Good morning, and welcome to Southern Copper Corporation First Quarter 2017 Results Conference Call. With us this morning, we have Southern Copper Corporation, Mr. Raul Jacob, Vice President of Finance, Treasurer and CFO, who will discuss the results of the company for the first quarter 2017 as well as answer any questions you may have. The information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions to not place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All results are expressed in full US GAAP. Now I will turn the call over to Mr. Raul. You may begin.

Thank you very much, Richard. Good morning to everyone, and welcome to Southern Copper's First Quarter 2017 Earnings Conference Call. Participating with me in today's conference are Mr. Oscar González Rocha, Southern Copper's President, CEO and Board Member; and Mr. Daniel Muñiz, Executive Vice President and also Board Member of the company. In today's call, we will begin with an update on our view of the copper market. We will then review Southern Copper's key results related to production, sales, operating costs, financial results and expansion projects. After that, we will open the session for questions. Now let me focus on the copper market, the core of our business. According to the International Monetary Fund, the world economy is accelerating to an estimated GDP growth of 3.4% in 2017, after a mark of 3.1% in 2016. The drivers of growth are the cyclical recovery of manufacturing and international commerce, both elements very important for our business. For 2017, we expect copper demand to grow at about 2%, driven by China's metal consumption recovery and a strong economy in the U.S .On the supply side, after five years of copper price reductions, we see supply underperforming market needs in 2017. Wood Mackenzie are expecting weak growth in 2017 for their supply. Actually, they are forecasting a decline of about minus 0.2% and a deficit of about 100,000 tons for the year. This lack of growth results from a consistent decline in investments that several companies has had in recent years as well as technical problems, labor unrest, excess government taxation and other difficulties. All of these factors, as we said, we believe will cause the copper market to be in deficit in 2017, giving good support to current prices. Let me now focus on Southern Copper's production for the past quarter.…

[Operator Instructions] Our first question on the line comes from Felipe Hirai from Bank of America Merrill Lynch.

I have two questions. The first one, Raul, is related to the strike. So do you expect to see any kind of impacts from the other unions in your Peruvian operations? Or was it all there is that you had, and [indiscernible] that you mentioned on the first quarter - sorry...

No, no - go ahead, go ahead.

The other one was related to the CapEx, sorry, Raul. Because we continue to see that you are investing below your budget. But just like you mentioned, in the case of Sonora, in the end, your final CapEx was below what you had initially budgeted. So is it the case that we should consider that there is downside risk to your CapEx numbers not because you're not investing but because your projects are still coming below the original budget?

Okay. Thank you very much for both of your questions, Felipe. On the strike, basically, as we have said in our press release and I mentioned here at the conference call, we have no reason, we don't see a reason for the strike. It was declared illegal by the government, shortly discarded. And we, as you know, have an emergency plan that takes care of our operations in this case with the use of contractors and some of our administrative labor doing some operational works. And basically, we believe that currently, our unions have no right or no need to protest with the use of strikes. So we're expecting to have a good relationship with all of our workers as we have had in the past and now as well. And we're not expecting any inconvenience regarding the labor force at this point. Regarding the second question on the CapEx. Well, we have a very aggressive growth plan, as you know. The plan has moved our production level from about 450,000 tons that we had say six or seven years ago up to almost one ton - one million tons for the year - next year, I'm sorry. For CapEx, obviously, the capital investments are aligned with that. For this year, we're expecting to spend close to $1.2 billion in capital. That is what we're expecting to do now. As we move on through the year, we'll be doing an update on that. And what we have to go with currently the Toquepala expansion and the Tia Maria project, those are the two major pieces that we have. There are some other projects, obviously, that we have been reporting to the market that will require some funds as well. And then we'll see there are new projects that we are adding from our pipeline of projects for the future.

Our next question on the line comes from Thiago Lofiego from Bradesco BBI.

Raul, could you please comment on how the construction permit process for Tia Maria evolved? And would you consider putting or substituting the Tia Maria project for any of the other projects that you have in your long-term pipeline, or that's not an option? And the second question, if you could please give us some color around cash cost going forward and also an update on the lower energy costs in the Peruvian operations, which you have mentioned was supposed to begin in April, I guess. So those are my two questions.

Okay. Thank you very much for your questions, Thiago. On Tia Maria, we're doing some work with the local communities. We believe that we're moving forward in the right direction. We basically have the construction permit as the last formal step for moving forward with the project, but we're still waiting to have a calm social situation in the valley and that as long as we're currently operating with no inconveniences over there. But as long as we have this work in progress, I think that we need to focus more on moving forward with it rather than making any announcements. We will report on Tia Maria when we have anything material to report. On the cash cost question and the power question. For cash cost, we're expecting a long-term reduction in cash cost per pound. It will be reflected in our financials as we increase our production. As I mentioned before, we're expecting to increase our production from our goal for this year, which is 900,000 tons up to 972,000 tons for 2018. A significant chunk of that increase will be - will come from the Toquepala expansion, and that should decrease our cash cost by about $0.10 from where it is right now. That's our current expectation. Now as you know, cash cost is one of the hardest things to predict because it has several elements that affected us. The cost of our - not only the cost of our operations but the prices of our by-products as well as the operating cost of our major materials. So that's a hard thing to predict. But that's - given the current price environment, that's what we're expecting. And regarding the power cost at the Peruvian operations, yes, we have - we're glad to report that we initiated a new power contract in April, at the mid part of April. The first bills are coming in line with where we were expecting, which is a reduction in our power cost in Peru of about 30%.

Any ballpark number in terms of costs? You mentioned $0.10 reduction from now, but if you could give us [indiscernible] average cost for 2017 and 2018 just to have clearer numbers, if possible?

Yes. Well, I'd say a $0.10 decrease in 2018, another $0.05 for 2019 and then relatively flat down to 2021.

Our next question on the line comes from Carlos De Alba from Morgan Stanley.

Just to clarify, Raul. The $0.10 for the - reduction and $0.05 reduction, it was on '18 and '19 on the cash cost of copper, is that before or after by-products or is the same in both cases? And then the second question will be, it seems that besides the lower power cost in Peru, the bigger driver of the lower cash cost per pound is higher production. But we - year-on-year, the cash cost before by-products increased from $1.41 to $1.49 despite the fact that production - copper production increased. So I wonder if you could comment about what other factors do you think would push these costs lower? And my second question will be, if you can comment about any potential for more share buybacks given the very strong cash flow generation that the company had in the quarter and what I suppose will continue in the next few quarters given the fact that, as you said, the increase in working capital coming from the expansions in Mexico has now normalized? So do you see or is the company planning on further share buybacks? Or if not, then what is the company going to do with the excess cash?

Okay. Let me start with the cash cost. My comment was referring to the cash cost after by-product rates. In the case of cash cost before by-product rates, let me just point out that we were having $1.66 of cash cost before credits in 2015. That was the average for 2015, okay? And then we went down to $1.45 in 2016. And then yes, it's what we're reporting now, $1.49. This is slightly higher than $1.45. But the main drop that we have was obtained in 2015 as we started the operation of the Buenavista concentrator, the new Buenavista concentrator and the SX-EW III plant, both of these projects in Buenavista and some other operational improvements and other investments that we do company-wide. So once we are in the $1.40-ish neighborhood, we're reporting $1.49 for this quarter, we expect the cash cost to trend to about $0.85 through the year as a mix of two things. The first one is going to be the higher - let me put it differently. We will increase the units, the low-cost units of copper in our production profile this year with more production coming from the SX-EW III plant, which we're expecting it to be producing more copper at the second half of this year. We're currently irrigating the areas that were not used in the last couple of years, and that will provide us with more solution that will allow us to improve our SX-EW III production through 2017, okay? That's one of the sources for lower cash cost before credits. And then we have - obviously, we are focusing on having as much as we can production from our by-products. Zinc is responding very well due to some improved operational improvements at the IMMSA operations and the other element, that is not under our control but it certainly influenced it, it's the prices of by-products that are important. On the share buyback, at this point, we have $82 million remaining in the program that was approved by the board a few years ago. This program has been in place for more - for over two years now. And we are - we have no specific plans to initiate any share buybacks. What will happen with the cash? It's always up to the board. They have to analyze what uses they may want to approve for any excess cash that the company is generating.

Our next question on line comes from Marcos Assumpção from Itaú BBA. Marcos Assumpção: My first question is regarding to cost. So above the cash cost per pound that was announced by you guys, the line of inventory charge, there was a big difference versus the fourth quarter. Can you explain to us what was the main cause for that? And also, on purchased concentrates from third parties, it also increased a bit versus fourth quarter. Is that a trend that we should consider or it was specific to the first quarter? And another question on the cost side. What are the potential benefits from the Cuajone optimization project that you expect to start by the third quarter?

Okay. Let me focus first on the inventory. Basically, we have had a higher than expected, than necessary, material-in-process inventory. And we have been focusing through the last quarter of last year and this quarter to reduce this inventory. And that's why we had a charge. Obviously, if we sell more and we sell a portion of our inventories, it has to be reflected as part of the cost of sales. That was basically what's happened in the first quarter. We are managing to reduce our inventory in process and then the copper in process in other words, and that's what we're basically doing. The case of purchased copper inventories, our purchased copper concentrator we're processing in our facilities. Well, we're doing very well at our smelting and refining facilities, both in Mexico and Peru. And that's why we are consuming not only our own material, but we have sometimes slightly more copper than what we need, particularly at the Peruvian operations. Now the Buenavista's in Mexico, as you know, Buenavista is long in copper, and we're basically consuming more purchased copper at the Peruvian operations. Finally, on the Cuajone expansion, well, basically, this project, we'll put a crusher, an in-pit crusher and conveyor belt, this material to our operations. The main benefit of this is twofold. First, it will allow us to cut rail transportation at the Cuajone pit and replace it by conveyor belt transportation. This is much more efficient and very cost reducing for our operations. That's one important thing. The second benefit of this project is that as you are replacing rail haulage from the mine by conveyor belt haulage, long term, you are also replacing truck haulage. So we don't have to operate as many trucks in the future as we will require given the growth of mine in the next few years. So it's - on the operational side, we have a cost benefit. It's important. It cuts to zero the cost of railroad managed inside the mine. And at the capital requirements of the Cuajone, it also has a benefit, which is that it will increase our - or decrease actually our needs from additional trucks at the Cuajone mine. Marcos Assumpção: Okay. Do you have room to replicate this type of investment in other mines? Or is this something specific to Cuajone given the mine design and where the reserves are?

Well, we have done this in our Toquepala operations. We are doing it now at the Cuajone operations. Would you like to comment on this, Mr. González? Oscar González Rocha: It's possible that we can do something in the future in Caridad mine with the new mining operation of Pilares in the future as we can take that to the mine by conveyor in case that the operation of the trucks will be more expensive and longer.

Our next question on the line comes from Jon Brandt from HSBC Securities. Please go ahead.

So two questions from me. You mentioned that the ore grade and recovery declined in Peru. I'm hoping you can explain a little bit about what led to that? Was it just part of the national ore grade? Was it expected? And should we expect it to go back to a more normalized level in the coming quarters? And then second question, I guess, could you just explain a little bit more in detail about the $10 million in environmental expenses in the first quarter? So what exactly was that? And should we consider that a one-off expense?

Sure. Thank you very much, Jon. Okay. On the first question regarding the ore grade and recoveries. Basically, we have a slight reduction in ore grade at the Toquepala mine. It was somehow compensated by more mineral throughput in the concentrator. This is the existing operating concentrator. In the case of Cuajone, we had - we're getting into a part of the mine that it has 2 problems. The ore grade is lower by about 8%, and the rock hardness index is slightly higher than the average for the mine. So those two things are affecting our Peruvian operations production. In the case of Toquepala, the lower ore grade has - coupled with a slight reduction in recovery and in the case of Cuajone, given that the ore grade decay - not decay, I'm sorry, let me correct that, temporary reduction in ore grade, the ore grade in Cuajone, it's lower and that is affecting our - that plus the rock hardness is affecting the possibility of recovering copper at the Cuajone operations. Those two impacts our production in the first quarter - or impacted our production in the first quarter and that's what we had on the operational side. On the P&L, as you mentioned, we have recorded a credit or a benefit - not a benefit, a recovery of certain provisions that we need in our financials to cover environmental remediation that we have for the Sonora River. The program is closed. All the proper authorities at the Mexican Republic have indicated so. We have to do some environmental monitoring of the River effective up to 2019. But basically, what - all the remediation regarding this matter has been finished. And that's why we could take back our provisions in excess of what we actually have to spend.

Okay. Just a follow-up on the ore grade. You mentioned that the ore grades were lower by about 8% in Cuajone. Is that expected to normalize in the coming quarters? Or is this something that you'll be mining a lower grade and harder - higher rock hardness in the next couple of years?

No, given the fact that we're in a portion or a part of the mine where this is the average ore grade and rock hardness and recovery expected, we believe that this is going to be for the full year in Cuajone. Now, for the next year, that should change. But for now, this is what will happen through the year.

Our next question comes from Renan Criscio from Crédit Suisse. Please go ahead.

Going back to your growth projects. You have a good pipeline of growth projects, not all of them yet approved. So can you provide an estimate for when those projects should be presented to the board? And which one of them would you consider as a priority? And also, if you can comment on your updated CapEx guidance for the years ahead, that will be helpful.

Sure. Let me start by the last part, the update on capital expenditures for the company. And for this year, as I said, it's $1.2 billion; next year, $1.5 billion; 2019, $1.7 billion; 2020, $1.9 billion. We're including here El Pilar and El Arco. I think those two are projects that have a very good possibility of moving forward in the next few years. In the case of El Arco, we're still doing some work and preparing it for developing. That's one of the projects, we believe, we'll be moving forward in the next few years, other than the ones that you know that has been approved by our board. Besides this, we are considering also the Buenavista zinc concentrator, which is a very interesting project for us. So in the numbers that I gave you, are included these projects.

Our next question on the line comes from Alfonso Salazar from Scotiabank. Please go ahead.

Raul, Alfonso here. Quick question, it's a follow-up on the strike and the impact. Since there's not going to be a major impact in production, what about costs? Can we see a temporary cost increase in the second quarter related to the strike? And the second question is if you can give us an update on production for the following years and if you have any update for 2017 in terms of production?

Well, the update on 2017 is that we are maintaining our forecast of 900,000 tons for the year. As I mentioned before, these different operational profiles that we have for the year in the case of Cuajone, lower ore grade and obviously, at the end, lower production will be replaced by more production coming from the Mexican operations, particularly Buenavista. On the cost side, well, we're seeing some pressure, some cost coming from the appreciation of the Peruvian as well as the Mexican exchange rates. That is something creating some pressure on our cost. Directly related to the strike, we have not - we didn't have cost pressure directly related to the strike. I mean, you're obviously incurring some expenses, but nonmaterial for purposes of what the company is doing. In the case of the Peruvian operations, I mentioned before that we have the new labor - the new power contract in place. That is decreasing our cost of power by about 30%, which is very positive for our cash flow in Peru. So we believe that these power cost reductions should take care of any other cost increases in Peru and that, somehow, will be reflected in our total cost for the corporation.

Our next question comes from Petr Grishchenko from Barclays.

Petr Grishchenko at Barclays. So first, the past few quarters, you talked about raising the revolver given the rates, and you discussed the interest you received. Can you please maybe talk about the update on that front?

You mean dollar appreciation?

No. You talked about raising the revolver, the revolving facility. So I want to - I'm curious if you could provide any update.

Well, we don't have any plans to have any new facilities. As you have seen, Petr, metal prices generally speaking are increasing, and that is providing us with the cash flow that we need to cover all of our financial needs and grow CapEx, et cetera. So at this point, we have no specific plans on that.

Okay. So that means also raising additional debt is off of the table, right?

For now, yes.

Okay. And I guess just from a free cash flow modeling standpoint, what should we see from working capital and taxes this year assuming - let's say, assuming you're holding guidance of $2.8 billion EBITDA?

Well, basically - well, you have seen that we did a very strong cash from operations - cash flow this past quarter. And we are expecting to have a better cash flow profile in the next few quarters. In the second quarter, well, it's tax season in Mexico. And you have to pay income tax as well as profit sharing in the case of our Mexican workforce. Obviously, that will decrease somehow our cash generation in the second quarter, but then we'll be generating significant amounts of cash. And you know how much are we going to invest, so it's something that you can do the figures on that.

So just can you give a number on working capital?

Working capital should remain more or less where it is right now. Slight increase in the second quarter, that will be compensated in quarters three and four of this year.

Okay. And I think someone asked this question on the dividends and what you guys expect to do with the free cash flow. I don't think I - like what's your plan on that, like how much kind of dividends you expect to pay this year?

I'm so sorry, but I couldn't get your question. You were cut. Could you repeat it, please?

Oh, I'm sorry. Yes. On the dividends, how much dividends do you expect to pay this year assuming --?

Well, at this point - the company policy is that at each board meeting, the board looks at the cash position, the markets, the capital needs of the company, have any financing that we have to attend or obtain, and on that base, dividend is approved. On the last quarter, the board - I mean, yes, for the first quarter of this year, the board approved a $0.12 dividend. That's what we have right now. That was the $0.08 that was approved at the beginning of the year in January. That's basically it for now. We have no forecast or a given payout ratio of dividends to hold.

Okay. And lastly, didn't you say your new CapEx guidance for 2019 was $1.7 billion?

I can't listen, Petr. I couldn't listen to you well.

Sorry. Your CapEx guidance for 2019, is it $1.7 billion now, which is $1.2 billion the prior guidance?

Yes, that's what we're expecting. For '18 is $1.6 billion - $1.5 billion. For '19, it's $1.7 billion.

And what has driven the $0.5 billion increase in CapEx? What projects specifically? Did you mention Pilares?

Yes, in this case, we're considering El Pilar and El Arco and the Buenavista zinc. Those three are the ones that are - well, those three, and we have some investments in the [indiscernible] that has been approved by the board already. Those three are in the projection that we have.

Our next question comes from Guillermo Estrada from GBM.

My first question is regarding Quellaveco mine. Do you have any updates on the situation? I mean, do you still have in the pipeline a possible M&A on this Peruvian mine? And my second question is regarding the Peruvian new environmental regulation. I mean, if you could comment on the - on your sentiment towards the update on the environmental emissions coming from the Peruvian refineries, it will be very helpful.

Certainly, thank you very much for your questions. On the Quellaveco, it's something that we have nothing to report at this point. On the second question, we're glad to see that the government is correcting something that was just wrong. The new environmental - air environmental standards that are very - we see them very positive. They have not - this has not been final, new - I mean, the government has published a proposal of new environmental - air environmental standards. So - but what is being proposed, we see that very positively. We believe that this is something that will help development of new smelting and refining operations in Peru.

Our next question comes from Andreas Bokkenheuser from UBS. Please go ahead.

Just a quick question from me. I know we're coming to the top of the hour. Just on Peru, following the change of government last year and in view of Tia Maria and everything else you're doing to develop assets in Peru, how is the government proactively working with you? And how are you proactively working with the government just to get some of these projects like Tia Maria off the ground now maybe in a different way than you used to work with the old government? Are you seeing any progress on this relationship with the government and the local community?

Thank you for your question, Andreas. Certainly, we're seeing government much more focused on doing what corresponds to the government activities. I mean public investments to improve the quality of life of the people that lives in the areas close to the projects, that's something that is helpful for the mining industry in general. And I believe that the coordination level with us has improved. Still we have some way to go, but we're doing a much better cooperation environment here in the country.

And our final question comes from Jean Bruny from BBVA. Please go ahead.

Most of them have been answered actually, but just maybe a last one. You already shared your view on the copper market, but just would like to know what - how do you understand the strong increase in the inventories we have seen in the first quarter of this year?

Yes, thank you for your question, Jean. Well, inventories increase usually in the first quarter of the year worldwide as a result of the - of certain events that affect the Chinese economy, particularly the New Year's Eve in China. But after that, and this is the trend that we're seeing nowadays, in the second quarter and the third quarter, we have a reduction, and this is - all what I mean is about refined copper, okay? The peak in inventories that we had this year was in April 3, where we have 717,000 tons of refined copper in the three major warehouses, which is the London Metal Exchange, the Shanghai Exchange and the COMEX in the US. That number went down - has been going down to 688,000 tons. This is as of yesterday. So if you see, we're actually taking the usual road, the trending road on this or the seasonal road on this, where you have lower inventories on the second quarter of the year. Now, in the last few days, we have had an increase in inventories. That is creating some concerns in the market. Our view is that this is a temporary thing that will be replaced by more reductions in the next few months and quarters. What we believe is that the market is becoming - is getting into a structural deficit that will give good support to current metal prices, and copper particularly.

And we have no further questions at this time. I'd like to turn the call over to our presenters for closing remarks.

Yes. Well, thank you very much. With this, we'll conclude our conference call for Southern Copper's first quarter 2017 results. We certainly appreciate your participation and hope to have you back with us when we report the second quarter of 2017. Thank you very much and have a very nice day to you.

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