sorry for the inconvenience. Rene Kleyweg – Renaissance Capital: That’s all right, Raul. We’ll catch up at some other point on that. Thank you.

(Operator Instructions) Your next question comes from Jamie Nicholson from Credit Suisse. Your line is open. Jamie Nicholson – Credit Suisse: Hi. Hello. Thanks for the call. This is Luciano Costa on behalf of Jamie Nicholson. I just wanted to ask the $1.3 billion budget for 2013 in CapEx, do you think you will need to finance that in the debt market or most of it from cash flow? If you could just comment and provide some color on that, that would be great. Thanks.

At this point we have no specific plans of taking on the debt markets. So the answer would be our own cash flow. Jamie Nicholson – Credit Suisse: Okay. Thank you very much.

The next question comes from Santiago Perez. Your line is open.

Hello. (Inaudible) thanks for your time and your questions. (Inaudible) answered most of my questions but I only have one remaining. Would you be able to give us a timeframe or more of a scheduled execution plan regarding shaktak election confits for the rest of the year and the following one 2013 please? Thanks.

Santiago, I’m sorry but we couldn’t copy you well.

Okay. I just wanted to know if you have any execution, scheduling execution plan for production for this year or the following. It would be great if you could shed some light on that.

For this year I think we already mentioned that we’re still holding the forecast of $640.8 and for next year $650.

Sorry, Raul. Maybe you didn’t hear me. I meant hedging. Are you planning to hedge in part of your production?

Hedge?

Hedge. Yeah.

No. At this point we have no hedge – we don’t have any hedge position and we are not considering doing anything like that at this point.

Okay. Thanks a lot. Congratulations on your results.

I have no further questions in queue. I turn the call back over to the presenters for closing remarks.

Well, this will conclude our conference call for the second quarter. We certainly appreciate your participation, and we expect to have you back with us when we record the third quarter results. Thank you very much, and again let me apologize for the technical inconvenience that we have had through the call.

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