Welcome to the Southern Copper Corporation Fourth Quarter 2016 Earnings Results Conference Call. My name is Richard and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Mr. Raul Jacob. Mr. Jacob, you may begin.

Thank you very much, Richard. And good morning to everyone and welcome to Southern Copper fourth quarter 2016 and full year 2016 earnings conference call. Before we go into the details of the agenda that we will cover today, let me say that we're very excited on how our corporation finished 2016. This has been a truly remarkable year for Southern Copper. Our record production of 900,000 tons of copper marks an inflection point for our Company. We did successful culmination of our first strategic growth plan executed to increase our production from 479,000 tons in 2010 to 900,000 tons this past year. And we're heading towards one million tons by 2019. One major component of this program is the $3.5 billion brownfield expansion of the Buenavista mine in Mexico, which has been swiftly and efficiently executed amidst a highly volatile and challenging commodities market environment. Today, Buenavista has become a world-class copper operation with leading production, the largest reserves and one of the lowest cash cost of our industry. Concurrently, a keen and continued focus on operating efficiency and cost control have reduced our cash cost to achieve $0.95 per pound in 2016, down 14% from the $1.11 cash cost per pound that we had in 2015 and positioning us as the highest margin major copper producer globally. We remain equally enthusiastic for the future as Southern Copper is uniquely positioned to continue delivering enhanced performance, sustainable growth and superior value. Our best-in-class low cost operations coupled with a large high-quality reserve base in investment grade jurisdictions, continues to offer highly attractive growth opportunities. On top of this, our robust capital structure and a strong cash flow generation provide us with the financial flexibility required for execution of our strategy. The year 2017 will be the starting point of…

Yes, please continue, you are still live.

Okay. Yes, thank you. The Buenavista Zinc deposit, it's also in Sonora in the Buenavista mine complex and this is a zinc open pit mine which capacity is expected to be 60,000 tons of zinc per year. Let me now focus on the copper market. Now that we have passed through our plans for the next few years, let me focus on the copper market, which is the core of our business. We're starting 2017 with the market showing the first signs of a structural deficit created by the lack of investments in the last few years. For 2017, we expect demand to grow between 2% to 2.5%, driven mainly by China's metal consumption recovery, a strong economy of the US, and the recovery of the European Union consumption of basic metals. On the supply side, after five years of copper price reductions, we see supply underperforming the market needs. We expect a weak growth in the range of 0.5% to 1% growth in supply for 2017. This lack of growth is the result of the previously mentioned decline in investments that several companies have had in recent years as well as technical problems, labor unrest, excess government taxation and other difficulties. All of these factors will cause a market deficit in 2017 giving good support to current copper prices. Let's now focus on Southern Copper's production for the past quarter and the year 2016. Copper mine production increased 10.3% in the fourth quarter of 2016 to 227,583 tons from 206,400 tons in the fourth quarter of 2015. This positive variance is the result of a 23.9% increase in production at the Buenavista mine which increased production by 21,576 tons or 23.9%. Annual copper production in 2016 was 899,955 tons, a new company record. This increase of 21.1% from the…

[Operator Instructions] And our first question in line comes from Tiago Losiego from Bradesco BBI. Please go ahead. .

Hi, thank you. This is actually Arthur speaking. I have two questions here. The first one is regarding the cash cost of copper. We saw a good improvement this year with costs already below $1 per pound. I'd like if you could give some more detail of how this could evolve in 2017 in 2018, what level you could reach. This will be my first question. And my second question would be regarding copper prices. We're seeing some disruption in some mines, in big mines worldwide. I would like to see if you have an understanding that it could impact copper prices, maybe pushing copper prices up even more, if we see these disruptions actually happening. Those will be my two questions. Thank you.

Okay. Thank you very much for your questions. Let me focus first on cash costs. Well, we're expecting for this year, a reduction in cash cost for several reasons. One of them is that we will have less energy cost at the Peruvian operations after or starting April that will be very helpful for us. And also we're expecting to have higher credits at the byproduct side. We're forecasting at this point $0.80 per pound as the average for the year. That's obviously contingent on how the cost of our major components will evolve through the year but that's our current forecast. On your second question, well, it's a speculative, what will happen to the market if there is a strike in the major mine. Obviously there will be less material available, but the market tends to usually maintain or forecast these in advance. So what we're saying now is that we're certainly seeing a market that is evolving towards the deficit. But how that will reflect on prices is not our job to forecast.

Thank you. Our next question in line comes from Karel Luketic from Bank of America Merrill Lynch. Please go ahead. Your line is open.

Hi, good afternoon, everyone. Good afternoon Raul. Thank you for the questions. My first question is if you can as usual past your guidance in terms of CapEx and production, not only for 2017, but also for the coming years, especially after you included in your pipeline, officially new projects going into 2023, if that changes your CapEx guidance specifically? And my second question is regarding Tia Maria. Do you have any updates regarding the construction license there maybe if there is anything changing with the new government in place now for some months already, if there is any signalization that, that could change, that would be great. Thank you.

Okay, thank you for your questions Karel. Let me be precise on the CapEx, I'm going to mention the estimates that we have now and I'm going to mention what projects are included as part of the CapEx, okay. For 2017, we're expecting to spend $1.1 billion; for 2018, $1.6 billion; for 2019, $1.2 billion; for 2020, $800 million; 2021, $500 million; 2022, $450 million. This includes the end of the Buenavista expansion, El Pilar, the Toquepala expansion, and the Tia Maria project. So on the pipeline that I mentioned at the beginning of our call, we're not including some of the projects that are still being developed and as we pass them though the Board, we will include them in our current CapEx forecast. Regarding the Tia Maria construction permit, there is not much to report at this point. We are working with the new authorities as well as with local community at the Tambo valley to move on with the project, but there is not much to report at this point.

Okay, thank you and if you can comment on production guidance as well, that would be great Rahul.

Certainly. For copper, we're expecting about 900,000 tons for this year. Next year we should, with the beginning of the new concentrator at the second half of the year. But at the end of the second quarter, the beginning of the second half of the year, we will have the new Toquepala concentrator starting operations. That will give us some more volume. So we are expecting to produce in copper, 972,300 tons; for 2019, 10, 13,000 tons; 2020, 11, 30,000 tons; 2021, 11, 47,000 tons.

Thank you. Our next is in line comes from Fawzi Hanano from Berenberg. Please go ahead. Your line is open.

Hi, thank you very much. Just a couple of quick questions. Firstly, I want to ask you about the Toquepala. You slightly reduced your guidance for 2018 to 217,000 tons from 235,000 tons, is this due to now a bit more delayed in the ramp-up in your expectations, but also you raised -- your 2019 guidance is 260,000 tons, so that implies more than 100,000 ton expansion. Has there been any scope change to account for the additional tonnage? My second question is regarding the Quebalix IV project, which as of your Q3 results, you had mentioned that it was 99% progress and with a capital budget of $340 million. On yesterday's results, it indicates that the capital budget is $444 million. Could you explain why there has been an increase in the CapEx budget? Thank you.

Okay. Let me start by the last one. We haven't increased the budgets for this project. It's been at $444 million for quite a while. On the Toquepala question, yes we reduced a little bit our expected production for 2018 on the new concentrator of Toquepala. The reason for that is a change, a slight change in the ramping up of the project. We're expecting a few months ago to have it ramping up at the end of the first quarter or the beginning of the second quarter. Now we're moving towards the end of the second quarter. So there is slight variance that we expect on the production level. Then for 2019, we're increasing our production for two reasons. The first one is that the new concentrator will be operating at full capacity through 2019 and that alone will provide much more copper. But on top of that, we are reviewing our mining plans and for 2019, we're expecting a slightly higher or great increase and that plus the additional milling that the new concentrator will have, that will let us have much more higher production from Toquepala in 2019. I just want to be precise on this. We have not changed the scope of the project. It is still a new concentrator with a daily capacity of 60,000 tons per day of milling.

Okay, thanks. That's clear. Just one other quick question with regards to Q4 sales. In terms of volumes, they lag production by about 17,000 tons. Is this just a timing issue that you expect to make up in early 2017?

You mean the difference between production and sales?

Yes.

Well we have certain variances in inventories at the end of this year. Through the whole year, we have been reporting that there is more -- now that we have a much bigger facility at Buenavista to operate, you have some production in process that is absorbing some working capital in the form of material in process. But we are pretty much operating at full capacity now, so we don't expect this to be a factor that affects the production in 2017. And actually, we will have some inventory improvement through the first quarter regarding our copper or copper material at the end of 2016.

Thank you. Our next question on line comes from Alfonso Salazar from Scotiabank. Please go ahead. Your line is open.

Hello Raul, good afternoon. I have one question regarding the goal to produce 1.5 million tons by 2023. There are a good number of projects involved to get there. And I don't know if you can tell us apart of the projects that you have been talking about in past releases, in the past conference calls. About this other projects that you are now mentioning in the press release, for example El Arco and Los Chancas, those are big projects and if you can give us an update on these projects, what are the challenges to put them into operations. And also if you think you will be going back to the debt markets in case all these projects are approved and ready to move ahead?

Yes, thank you for your question Alfonso. Let me say first, in the case of El Arco, this is a project that we have been developing in the last few years. We are moving forward to have this project ready to initiate construction, but that is taking a while. We are doing some work related to improving the design of the project and also acquiring some assets and answering some key questions such as how are we going to provide energy to the project, for instance. So we're in that process but we see these projects moving forward very nicely in the case of El Arco. For Las Chancas, which is a project in Peru, it's in the Apurimac region where Las Bambas is. And this is a project where we have been working on the feasibility study. We're about to finish it in the next few quarters. And with that, we will have a much clearer view on what to do in this case. We are very positive on the way that the new Peruvian authorities are handling the mining business. We think that this is encouraging for us and this plus the fact that we have a very interesting project in Los Chancas; it's certainly helping us to consider it as a new option for the company. Regarding debt market, obviously we need to look on how our cash flow -- it's moving forward as we put these projects in track. At this point, we're not considering going to the debt markets, but depending on or contingent on how the pipeline of projects evolve, we will certainly consider that. The important thing here is that we will be, as always, very responsible in how are we going to handling the new debt issues for the company.

Thank you. Our next question on line comes from Mr. Leonardo Correa from BTG. Please go ahead. Your line is open.

Hello, good afternoon, everyone. Thank you Raul. The first question regarding --- still on the projects Raul. Maybe you can share with us, more specifically, on El Arco and Los Chancas, when you think the Board will appreciate these projects and approve them? I think that would be helpful. Also in terms of -- the second question in terms of your longer-term production targets. This is a question, I think; I've asked before, but just on your longer term production profile, when you think you'll start to have to invest more aggressively in replacement? So that would be my second question. And finally, just a very quick question on hedging. If the strategy changes with the current copper pricing environment. Thank you very much. [Multiple Speakers]

This is Daniel Muniz, how are you? Thanks. Thanks for the question. I see a lot of questions and interest regarding the new projects and I just like to comment how we view all these projects and why we're looking at this, at this point. I mean basically, for us it was very important to conclude the Buenavista expansion. I mean the $3.5 billion program that was concluded. So I mean this last week, we reported to the Board the conclusion. Quebalix is 99.9% completed, which is very last detail we have there. So in that sense, I mean, we've completed this first stage our expansion and we've been working on prioritizing and putting in a same dashboard, all the projects that we have in the future in order to look at them side by side and compare them in life of mine, reserves, production, I mean brownfield, greenfield, et cetera. So we'd been looking at all this and been trying to develop what will be there next seven to 10 years. We've set out seven years here. But I mean, of course, each one of these projects is in different stages. I mean some are in pre-feasibility, others are feasibility, others like El Arco, we are starting to reassess and reconfirm their last feasibility study with which was I mean many years ago. So I mean just FYI, this is a continuing progress and we'll keep you updated. So this is really the way we're looking at this. I mean, we're trying to see, we've completed this stage; we are starting a new phase. And this is what the company has that is very lucky to have. That doesn't mean that the Board is going to go, I mean full steam and lever and get debt and try to accomplish it. I mean we are very cautious about how to proceed. We are very cautious about the copper prices and the environment we're looking at. I mean, it's more of a -- giving you guys what we've been going through in a strategic plan going forward in the mid long-term? Regarding hedging, we have not hedged, I mean, for many years. We are very positive in the copper prices going forward and we have not discussed in the Board any hedging at this moment. And I don't -- was there a third question. I want to span too much.

Well, basically we're considering about of $450 million for replacement capital long term at this point, given the current facilities that we have and we're building.

Thank you. Our next in line comes from Ivano Westin from Credit Suisse. Please go ahead. Your line is open.

Hi, everyone thanks for the question. I'm just trying to reconcile what had been discussed here today. You just mentioned that you have a positive view on copper price moving forward, you've done a great job in reducing our overall cash cost, 14% year-on-year last year and it was further reduced this year. Your CapEx plan will reduce drastically at least as of now going to $0.5 billion in 2021. I'm just trying to get your thoughts on that. It's very clear that you're going to be very cautious on that on leverage and you have your future growth plans, which may or may not be approved. So I'm just trying to understand your thoughts on possible increase in dividends in the years ahead or any buyback. And if you could comment on the Tia Maria CapEx that you expect for 2017 and for 2018 and if the Tia Maria project is further delayed, if you'd expect to increase the return to shareholders and how? Thank you very much.

So, let me step in with regarding the dividends and buybacks. Regarding dividends and buybacks, I mean of course we look at it every quarter, as you know, we don't have -- it's hardly that we do believe in a track record of paying dividends. I mean again, every quarter we look at what the cash flows are going to be going forward and what are the CapEx needs for projects that have already been started. In this case, the main project is Toquepala expansion on we are deploying cash. So I mean of course again it's going to be a quarter on quarter basis, but very cautious about using the right -- I mean, the cash flow for prioritizing our completion of the project here. Same thing for buybacks, I mean we haven't bought -- we didn't buyback pretty much anything last year. It was a little bit in the beginning of 2015 and it was pretty much the lowest copper price that we've seen in the recent history and that was a rationale for a little bit more -- I mean opportunistic and that was it. Regarding Tia Maria, Raul, do you want to comment?

Yes. For this year, we're budgeting relatively a small amount of money for work with the local communities. For 2018, we have a budget of $431 million; 2019, $352 million; and 2020, $233 million. We have already invested about $354 million in equipment that is a store in a facility in Peru. So that will comprise the whole budget for Tia Maria.

Thank you. Our next question in line comes from Alex Hacking from Citi. Please go ahead. Your line is open.

Hi, good afternoon Raul and Daniel. So just one quick clarification, the copper production guidance that you provided earlier, the five-year guidance. I'm assuming that includes Tia Maria, is that correct?

Correct. It does include Tia Maria but, go ahead Raul.

Yes, it does include Tia Maria starting production by 2020.

Okay and then I guess, I'm going to ask three questions if it's okay. Second question, has there been any further discussion on Quellaveco or that is off the table at the moment?

Not really any discussions lately.

Okay and then the third question, I mean, I know that this is very premature, but regarding Los Chancas potential projects in Peru if I remember, there was some I guess social opposition to that project many years ago, but obviously, it was many years ago, and since then you've had Las Bambas built, which I think is somewhat close by. Could you maybe discuss kind of the risk around, kind of the community relations of that projects and how you're thinking about that. Thank you.

Sure. Well, first of all, I think it's a very different context than of Bambas. I mean we are very positive, we've been reported by our team regarding community. The community is very supportive for a new project here. So I mean, Raul, you're there locally, you can explain probably the dynamics on probably region by region, but all that we've been I mean that we've been reported is that [Technical Difficulty]

Yes, I'm moving forward with the Los Chancas then. Well, we currently are expecting to move on with our -- as I said, the feasibility studies should be finished through 2017. Then we will focus on the environmental impact assessment, which we expect to have it finished by 2018, finished means approve as well and we have two communities that are the area -- part of the area of influence of the project and we're currently in very good standing with both of them. So we don't see a problem at this point with the project and that's why we've included it in our pipeline of future developments.

Thank you. Our next question in line comes from Mandeep Manihani from JP Morgan. Please go ahead. Your line is open.

Yes, thank you. I've a couple of questions. The first is you did give the cost guidance for this year after byproduct. Do you have a similar number for cash cost before by-product credits? And secondly on the new projects, do you have a sense as to -- in the cost curve, where do El Arco and Los Chancas lie? And in the past, you've also talked about, in your pipeline, potential copper smelters given that you have more concentrate production. What are your thoughts on that at this point? Thank you.

Okay, on the cash cost before byproducts, we're forecasting $1.37 per pound before any credits. That's our current forecast for 2017. On smelters, well at this point, these are the projects that we're considering. There is also the possibility of -- our company has a call for being an integrated copper producer, we're currently number -- the third one worldwide. And we believe that if there is -- there are the right conditions, we should go ahead and develop and new metallurgical complex or acquiring one if that's appropriate. So that is something that we are not saying that we will not do. We may consider it, but at this point, the project that we're entertaining is the ones that I mentioned at the beginning of the call.

Thank you. And regarding El Arco and Los Chancas, where they lie on the cost curve? Would you have any idea about that at this point?

Both of these projects are relatively low cost. In the case of El Arco, it's due to it's -- the size of the operation and the fact that we'll have to install certain facilities that are not over there available which will allow us to use the best equipment available. Besides that, El Arco has an excellent ore grade and high gold byproduct, which is something very attractive for us. In the case of Los Chancas, it also has very important molybdenum byproduct. Los Chancas has -- it's a project that is aiming to 100,000 tons of copper production and byproducts of molybdenum will be probably the most important molybdenum operation that we have after Caridad, which is the highest one in production right now. Los Chancas also will have some silver as a byproduct. So with these two byproducts plus at a relatively low cost operation, we expect to have very attractive cash cost for Los Chancas.

Thank you. Our next question comes from Peter [Cruickshank] from Barclays. Please go ahead.

Hi guys and thanks a lot for taking my question. I was just curious on the cost side, as a follow-up, you mentioned $0.80 cash cost, what Peso and Sol numbers are underlying this estimate and can you perhaps help us separate the impact of call it like, organic cost decline from favorable FX moves?

I'm sorry; I couldn't get your questions, could you repeat it please?

Yes sure, can you hear me? I was wondering on my cost side so $0.80 as you put out for this year. What FX assumptions are underlying this estimate and if you can help us separate the impact of organic cost cutting from favorable FX moves?

Okay. Well, obviously, we're benefiting from the weak peso in Mexico as well as relatively lower fuel cost that we have now. Even though they have increased a little bit, they are not -- few are not as expensive as it used to be three or four years ago. So that is something that if it changes, it will affect our cash cost. On the structural side of what we're seeing is, first we have -- we're expecting a 30% to 40% reduction in power cost at the Peruvian operations, that is very positive for us and that should help with our cash cost. Besides this, on the production side we will have a much more production for Zinc and Silver, which will be -- also being benefit by the higher prices that we're getting at the beginning of this year and we're expecting them to hold for Zinc and for Silver. Well, silver has been weaker than what it was last year, but still very attractive in terms of what it cost to us to obtain this metal vis-à-vis the price that it has in the market.

Okay, got it. And another question, you mentioned your maintenance CapEx, I think, now its $450 million a year down from $500 million. And I was wondering what are the drivers? Is this also effects driven or is there something behind that?

No, it's roughly -- we're in that range. $450 million is what we're expecting right now. There is a little bit of an FX effect that is helping us in both Mexico and Peru. And also we've -- once we review our maintenance CapEx, we're doing some adjustments into it as we move on.

Got it and the last question on the capital structure, I think in last earnings call, you talked about the idea of raising revolver given what the rates were and the interest you received. Now, I think you suggest that you're no longer pursuing a race in that unless or I guess it depends on the pipeline development. So I just wanted to clarify that, like what conditions do you see in your project development that would make you to consider raise that?

Well, obviously it's your cash flow position. At this point, given that the projects that we're developing and the ones that are in the pipeline that has been approved for our Board, we don't see that we will need additional debt. That's why we believe that our total debt to EBITDA ratio should improve this year and the next couple of years. Now, as we move on with these new projects that have been mentioned today, depending on the cash generation of the company, we will consider if we go to the debt market. At this point, we are not thinking about anything like a revolver or anything like that. But there is always a possibility that we may consider later on in time. Right now, we believe that we have the resources to generate the cash flow that we need to undertake the projects that are in our current pipeline, as Board approves, so we don't see a need for additional funds in the formal steps.

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

Hi, good morning, everyone, and congratulations on the results. Well, most of my questions have already been answered but if you could comment about the net cash cost evolution for 2018 and the following years, it will be very helpful. And just as you mentioned, we saw a strong increase in tax expenses during the quarter, what could we expect going forward from this effects? Thank you.

Okay, thank you very much for your question Guillermo. Well, let me focus first on the tax question. It's basically, we have to accommodate in the last quarter of this year for an adjustment in deferred tax. This is a non-cash effect on taxes that we have to report for the full year 2016. So if you take the total tax records that we have in 2016 and compute the rate of tax to revenues before taxes, it's about 39% and that number should hold because it's the 35% that we have in the US plus the special mining taxes that we're playing in both Mexico and Peru that are about 4 percentage points, when you add them together.

Okay, about the cash cost evolution?

Net cash for the future, yes, net cash cost for the future, well, we should have some improvement in cash cost when we have the Toquepala expansion in place. Toquepala will produce much more copper at the very low cost plus molybdenum which is a byproduct, which is important with some silver as well. That should drive our cash cost from our forecast of $0.80 down to about $0.75 or so. Now, there is always a contingent on how prices evolve and how are we seeing the main costs of our supplies at the same time. But at this point, with the information that we have today, that's our view $0.75, once we have the Toquepala expansion moving forward at full speed.

Thank you. Our next in lines comes from John Tumazos from John Tumazos Independent. Please go ahead.

Thank you for taking my call, it's John Tumazos. Could you just repeat the year-by-year capital spending to 2022, I may not have gotten it all and did you say exactly the 2017 scheduled output for Moly, Zinc and Silver? I know you were talking about increases, but I don't know but I got next year's viable. And for the two projects El Arco and Los Chancas, in very round numbers, would the CapEx be closer to $1 billion or $2 billion?

Okay, let me start with the production profile for 2017. For molybdenum, its 19,700 tons; for Zinc, 80,800 tons; for silver, it's16, 00,600 ounces and that's basically it. For the production profile -- the CapEx profile; for Los Chancas and El Arco, the CapEx estimate is, for El Arco its $2.8 billion and for Los Chancas, it's $1.8 billion.

A year to -- CapEx?

The CapEx for the next few years? Yes, okay. For 2017, it's $1.1 billion; 2018, $1.6 billion; 2019, $1.2 billion; 2020, $800 million; 2021, $500 million.

At this time, I see we have no further questions. I'd like to turn the call back over to Raul Jacob for closing comments.

Thank you very much Richard. Well, with this, we conclude our conference call for SCC's fourth quarter and full-year 2016 results. We certainly appreciate your participation and hope to have you back with us when we report the first quarter of this year, 2017. Thank you very much and have a nice day today.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.