Good morning, and welcome to Southern Copper Corporation's Second Quarter 2020 Results Conference Call. With us this morning, we have Southern Copper Corporation's Mr. Raul Jacob, Vice President of Finance, Treasurer and CFO, who will discuss the results of the company for the second quarter of 2020 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, Victor. Good morning, everyone, and welcome to Southern Copper's Second Quarter 2020 Results Conference Call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO and Board member. Before we go into the details of the past quarter, let me first express my best wishes for you and your loved ones during these trying times. In today's call, we will begin with an update on the fight against the COVID-19 pandemic and its impact on our operations. We will then review the copper market and 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. We continue to fight the COVID-19 pandemic by prioritizing efforts to safeguard the health and well-being of our workforce, their families and nearby communities. Our company is operating in total compliance with the emergency levels required by local, regional and national governments, and we have implemented rigorous hygiene, sanitation and safety protocols at all our facilities. As of June 30, about 83% of our workforce in Mexico and 64% of the workforce in Peru are working at the operations while at home. Recently, we have opened limited access to company premises to our most essential contractors, as part of the protocol followed by our contractors must comply with proper COVID-19 testing, clinical monitoring and mandatory quarantine. We're enforcing multiple actions to limit workforce exposure to the disease by imposing travel restrictions, prohibiting face-to-face meetings, urging frequent hand washing and require adherence to all other health, safety and social distancing measures created by government authorities. From the beginning of the COVID-19 pandemic, Southern Copper has been implementing strong prevention measures to protect the health of its workers, their families and their communities. For this…

[Operator Instructions] And our first question will come from the line of Jonathan Brandt from HSBC.

Congratulations on the results. I first wanted to ask you about the project. So I know you were saying that you don't expect material delay. I'm just wondering sort of why that is. Are you assuming that -- are things sort of getting back to normal now with the project work? Are you expecting to make it up? If you could help me sort of understand there isn't more of a delay in the projects, that would be helpful. And then secondly, it'd be great if you could sort of touch upon what you're seeing from your clients in terms of demand for copper. Are you continuing to sell to sort of the traditional clients that you always do? Are you seeing interest from sort of your nontraditional clients given the potential for supply disruptions from other parts of the supply chain? That would be great.

On the projects, we have, as I mentioned, we have implemented several COVID-19 combat measures that our -- at our projects as well. I explained them a few minutes ago. And we have 2 situations here for the projects. Certain activities are required or are performed at a certain level of isolation. Let me say, for instance, if you have to, for example, travel or do some land works, most likely, the individuals involved in this are not in contract. And particularly, we stress the fact that they have to maintain social distance and use the proper equipment. So even though certain activities have been postponed, we are still working on all the engineering that we can perform on a safe mode and operations that are keeping social distance and other COVID-19 precautionary measures. We expect to catch up, basically. We are seeing now a slight delay. It's probably a couple of months, and we want to catch up on that. Regarding our clients, I'd like to remind our audience that our copper production, it's a very high quality. We offer -- we guarantee four nines. That is 99.99% of our refined copper. And our concentrate sales are for what you will call nowadays a clean concentrate, which is a high-quality concentrate. So we haven't had much trouble with our clients. Maybe one or 2 requesting a delay in the shipments that we have programmed, but nothing significant to note at this point. We are not seeing a change in the way that our clients operate. They are keeping our contracts. By the way, this is the same pattern that we observed at the prior crisis in 2008, 2009 in the sense that the quality of our copper make us to be preferred on top of some other producers. That's a personal assumption.

Okay. Just to follow-up on the project question. If sort of COVID lingers for longer and some of these restrictions that are currently in place sort of remain in place, could we potentially see sort of longer delays to some of the projects if things sort of don't improve? And sort of at what point do you -- would you start the construction progress where you would sort of have to delay it? So I understand how with the engineering and things like that, you're not sort of in close proximity to other people. But at what point does the constructions have to start in order to meet these time lines that you've laid out?

Well we don't like to speculate on different possibility of a worsened scenario -- in a scenario that's worse vis-a-vis what we have today. What we are reporting is what we see now. If there is a more difficult environment to operate, then we'll certainly have to maintain, as a top priority, the safety of our workforce and the health of our workforce and our contractors as well. That includes, obviously, the capital projects. So I don't want to speculate on that. What we are seeing now, if conditions remain as they are now, we will be -- we'll need to catch up later on in the future on these projects. I believe that a delay of 2 months or so that we may have now for some of the projects and some others that have been moving forward, as I explained, should or could be recuperated over time.

And our next question will come from the line of Thiago Ojea from Goldman Sachs. Our next question comes from the line of Timna Tanners from Bank of America.

I wanted to drill down a little bit more on your cost commentary. So it's clearly a really impressive result, as you point out. How should we -- I'm trying to drill down how much of that is sticky? And how much of that was due to the delays in or suspension of stripping and maintenance? In your commentary, you mentioned that it could take 9 months for you to do some of that catch up. So will it be like spread out over those 9 months equally? Should we expect more -- if this was a lower cost than normal quarter? Should we expect higher costs than normal for three quarters? If you could just help understand what to expect on cost side.

Certainly, Timna. As I say, we have to prioritize to maintain levels at our plants to do the very focused work in order to produce the mineral that was required to fit our concentrators and the plants that we have. That -- the cost of that for the future was to postpone certain maintenance and certain stripping, particularly at the Peruvian operations. We believe that this -- the catch-up on the stripping will be spread through the 9 months that I mentioned. For the year, we're expecting a cash cost before by-product rates of $1.37 per pound. Currently, for the 6 months that we have had already, it's $1.34. So it's a $0.03 of additional cost that we will incur. It's about $170 million that should be spread through time in the next few months. As I say, it's 9 months for the most important -- certain maintenances were scheduled for the past 2 months or 3 months, and we have been reprogrammed them as proper for depending on the condition of the equipment for this quarter and the next ones.

Okay. Just to clarify then, the $1.37 is the forecast for the year from $1.34 year-to-date. That's across all operations, not just Peru so the Peru impact...

For the whole corporation, yes.

Okay. Perfect. So just wanted to ask maybe a basic question, taking a step back. It's been remarkable how little your operations seem to have been affected by COVID-19. You've been -- despite some of the pretty severe actions taken in Peru and Mexico. So do you think that that's sustainable? Is it possible that there's not really any further lockdown and you're able to continue to produce in both those geographies? And then if while you're at it, if you could give us any update on Tia Maria that it's been a year, as you point out, since the license was granted.

Certainly. Well in our mining operations, in some cases, as is the case of the Peruvian mines and some of the Mexican operations as well we have the possibility of -- we have had the possibility of isolating our operations because of the nature of where they are located. Let me put as an example of what happens with the Toquepala mine in Peru. It's 150 kilometers away from the nearest city. So we agree, and we certainly appreciate the help of our unions on this, we agree to have a strict lockdown, defined as if you go out, you can't get back until the quarantine ends. That was what we did. And we took several measures to control the supply chain that we have to feed this operation and provide all the services, food, et cetera, et cetera, et cetera, that is required by our workforce. And we have operated through the lockdown with these characteristics, and we haven't had any cases during -- at the operations of these facilities for quite a while. That allows us to maintain a proper production environment. And by the way, in the Peruvian operations, we -- the workers have their families living at the premises in the town site, nearby the mines and the metallurgical facilities. In the case of Tia Maria, well we have expressed several times that the company has all the permits that are required for initiating the production of the construction of the project. We believe that this is -- the pandemic has make us much more clear for the local population of the importance of this project, and we are expecting the national government to work with us in order to move on with the project in a time where this kind of investment that will create about 9,000 jobs while in construction will be a good possibility of improving the economic environment in both the Islay province and the Arequipa region. We're expecting, in this case, to move on with the project at any time. We're ready for that. We want the Peruvian government to concur with this view and then move forward with the operation.

Our next question will come from the line of Andreas Bok (sic) [ Bokkenheuser ] from UBS.

Just one question from me. So just one clarification on your sales strategy versus your production strategy in the second quarter and first half as a whole. I mean we obviously saw sales volumes up more than production was obviously down a bit. Was that purely just buying more concentrate from third-party operators and selling that onwards? Or did you do any destocking as well of any of your inventories on site? And maybe related to that, if there was any destocking, would you expect any restocking on your behalf in the second half of the year and maybe for sales volumes to slow down a bit? So that's basically a second half kind of sales volume outlook question.

Andreas, well we had -- at the end of the first quarter, we had some inventory buildup of production in process that was finished through the quarter. And we, at the very beginning of the pandemic, had some difficulties in shipping some of our production, but that was very quickly solved. And we could deliver our shipments as scheduled. So that allows us to sell this excess inventories of production that we have through the second quarter. That explains the difference in sales vis-a-vis productions. In the case of the concentrate purchases, we have -- for technical reasons, we're buying some concentrates that have certain characteristics that allow us to mix with our own concentrate, use our smelting and refining facilities at a much higher capacity or almost at full capacity nowadays because of the quality of the concentrates that we buy. These concentrates mix very well with our own, and that creates certain synergies that allow us to reduce the smelting and refining costs, which, by the way, our smelters have -- has had a record in cash cost at the Peruvian operations.

Our next question come from the line of Jens Spiess from Morgan Stanley.

Congrats on the results. Just -- I just want to know if your $1.37 cash cost guidance includes the impact of improved sanitary standards and testing of your workforce. And also, if you could give us an updated guidance for production, cash costs and CapEx for other years.

Certainly. Okay. Yes, it does. The $1.37 includes all the expenditures that we have had at the operational side of our facilities in both Mexico and Peru. In total, we have spent a little bit less than $12 million in this past quarter for sanitary standards, et cetera. This includes -- let me explain what I mean. This money is just for purposes of maintaining proper working conditions with -- for our workforce. It does not include the donations that we're doing that are included in some -- in the administrative expenses for the company. And in the case of cash cost and production guidance, certainly -- for production, I mentioned already our forecast for the year, but I'm repeating it now. We're expecting to produce 997,100 tons of copper for 2020. Our production will be pretty much flat all the way to 2023. For 2021, we're expecting to produce 986,300 tons; 2018 -- 2022, 949 -- 950,000; 2023, where we will have the beginning impact of Pilares, Buenavista zinc and El Pilar, we're expecting to increase our production to 1,066,000 tons. For 2024, we're expecting to produce 1,104,000 tons, and this is basically the result of having Pilares, Buenavista zinc, El Pilar and a partial production of Tia Maria. In the case of cash cost for this year, I already mentioned that we are expecting an overall for the whole corporation cash cost before by-product credits of $1.37. In credit, we're expecting $0.60 per pound of copper. That give us $0.77 per pound for the year, slightly higher than what we're expecting now. As you know, cash cost is one of the most difficult things to predict because it has not only the cost impact on several supplies, such as fuel, power, et cetera, labor and -- but also the impact on price -- of prices on our by-products. I mentioned already -- I mentioned already silver price, an average silver price for the quarter of about $16.54 per ounce of silver. And as you know, now it's over $20. It's much higher than that even today. So it will vary, but that's our forecast at this point, $0.77 per ton. For the next few years, well we're assuming an increase in our cash cost due to the price deck that we're considering for the next years and certain ore grades variances that we have in different operations. Overall, we will have -- we're expecting a cash cost of about $0.93 for 2021, $0.96 for 2022, $0.88 for 2023 and $0.87 for 2024.

Okay. And just to be clear, you said $12 million per quarter spend on increased sanitary standards and testing?

No. I'd say that so far, $12 million.

So far?

I don't think that we will be spending -- so far, yes. That includes like a onetime expenditure for different items that are at inventories right now, let's say, medical supplies. We have several medical supplies that are at disposal for our -- are ready-to-use for -- by our workforce, and that will be consumed through the year. So let me add a little bit on what -- your question. The COVID-19 requires a big effort on our site and our workforce and everybody to contain it. But we haven't had a major damage to any of our facilities or anything that requires a significant expenditure. We're basically focusing on having the proper medical supplies, the social distancing. Several measures to maintain social distance has been undertaken. For instance, the capacity of the shuttles that transport our personnel has been reduced. So you have to spend a little bit more money renting some additional buses, for instance. But that -- those are relatively speaking, minor expenditures given the size of our operations.

Okay. So you're not required to test your workforce?

No, we do. We do. And we are including the testing in what I just said.

Our next question will come from the line of Grant Sporre from Bloomberg Intelligence.

Just -- it's -- I guess it's a follow-up question from my side. You've obviously given guidance for production for this year. But given the delays in maintenance and stripping, at what point does that start to impact your production going forward? If for some reason, you can't achieve the schedule that you would like. So that's my first question. And the second one is, I guess, just to complete on the CapEx guidance and following up from the last question, you gave production and cash costs. Just if you could give us CapEx guidance as well that would be great.

Certainly, Grant. Well we have been operating our facilities not at full capacity in the past quarter for a while. Then we're able to increase the capacity as we move on into having less restrictions, generally speaking, in both Mexico and Peru. We don't want to find out when this is going to impact our production delay and maintenance and such. We're focusing on scheduling them as we come with the proper workforce in our facilities and the contractors that, in some cases, perform this maintenance of major equipment. We are in that process. We expect to have, by the end of this quarter, most of our workforce at the operations already. So we are basically focusing on being sure that how -- the way that we're operating won't be affected by major, major -- any major maintenance. We were relatively lucky in the sense that we did significant maintenance of our smelter facilities in Peru last year. We have to do each 2 years a major maintenance to the smelter. Well it was scheduled for 2019, we perform it. And this facility and the refineries are in good shape. The same happened in some of our operations in the mining side in Mexico. And we focus quite a bit on having all of our production line with proper maintenance, which is preventive maintenance in most of the cases. And that is certainly useful to situations like this. On CapEx, our current guidance is as follows: for this year, we're reducing our CapEx guidance from $1.10 billion to $800 million. We're expecting a reduction of about a little bit more than $300 million in capital expenditures in 2020. That money will be reallocated to 2021, most of it. For next year, we're expecting $1.7 billion of capital expenditures. For 2022, $2 billion. For 2023, $2.9 billion and for 2024, $2.7 billion. This is to have the 3 projects that we have in Mexico, the Buenavista zinc, the Pilares project and the El Pilar project. These 3 projects, up and running by the end of 2023 and at full capacity in 2024 and also to accommodate the Tia Maria investment that we should initiate, if not this year, next one and the Michiquillay project and the Chancas projects. In this case, for Michiquillay and Los Chancas, they will be -- they will not be in operation by 2024. We will be on the investing part of the projects at that time.

Our next question will come from line of John Tumazos from John Tumazos.

There were earlier questions about your costs I don't want to duplicate, but the questioners might have stressed deferring maintenance or deferring stripping or COVID costs. But how much of the $0.67 cash cost simply was the decline in crude oil prices or weaker currencies? And now crude is back over $40, that's an upward pressure?

Okay. Thank you very much for your question, John. Let me comment on that. We had -- for diesel and fuel, we have savings of $38.5 million. That's on the average price that we had in the second quarter. We have, for labor cost, a reduction of about $10 million, mainly due to exchange rate. That's for the second quarter. We expect -- well exchange rates seems to be for a while where they are, so we should be having some savings on that regard. On fuel, yes, there is a recovery. We're still not back to where we were before the COVID-19 crisis initiated, so we will be capturing a portion of these savings through the year.

Our next question will come from the line of Thiago Ojea from Goldman Sachs.

Sorry, I think I had an issue with the telephone for. I think what I would like to understand a little bit better is, it seems that your volumes comparing to peers were better. Do you expect -- although your volumes increase, that for the entire industry, especially in the country that you operate in, Peru and Mexico, that you're going to outpace your peers in terms of volume output? And the second question is, do you see the supply globally being weaker that this could be a favor in terms of demand? It seems that now the COVID-19 is starting to ease. So thinking more 6 months, 12 months, do you see an important difference on the supply and demand stabilization?

Sure. Well I think that we have certain conditions in our operations that allow us with a very detailed and thoughtful plan to maintain -- or to catch up on our production level once we have the possibility. As you -- as I mentioned before, certain -- some of our facilities are relatively isolated. And the workers are performing -- being this a very high capital-intensive industry, you may have a facility that is huge, where maybe 40 workers are on a daily basis, and they are spread through a big area, so they have no contact to be sure. And particularly, if you stress that they can't relate as they used to with their fellow workers, that has helped us. As I mentioned, we focus specifically on prioritizing mineral production. So you have with this combination of 2 factors that has been in our favor. As I mentioned before, as an example, Toquepala mine, due to the fact that it was constructed in the 1960s of the past century, and at that time, you have to provide the housing facilities to the workforce and their families. And so what we have in some of our operations are little towns actually, where you have a bank agency, a hospital, a market, churches, et cetera, et cetera, et cetera. So that plus a very mature attitude of our workforce allow us to maintain operations, keeping social distance and operating at the very beginning of the pandemic with very little personnel, basically maintaining our operations at a lower than the usual rate. And then we -- as conditions were understood by the authorities, we could improve and increase our production and operation. And by focusing on better areas of the mine, we were able to produce the copper that has been reported.…

Just a final question. The Latin American countries are suffering a lot with the pandemic. Mexico is one of the most affected, and the economies are being affected, and therefore, your tax collection is also being affected. Late last year, there were a few congressmen in Mexico proposing different mining deals and an increase on royalties and taxes. Do you see this as a potential source of concern for the mining industry in Mexico? Do you think that this could be now, given the economic situation, proposed again or something towards that line?

No. At this point, we don't see anything related to that. Nobody is talking about specific new taxation for mining companies or operations at Mexico or Peru.

Our next question will come from the line of Alfonso Salazar from Scotiabank.

I have one clarification, if I may. You mentioned that production was not at full capacity, is that right? Because I see, actually, in the quarter was above 250,000 tons that if you analyze that, it's more than a million tons a year. So if that is correct or not? And regarding the situation in Cananea, because some of the Peruvian mines seem to be more far away from the city's [ port stacks ]. It's not the case of Cananea, which is very close to the town. So what's the situation there? If you -- what's the COVID situation in Cananea? Do you have any cases in that mine? If you can comment anything on that. Also 1 year ago, if you remember, there were some costs that's going to take place precisely 1 year because it was the anniversary of the strike that started in 2007. But I haven't heard anything for this year. Apparently, there are no protests there taking place this time. If you can just mention anything about it.

Hold on a second please, Alfonso. Okay. Well we -- at the beginning of the pandemic, we were not able to operate at full capacity. We were operating with about 40% of the workforce in Mexico and a similar number in Peru. So we were not reaching full capacity at that time. Then we have been operating -- if you see our concentrators, they were not milling as much mineral as they could on a daily basis. But they were milling much higher ore grade minerals, so that allows us to catch up on the production side. When you add a higher ore grade mineral, you have not only the benefit of that higher ore grade, but also the possibility of recuperating a slightly higher percentage of copper per ton of mineral. So those 2 factors have helped us to produce as we have reported this past quarter. Now regarding the Cananea, as you well mentioned, Alfonso, the Cananea town is nearby or almost side-by-side with the Buenavista mine that we have. We had about 18 cases of COVID at the Cananea. It's a relatively small number. You consider the size of our workforce over there is, well, less than 1% of our workforce. And so far, we haven't had any major or any deceased to regret in this case. That's basically it. We haven't had any impact on what you say about the strike. I think that the workforce is acting very -- in a very mature way in our operations, as I stressed in different parts of this presentation.

Very good, Raul. Just one follow-up. If you are -- we're using high-grade ore at the beginning of the pandemic, should we expect lower grades going forward or at some point?

We have to mine certain parts of the operations where you have not as good ore grades as we have mined before. That will have an impact in cost, and -- but we're expecting to fulfill our forecast for the year, as I indicated before.

And our next question will come from the line of Alex Hacking from Citi.

I just have 2 quick clarifications, if that's okay. Did you say that the target for copper production next year is 949,000 tons? Did I hear that correctly?

Hold on a second please, Alex. For this year, we're expecting 997,100. And for next year, it's 986,300. Yes.

Oh, 996,000? Okay.

9-8-6. 9-8-6.

Okay, 9-8-6. And then the other clarification was just on the CapEx. Did you -- you said $800 million for this year? Is that correct?

Yes, that's correct.

But you only spent $200 million and less than $250 million in the first half. I guess why are we going to see such a huge ramp-up in the second half of the year?

Well, one of the reasons for that is that we will be doing -- paying the bills that we have put as purchase orders at the first half of this year for, say, the Buenavista concentrator, the Pilares, some of the expenditures that we have to do in order to initiate the mine operation of Pilares in the next year or so. So that's basically it. It's basically paying bills on purchase orders that we have put in the first part of the year.

Okay. But I mean, I guess, not the -- I mean the total budget for those 2 projects combined is less than $600 million. So it seems aggressive, but fair enough.

Well that's what the -- our project team has indicated that they are -- they don't see their expenditures going through the initial budget that was $1.1 billion. They are expecting $800 million. That's what the information that we have from them.

And our next question comes line of [ Yuri Maxwell ] from [ Craig Asset Management ].

Yes. Just a quick clarification. You've given the guidance for cash costs, but you gave it for cash cost, after by-products. Do you mind giving the cash cost guidance before the by-products throughout the year as well? So it's $1.37 for this year. What about the other years, please?

Certainly, [ Yuri ]. Well for next year, we're expecting $1.53. For 2022, $1.66. And for 2023, $1.54. And for 2024, $1.61. Let me comment, [ Yuri ], let me comment on that. We're expecting and we're assuming that certain prices that we're seeing much more positive now will change over time and come back to where they were. That's -- that put us on a very conservative pattern in certain cases, but we operate our assumptions on that base.

When you talk about the price, do you mean the prices for supplies, raw materials, this kind of stuff?

A recovery or, let's say, a recovery of the Mexican peso or a recovery of the Peruvian sol that will make -- or a weaker dollar to put it differently, will make local cost a little bit more expensive in U.S. dollars, fuel oil coming back to where they were. That's -- those are general assumptions. We, on this case, rather be on the more conservative side to do our planning for the other years.

Thank you. Now I'm not showing any further questions at this time.

Thank you very much, Victor. Well with this, we conclude our conference call for Southern Copper's Second Quarter of 2020 Results. We certainly appreciate your participation. I hope to have you back with us when we report the third quarter of this year. Thank you very much, and have a nice day.

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